Emerging Markets: Why Investors Are Missing Out

Investors often shy away from emerging markets due to perceived risks, but is this fear justified? Many times, the risks are overestimated, leading to missed opportunities.

The Impact of Geographical Proximity

For example, after the 2023 coup in Gabon, investors pulled back from bonds across Africa, even in politically stable countries like Kenya. This knee-jerk reaction shows how geographical proximity can unfairly taint entire regions.

Resilience During Global Crises

Interestingly, emerging markets have shown resilience during global crises. During the 2008 financial crisis, default rates among emerging market firms were lower than those in advanced markets. Additionally, recovery rates in emerging markets and developing economies (EMDEs) average 72 percent, which is higher than global averages for comparable assets.

Infrastructure Loans: A Surprising Reality

Infrastructure loans in Africa also have lower default rates compared to Western Europe and North America. This suggests that the perceived risk of investing in Africa is much higher than the actual risk. This disconnect between perception and reality is causing investors to miss out on viable opportunities.

Addressing Real Challenges

Of course, there are real challenges. Currency and complexity risks exist, but they can be mitigated through hedging, credit enhancements, and tailored guarantees. In 2021/22, project sizes in EMDEs were much smaller than in high-income countries. By aggregating projects and creating a pipeline of bankable opportunities, investors can find more attractive opportunities.

The Power of Collaboration

To mobilize capital, collaboration is key. Multilateral development banks, development finance institutions, banks, institutional investors, insurance companies, credit rating agencies, and guarantee providers all need to work together. By strengthening market infrastructure, building local capacity, and addressing information gaps, investor confidence can be boosted.

Unlocking Private Capital

Ultimately, these steps can unlock significant private capital for countries most impacted by climate change. By challenging biases and simplifying participation, investors can tap into a wealth of opportunities that are currently being overlooked.