Relentless Resolve: Overcoming Barriers to Private Investment in Emerging Markets

The world faces a monumental challenge: trillions of dollars of investment are required annually in emerging markets and developing economies (EMDEs) to help alleviate poverty, boost prosperity, and address the impacts of climate change. For example, a joint report by IFC and IEA (June 2023) found that 2/3 of the finance for clean energy projects in EMDEs (outside China) will need to come from the private sector, rising from today's $135 billion to as much as $1.1 trillion a year within the next decade. Meeting this challenge demands a dramatic scale-up of private capital mobilization alongside the efforts of the World Bank Group and other development partners.

To drive progress on this critical agenda, Ajay Banga, the World Bank Group’s President, launched the Private Sector Investment Lab (PSIL) in June, recruiting 15 distinguished CEOs from asset management companies, banks, and operators to identify barriers and potential solutions to investment in EMDEs. In just ten months, the PSIL has delivered groundbreaking recommendations focusing on four key areas: regulatory certainty, political risk insurance, foreign exchange risk, and creating an originate-to-distribute model.

The World Bank Group has delivered $100 billion of private capital mobilization into EMDEs in the last three fiscal years, with IFC accounting for ? of this total. But more needs to be done. The global community is looking to MDBs, DFIs, and the private sector to find innovative solutions.

Following collaboration with the PSIL, we are taking several steps:

On Tuesday, during the World Bank Group's Spring Meetings, we previewed the launch of a new unified guarantee platform that will deliver simplicity, improved access, and faster payment execution. This groundbreaking reform, set to go live on July 1, will consolidate 20 guarantee solutions currently spread across the institution, putting us on a path to triple our annual guarantee issuances to $20 billion by 2030 and multiply our mobilization of private capital many times.

We are developing capital markets and originate-to-distribute solutions, including a tool to facilitate and scale an originate-to-distribute program to crowd private sector capital into emerging market assets. Essentially, we want to create a brand-new asset class attractive to institutional investors. We intend to execute the inaugural securitization later in 2024, with a structure expected to contain IFC-originated assets and the possibility to broaden the originator base to include other MDBs/DFIs over time. The WBG is also developing local bond and derivative markets, regulatory frameworks, and policy reforms to strengthen local capital markets, which are essential for sustainable financial flows and domestic capital mobilization.

To address foreign exchange risk, IFC has committed nearly $31 billion in local currency across more than 70 currencies worldwide during the last decade. But this is not enough.

The world needs more local currency financing and affordable hedging options to facilitate private investment, especially for the green transition. We are looking into additional solutions, building off IFC's existing onshore and offshore products, including local currency bond issuances and products such as guarantees and risk-sharing facilities in local currencies.

Equity remains scarce in most emerging markets and is often unavailable in sufficient amounts or terms as businesses require. IFC mobilizes equity by being an anchor investor in equity issuances, bringing in other investors, and providing overall leadership by negotiating terms and incorporating ESG requirements into transactions.

Finally, we continuously receive feedback from private sector partners who require greater regulatory certainty to deploy capital at scale. This is where the power of the joint World Bank Group approach can make a big difference.

The potential impact is immense. With $400 trillion in assets under management globally, reallocating just 1% of private capital to EMDEs each year could have a transformative impact on growth and development in these countries. New data recently published by the World Bank Group also shows that private investments in EMDEs are less risky than often perceived, with default rates in line with global benchmarks. The time for transformative investment is now.

Mobilizing private capital at the required scale will demand intensive, sustained collaboration between the public and private sectors. The PSIL has proven the power of this model. As the Lab reconvenes later this year to review progress and advise on the next steps, the World Bank Group remains committed to deeper, ongoing engagement with our private sector partners – because the PSIL has also demonstrated the need for relentless effort. Bright ideas are no longer enough. We have to act – bigger, bolder, and faster.

I am deeply encouraged by the PSIL's initial results, the upcoming launch of our new guarantee platform, and the momentum these initiatives have generated. By working tirelessly to implement groundbreaking solutions born of relentless innovation, I believe we can mobilize the transformative power of private capital to advance growth, opportunity, and sustainability in emerging markets worldwide. The World Bank Group will continue to push the frontiers of what is possible, refusing to rest until we have achieved our ambitious goals and created a more prosperous, resilient future for all.