Changes in rules of the game main risk for foreign investors, says MIGA

- Wednesday, August 3, 2011

Changes in rules of the game main risk for foreign investors, says MIGA

The World Bank's Multilateral Investment Guarantee Agency (MIGA) sees regulatory changes as the main risk for foreign investors today in Latin America, MIGA's lead risk management officer, Daniel Villar, told BNamericas.

"What foreign investors fear most are regulatory changes, and there has not been significant progress in ensuring the stability of the rules of the game in Latin America," he said.

The region's financial services markets have not been immune to such changes this year. New rules in Argentina will next month force insurers to buy their reinsurance coverage from locally registered companies, and a bill aimed at capping interest rates in El Salvador could hurt banks later this year.

Start your 15 day free trial now!

cta-arrow

Already a subscriber? Please, login

"Governments in Latin America have in general become more pragmatic (even in countries like Bolivia and Ecuador)," Villar said. "But investors never really know what governments are up to, and there is a permanent risk of changes in the rules."

A LOST OPPORTUNITY

Villar said that today's macroeconomic picture looks very good in Latin America, but that the last several years have been a "lost opportunity" in terms of not making a more sustained effort to strengthen political institutions.

"The last decade has seen institutions growing weaker because the presidential systems have grown stronger, in large measure due to the relaxation of re-election prohibitions. There has also been an increased personalization of power in the region, which in many ways is a return to the past," he noted.

RISK OF FALLING COMMODITIES PRICES

High commodities prices have been one of the main factors behind the strong economic growth that many Latin American countries have enjoyed during the last several years, apart from the downturn in 2009 caused by the global financial crisis.

Villar said many countries in the region would suffer from a big drop in commodities prices due to "the great weakness of political institutions."

The expert added that Peru is the only country where such a drop could lead to major conflict, since the country's historical social problems have not been adequately addressed and political institutions remain much weaker than other countries at similar income levels.

MIGA provides political risk insurance (guarantees) to the private sector to comply with its World Bank mandate to promote foreign direct investment in developing countries to help support economic growth and reduce poverty.