The US Federal Reserve’s decision to taper its $85bn-a-month asset purchase programme will negatively affect private investments into emerging markets but, according to specialist insurance firm Beazley, global trade will still be led by FDI in emerging markets in 2014. Investment into emerging markets is expected to fall from $1200bn in 2012 to little over $1000bn in 2014, but Beazley predicted that this downward trend will be short lived.
As well as the US Federal Reserve's withdrawal of its tapering programme, inward investment into emerging economies has also been affected by the political uncertainty arising from the fact that elections are due in 2014 in many emerging economies, including India, Pakistan and Sri Lanka. This has caused some foreign firms to direct their investments back to developed economies, but Beazley indicated that this capital flight will only be temporary and, over the longer term, 60% of the growth in global trade will occur in emerging markets.
According to Crispin Hodges, an underwriter in Beazley's political risks and contingency team, companies investing in infrastructure and natural resources face the greatest risks from political fall outs in emerging markets. Pointing to Indonesia’s recent decision to impose a minerals export ban, Mr Hodges maintained that foreign firms involved in extractive activities with long-term contracts face the highest risk of political instability and unpredictable regulatory changes.
“Companies that are heavily exposed to contracts or concession agreements with governments, especially those providing primary services such as utilities, infrastructure, and transport to populations, face greater exposure,” said Mr Hodges. “Indonesia’s recent minerals export ban [was] an attempt to encourage the development of its refining capacity by redirecting investment up the value chain. The risk here is that this may simply lead to lost inward investment and export earnings.
"In any contract with a very heavily politicised aspect, local counter-parties are not simply private contractors. Also, government agencies face pressure from their electorate to extract the best results from the foreign entity. In countries experiencing a greater level of flux, whether due to devalued currencies, issues with attracting FDI, or as a result of fluctuating interest rates, this presents a greater challenge.”
While firms operating in emerging markets continue to face a greater risk of resource nationalism and unpredictable regulatory changes, Beazley maintained that politically unstable emerging markets such as Ukraine, Iraq and Egypt remain the exception rather than the norm. It said that continued growth in emerging markets means emerging economies on the whole remain attractive to foreign investors.
With 15 emerging economies expected to elect new governments this year, Mr Hodges maintained that instead of adopting a bearish approach to investment, foreign firms should instead monitor political and economic changes across these economies, considering each on a case-by-case basis.