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Private Capital Can Spur Emerging Economies’ Advance

May 03, 2016
   
   

The U.N.’s Sustainable Development Goals and meetings on climate change have helped the development community recognize the need for private-sector participation, Hua Jingdong, vice president and treasurer of the International Finance Corporation, said during the Global Conference panel “Widening Access to Capital in Developing Markets.”

“Last year was a pivotal year,” Hua said. “For the first time, the development community recognizes the importance of the private sector for expanding development finance.”

Noting that policymakers are too often preoccupied with the construction of physical infrastructure, Hua argued that economic development requires three types of infrastructure — physical, social and financial — to be self-sustaining. Financial infrastructure is especially necessary for countries to move beyond official development assistance.

Local financial-market development is crucial for mobilizing local savings for long-term investment. Local investors are often more patient than their foreign counterparts, and are able to take advantage of local knowledge. Further, they are better positioned than banks to make long-term investments. Rwanda, for example, is increasingly focused on the development of pension funds and insurers to enable families to better save for education, health, and retirement, and to then invest those savings more effectively.

“We were relying on the banking system,” said Claver Gatete, Rwanda’s Minister of Finance and Economic Planning. “And the banking system was relying on short-term deposits, which makes it difficult to lend long-term.”

Nonetheless, foreign capital is often needed to close the savings-investment gap, and local capital markets can enable businesses and governments to raise money from foreign investors without exposing themselves to currency risk. Foreign direct investment (FDI) is not always enough. “Many private-sector investors are not big enough to engage in FDI,” Gatete said. “But they have money — they invest it through fund managers. This money needs capital markets to be effective.” Even FDI and private equity investments need to be backed up by deep and liquid capital markets, said Afsaneh Beschloss, president and CEO of the Rock Creek Group.

Financial-market development can also help promote financial inclusion. Ermias Eshetu, CEO of the Ethiopia Commodity Exchange, described how Ethiopia, a largely agrarian economy, prioritized the development of the exchange, which has created an ecosystem in which more than 3 million farmers now participate. The exchange has not only enabled farmers to obtain better prices for their goods, but also allows them to use their warehoused goods as collateral for bank loans. The exchange is in the process of moving from open-outcry to electronic trading, which will its capacity for transactions. It will soon introduce futures and other derivatives and may one day even serve as a platform for stock and bond trading.

“Everyone focuses on the investment part,” said Beschloss. “But if the operational part — the trading part, the custody part — if these things don’t work smoothly, the whole thing crashes. So this is really key.”

 

Gatete emphasized the importance of regional integration to Rwanda’s plans. “In the case of the East Africa Community (EAC),” he said, “we are developing capital markets that not only serve the individual countries, but we are looking to link them together, so that trading and investment can be region-wide.” He noted the progress that the EAC has made in harmonizing the payments systems and the work that has been accomplished in linking together the various trading platforms; now they are looking forward to harmonizing regulations and corporate governance rules.

Panelists also noted the importance of new financial technologies, such as mobile banking, for catalyzing financial development. Many African countries have been able to leapfrog the U.S. and Europe in this regard. But while fintech will be important for the collection and disbursement of funds, most countries lack a comprehensive and coherent regulatory framework for the sector.

Finally, more needs to be done to direct manage for social impact. “Big investors are receiving funds from people who really do want their savings to have a positive social impact,” said Beschloss, but more is required “to make sure these funds are being channeled effectively toward those ends.”

Watch the Full Discussion


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