World Economic Forum Financing for Development Workshop Current Risks in the Global Economic System, and The Role of Risk Management Tools Daniel Wagner Office of Cofinancing Operations Asian Development Bank

Lessons Learned, or Future Shock? w Wildly inflated stock and real estate markets globally w Commodity price boom – no end in sight w Oil price – set to continue to rise w US current account deficit – mammoth and growing Forced reliance on foreign borrowing w Wildly inflated stock and real estate markets globally w Commodity price boom – no end in sight w Oil price – set to continue to rise w US current account deficit – mammoth and growing Forced reliance on foreign borrowing

Lessons Learned, or Future Shock? w US consumer credit binge w High unemployment / drops in real GDP in a number of countries in Europe w Possible future change in Bretton Woods (II) – US dollar as the world’s reserve currency?

The Role of Risk Management Tools w Attract FDI w Encourage risk taking w Permit a broader range of trade and investment activities w Encourage partnerships between risk takers and risk managers w Encourage partnerships between the public and private sectors w Attract FDI w Encourage risk taking w Permit a broader range of trade and investment activities w Encourage partnerships between risk takers and risk managers w Encourage partnerships between the public and private sectors

Need for Increased Flexibility w Enhance local currency financing Avoids currency mismatches w Arrange public sector financing without government guarantees Sub-sovereign lending w Improve balance sheet management Use multi-tranche financing facilities Use contingent/standby financing facilities w Broaden risk sharing partnerships w Enhance local currency financing Avoids currency mismatches w Arrange public sector financing without government guarantees Sub-sovereign lending w Improve balance sheet management Use multi-tranche financing facilities Use contingent/standby financing facilities w Broaden risk sharing partnerships

MDB/MDB Collaboration: Afghanistan Investment Guarantee Facility Joint venture between ADB and the World Bank Group (IDA/MIGA) Political Risk Guarantee (PRG) facility focused on promoting FDI into Afghanistan Open to public/private sector coinsurers

Capacity Building: Pakistan Political Violence Facility w Political Violence/Terrorism Reinsurance Facility w For local and foreign investors/lenders w Counter-guaranteed by the GOP w Parallel reinsurance from the private sector

Leveling the Playing Field: Trade Finance Facilitation Program w Meant to benefit small/weaker issuing banks revolving PCG w A revolving PCG that guarantees payment if an issuing bank fails to pay an LC or other qualifying instrument Risk Sharing Agreement w A Risk Sharing Agreement with EBRD where ADB and EBRD member countries overlap revolving credit facility w A revolving credit facility providing short-term loans to issuing banks to help fund client working capital needs

Generating Investor Confidence: Philippine Power Sector Development Program w In discussion stage with the GOP w Objective: promote power sector restructuring by encouraging privatization of gencos, transcos, and the flow of FDI into new power assets and reduce electricity costs w Three forms of assistance w Three forms of assistance: PCG for debt restructuring – up to $500m to enhance new PSALM bond issues

Philippine Power Sector Development Program PRG to promote FDI – would cover both existing assets, and new forms of investment PCG for electricity market trading – would be extended to institutions that extend credit for financing power purchases to a variety of buyers

We need to reconsider: 1. Comparative advantages of the Public sector Private sector 2. Critical role of regulation and governance 3. Tariff structures That are viable and affordable for the entire project life Critical Need: A New Model for Infrastructure Development

w We need to develop better, more bankable versions of these models w Backed by the fundamental willingness and ability of customers to pay Rather than on government guarantees or payment assurances The Need for a New Model for Infrastructure Development

ADB’s Role w Forming alliances: Corporations, governments, NGOs, foundations, educational institutions w Focusing on comparative advantages w Creating ‘enabling environments’ Legal/regulatory frameworks Good governance Investor confidence

Objective w Tackle broad spectrum issues w Achieve accountability by all parties w Help to dilute unsavoury alliances w Encourage broadly-based participation in economies

World Economic Forum Financing for Development Workshop Current Risks in the Global Economic System, and The Role of Risk Management Tools Daniel Wagner Office of Cofinancing Operations Asian Development Bank