While the eurozone makes headlines with its travails, the worst impact of the crisis is far away from Europe – in the world’s poorest countries.
So says Lars Thunnel, the chief executive of the International Finance Corporation, the World Bank’s private sector arm. Echoing last week’s remarks by Christine Lagarde, the IMF managing director, Thunnel told beyondbrics: “We are concerned the poorest people and the poorest countries are hurt worst in a crisis.”
Thunnel, who is retiring next month after running the IFC for six years, warned of the effects of the latest developments in the eurozone:
I think that if we look at what’s happened in the last 10 days or so this is very serious. This is a question of both a shortage of liquidity and disruption in the capital markets.
Economic growth, which had held up “quite well”, was now slowing in China and other emerging economies under the influence of the eurozone. “You have a lot of linkage in terms of trade, in terms of capital and in terms cross-border loans. These are linkages which are bigger than we thought.”
Thunnel said poor countries in Africa and other regions were experiencing difficulties financing trade, including imports of food and other commodities. Poor countries are particularly reliant on banks for trade support because they depend on bank-financed letters of credit.
Thunnel said European banks, which were strong in letters of credit, “are pulling back which is hurting poor countries disproportionately.”
Poor countries are in a double bind: as well as seeing their lenders draw in their horns because of global financial turmoil and the impact of Basel III capital rules, their import bills have been rising due to increasing world commodity prices.
Thunnel said: “We see some countries with problems getting [trade] finance. I think this is very dramatic. I think if this situation (in the eurozone) continues, yes, it will get worse.”
As executive vice president, Thunnel has been in day-to-day charge of the IFC under Robert Zoellick, the IFC president, who is also outgoing president of the World Bank.
Thunnel, a former Swedish businessman, has led an expansion of the IFC’s portfolio. Annual investment commitments have doubled from around $6bn in 2006 to $12.2bn last year, and are expected to rise further this year.
Some of this increase has come in response to the global crisis, with the IFC supporting EM banks that could no longer finance themselves from the market as easily as before 2008. Thunnel said: “Banks that needed no support before the crisis are now banks which we are working with.”
After the 1998 crisis we saw local markets needed international banks…and now we are seeing the reverse trend… In some countries…they’re trying to rebuild local markets.
The most exposed region is eastern Europe (excluding Russia and Turkey), where around 80 per cent of bank assets are controlled by west European groups that are now under pressure.
But Thunnel said the IFC’s expansion also reflected the “tremendous” growth in emerging markets, which went far beyond the four Bric economies.
He had pushed hard to increase the IFC’s exposure in poor countries, including conflict-torn states such as Afghanistan.
The poor countries’ share of IFC funds grew from 25 per cent in 2006 to around 50 per cent last year. Thunnel said: “ We have just opened an office in South Sudan and we are financing a modern office building.”
People said, ‘You are going to destroy the organisation moving from the Brics to frontier countries and Africa.’ I said, ‘Rubbish. We have an opportunity and a competitive advantage.’
Thunnel urged developed world leaders to do more to tackle the crisis, including taking action to boost economic growth.
Leaders need to be pro-active and not reactive. They need to lead markets and not be lead by the market. You can’t just starve yourself to health. You need to have some combination of growth [and austerity].
He conceded that there were difficulties with political developments in key countries, including recent elections in France and Russia, the forthcoming presidential poll in the US, ‘stalemate’ in India, and events in the Middle East and in China.
“But people have to keep the trains running and not just wait for elections.”
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Lars Thunell: IFC foresees a bigger role in wake of global crisis, FT (2009)
G8 leaders urged to focus talks on growth, FT
S Sudan: new skyscraper, bad timing, beyondbrics