Security fears drive demand for political risk guarantees in Asia
Security fears drive demand for political risk guarantees in Asia
Agence France-Presse, Bandar Seri Begawan
Security concerns in Asia could fuel growing demand for political risk guarantees, continuing a three-year trend, an Asian Development Bank (ADB) consultant has said.
Demand for such political risk guarantees has steadily increased since the Manila-based multilateral lender began to underwrite them in 2000, said Daniel Wagner, ADB Specialist Consultant on Political Risk Guarantees.
A political risk guarantee assures an investor that the guarantor will assume costs for damage or disruption of business arising from non-commercial risks such as expropriation, currency inconvertibility or non-transfer, terrorism, sabotage, riots or breach of contract.
"We started with no portfolio three years ago. We have had a consistent submission flow and it is growing," he told AFP on the sidelines of the recent Pacific Economic Cooperation Council meeting in Brunei.
"It's going to continue to grow because political risk is not going to become less of an issue with time. It's going to become more of an issue.
"The question becomes, will the demand of international equity investors, lenders and traders coincide with what providers of political risk guarantees are able to provide?"
Wagner said ADB guarantees are a risk management tool to help catalyze trade and investment into Asia at a time when investor perception of the region has been dented by a spate of terrorist attacks.
"We think we have a good story to tell. What we want to do, ultimately, is provide credit enhancement," he said.
"It helps to mobilize capital and that's what we want to do - facilitate capital flows to promote the development process in Asia."
Indonesia, the Philippines, China and Vietnam are the countries in Asia where most companies have sought political risk guarantees over the past two years, said Wagner, who has 15 years of experience in underwriting and brokering political risk insurance for global companies.
ADB, with a premium triple A rating from international credit rating agencies, can issue up to 150 million dollars of political risk cover per transaction and is the only multilateral institution focused exclusively on Asia.
Despite rising demand, however, the number of investment transactions which require political risk coverage has fallen because of a slump in cross-border investments induced by the global economic slowdown and security concerns.
"A number of lending institutions have reduced their cross- border exposures in developing countries. They are sticking more towards investment in the developed world," Wagner said.
The September 11, 2001 terrorist attacks in the United States, the currency meltdown in Argentina and other global stresses have forced investors "to take a second look at where they are doing business and how they are doing business."
Approximately 75 percent of those entities seeking political risk guarantees are financial institutions looking to support cross-border transactions, Wagner said.
ADB has provided political risk guarantees for the financiers of power plants in Sri Lanka, Bangladesh and Vietnam. The bank is currently working on projects in Indonesia and Thailand.
With political risk taking a front-burner position now in the minds of many international businesses, it has become a much stronger potential deterrent to investment than it was two years ago, Wagner said.