Foreign direct investments (FDI) into emerging markets could decline over the next three years because of political and macroeconomic concerns, the World Bank`s political risk insurance arm said on Thursday.
For the first time in five years, companies listed political and macroeconomic instability as their biggest constraint for investing in emerging markets over the next three years, according to the World Bank`s Multilateral Investment Guarantee Agency (MIGA).
It said the market for political risk insurance expanded 33 per cent last year to $100 billion, a historic high, and is on track for similar growth this year, even as FDI is falling.
The report notes the ratio of FDI to PRI now stands at 14.2 per cent for developing economies, a marked increase on the low-water mark of nearly 5 per cent in 1997.
The dramatic increase in political risk insurance issuance of recent years has continued and is on track for similar growth in 2013, it said.
Foreign investors are increasingly cautious about investing in developing countries in the face of continued global economic and political turbulence, states the World Investment and Political Risk 2013, published by the Multilateral Investment Guarantee Agency (MIGA).
While macroeconomic instability and political risk rank are top concerns for foreign investors over the short and medium terms, nearly half of respondents to a survey said they expected to increase their investments in developing countries over the next 12 months, with the number of willing investors increasing to 70 per cent over a three-year period.
The fifth annual MIGA-EIU Political Risk Survey finds that breach of contract and regulatory risks once again top survey respondents' political risk concerns. Survey results show that these concerns are based on actual experience as well as sentiment.
"The persistent global economic uncertainty appears to have tainted the overall mood, with economic pessimism underpinning the expected stagnant FDI levels," according to the report.
The findings suggest that the global recovery is yet to find its moorings after the 2007-2009 financial crisis.
Overseas financing into developing countries is set to fall 4.5 per cent next year after rising 2 per cent in 2013, the MIGA report said, adding that at around $600 billion a year, FDI to emerging markets, however, is close to quadruple the levels seen a decade ago.
Growing investments into sub-Saharan Africa and South Asia are some bright spots, although Europe and Central Asia are seeing declines.
World Investment and Political Risk 2013 notes that the continued level of investor caution has been a boon for the political risk insurance industry.
MIGA aims to encourage FDI into emerging markets by protecting private investors from such political risks as war and sovereign default.
Investors are most concerned about instability in the Middle East and North Africa, expropriations and legal disputes with governments in Latin America, contract renegotiations in countries with natural resources and general capital constraints, MIGA added.
But, MIGA, said most of the 459 companies it surveyed about their activities in emerging markets were not planning to withdraw or cancel existing investments.