The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical
This paper presents empirical evidence on the cyclicality of investments made by the International Finance Corporation over the past 20 years and explores their implications for the International Finance Corporation’s investment strategy in the aft...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/562091627579634624/The-Cyclicality-of-IFC-Investments-To-Be-or-Not-to-Be-Procyclical http://hdl.handle.net/10986/36057 |
| Summary: | This paper presents empirical evidence
on the cyclicality of investments made by the International
Finance Corporation over the past 20 years and explores
their implications for the International Finance
Corporation’s investment strategy in the aftermath of the
COVID-19 pandemic. An Independent Evaluation Group report on
World Bank Group operations during the global financial
crisis found that the International Finance Corporation’s
role was “neutral to procyclical,” as it “did not increase
investments in response to the crisis.” This study provides
a more detailed assessment of the cyclical patterns of
International Finance Corporation investment activity by
using a longer time horizon of assessment rather than a
specific point-in-time-episode, differentiating original
commitments from disbursements, and disaggregating
investments across regions and industries. The results of
the study confirm that International Finance Corporation
investment activity was overall procyclical during 2000–19,
but this general pattern masks differences over time and
across regions and industries. The paper also examines the
relation between the cyclical patterns of International
Finance Corporation investment activity and its financial
performance. The results suggest that the procyclicality is
linked with sounder asset quality (measured by nonperforming
loan ratios) and higher profitability (measured by
risk-adjusted return on capital), underscoring that prudent
portfolio risk management and profit seeking strategies have
coexisted with International Finance Corporation investment
procyclicality. The procyclicality of International Finance
Corporation operations is consistent with its institutional
mandate of supporting private sector investment, which is
usually procyclical, and the need to maintain an AAA credit
rating. Nevertheless, the facts that commitments became less
procyclical after the 2008 crisis and the cyclicality of
investments varies across regions and industries suggest
that there is scope for easing procyclicality without
jeopardizing the International Finance Corporation’s
financial sustainability. In this context, the International
Finance Corporation’s COVID-19 Fast-Track Facility is a case
in point for easing investment procyclicality. Moreover,
from a medium-term perspective, a less procyclical
investment strategy may be more in line with the
International Finance Corporation’s 3.0 and Upstream
initiatives, which aim at building pipelines of sound
projects and prioritizing returns through long-term risk
premia and, hence, are undeterred by short-term cyclical volatility. |
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