Many of the most pressing development challenges lie in Africa and South Asia. These regions face significant infrastructure gaps, weak governance, and unmet social needs. However, these regions also account for some of the highest rates of population and economic growth in the world, with unexploited possibilities for private sector development. Though these regions have several viable investment opportunities, many of them are not coming to fruition for a variety of reasons. One reason for the failure of private capital mobilization is that investors perceive these risks to be too high. Those seeking to attract foreign investors are sometimes unable to escape the limitations of the sovereign credit ratings received by their country. Moreover, local capital markets are underdeveloped, often inhibited by excessive perceived and real risks.
Bilateral and multilateral development agencies use guarantees to reduce investors’ exposure to risks and attract private capital to developing countries. While guarantees are not a silver-bullet solution to mobilizing private capital into the developing world, there are markets where the availability of the right guarantee product will enable investments that would otherwise have been blocked because the risks involved simply exceed market tolerances or regulations limit investors’ ability to bear the risk. Bilateral development agencies and development finance institutions (DFIs) have the flexibility to be more innovative in this space.
In partnership with the CDC Group, CSIS conducted a study on innovative uses of financial guarantees to leverage private capital in lower-middle-income and low-income countries. This event will feature the launch of the report and a discussion on what bilateral aid agencies and development finance institutions can do to scale up the use of guarantees.