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.