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The ATrium DiAlogues Partners in development: the role of development finance institutions during the current economic crisis and the views of our clients DEG Symposium in Cologne on 16 September 2009 DEG Profile DEG, member of KfW Bankengruppe, is one of the largest European development finance institutions for long-term project and company financing. For more than 45 years, DEG has been financing and structuring the investments of private companies in developing and transition countries. DEG invests in profitable projects that contribute to sustainable development in all sectors of the economy, from agriculture to infrastructure and manufacturing to services. DEG also focuses on investments in the financial sector in order to facilitate reliable access to capital locally. To date, DEG has worked together with more than 1,500 companies and has committed financings of around 4.7 billion euros over the past five years alone. The aim is to establish and expand private enterprise structures in developing and transition countries, and thus create the basis for sustainable economic growth and a lasting improvement in the living conditions of the local population. The Mandate DEG provides long-term capital for private enterprises investing in those countries. DEG only takes on commitments in projects that make an effective development policy impact, meet environmental standards and comply with social principles. DEG is particularly committed to its developmental mandate and its guidelines for social and environmental compatibility: they form the decisive frame of operations. Development Policy Mandate Only successful and long-term viable private enterprises generate economic growth. They create jobs and income, contribute to improving the countries‘ foreign exchange balance by producing competitive products, contribute to government revenues by their tax payments and increase national value added by processing local resources. DEG fulfils its role as a development finance institution for the private sector in two ways: it is the reliable finance partner for enterprises that undertake investments and at the same time it focuses particular attention on these investments producing positive effects in the developing countries. The aim is to contribute to lasting economic growth in developing and emerging-market countries and improve the living conditions of the local population. DEG thus contributes to the Millennium Development Goals, which are a joint commitment of industrial and developing countries to tackle poverty in a sustainable manner. DEG‘s promotion of private sector development pursues the following aims: • providing finance for direct investments as the least volatile segment of capital flows into partner countries. • providing long-term loan finance to help safeguard cofinanced investment projects against crises. • helping to diversify capital flows by supporting pioneer investors in new countries and regions. • and, as part of financial sector development, strengthen local capital markets so they can provide localized finance for investment projects, in particular for small and medium enterprises. In addition, DEG also mobilizes other partners and additional capital for investment projects. This way, DEG also helps maximize growth effects with low capital input. Environmental and Social Compatibility For DEG, environmental viability and sustainability as well as compliance with social standards are essential benchmarks of sustainable economic activity. Environmental and social compatibility involve protecting human lives and people’s health, their economic livelihood, the ecological, social and cultural environment as well as the sustainable use of natural resources. So DEG advises, finances and supports only enterprises that share these convictions and can provide evidence that their plant, processes, products and services meet environmental standards or that they are prepared to implement them in the future. This way DEG helps conserve the earth‘s natural resources and does its share to put the precept of environmental protection into practice in developing and transition countries as well. 6
The ATrium DiAlogues Partners in development: the role of development finance institutions during the current economic crisis and the views of our clients DEG Symposium in Cologne on 16 September 2009 Introduction The effects of the financial and economic crisis on emerging markets and developing countries The negative effects of the current financial and economic crisis have now spread far beyond just the western industrialized nations. The recession is now having a global impact. This is because the international markets for goods, services and financial products are closely interlinked; many African and Asian countries are dependent on global market prices. After a short delay, the crisis has now reached the emerging markets and developing countries. At the end of June, the World Bank reduced its growth forecast for the poorer nations to just 1.2 percent. In 2008, this figure stood at 5.9 percent. Added to this, the global economic crisis and the fragility of the financial markets are having a particularly drastic effect on flows of private capital into the emerging markets and developing countries. According to World Bank estimates, this is likely to be around 363 billion dollars this year – less than a third of 2007’s record high of 1.2 trillion dollars. Worsening conditions for financing The extent to which poorer nations suffer from the consequences of the crisis is dependent on how closely they are integrated into the world economy. The financial markets in the emerging nations and the advanced developing countries are being hit particularly hard. According to the UN, stock market prices between January and October 2008 crashed by around 40 percent in these countries. Hardest hit were Russia, with losses of 70.9 percent, and Ukraine, with 77.5 percent. One of the general problems has been that small and medium-sized enterprises in emerging markets are currently finding it extremely difficult to get credit from the banks. In addition to this, many entrepreneurs took up loans in euros or dollars before the crisis which they now can no longer repay because of the devaluation of their own currencies. Economists estimate that, in the emerging markets, loans of around 2 to 3 trillion dollars will be due in 2009. Decline of foreign trade To add to the considerably worsened financing conditions, the falling demand for export goods such as electronic products, clothing, games and toys is also hitting the emerging markets and the advanced developing countries hard. China has already witnessed the closure of thousands of factories. Around 20 million migrant workers have lost their jobs, according to official estimates. Similar trends are being observed in African countries such as the Democratic Republic of the Congo, Zambia and South Africa – all of which are dependent on the export of raw materials. The global decline in demand has led to cutbacks in production and company closures here too. Reduced investment from abroad Developing markets are also experiencing a huge fall-off in the level of migrant workers’ remittances. According to the World Bank, these stood at around 305 billion dollars in 2008. However, because of the economic downturn, the quantity of money flowing from migrant workers in the industrial nations back to their home countries has dwindled significantly. According to figures from the Inter- American Development Bank (IDB), transfers from migrants in Brazil (Latin America) and the Caribbean have already fallen by up to 11 percent this year. This development is particularly deleterious to countries where money transfers from abroad make up a large part of the gross domestic product; for instance, Tajikistan, Moldova and Honduras. Private development finance institutions in demand To cope with the current bottlenecks in financing, emerging economies and developing countries are relying more than ever on the support of private development financers. Because it is right now that these economies need capital to ensure basic social services, to realise development investments and to stabilise the finance sector. Which specific measures are suitable and what kinds of contributions private development financers and their partners can make is the subject of this year’s specialist conference ‘Partners in development – the role of development finance institutions during the current economic crisis and the views of our clients’ organised by DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH. 7
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