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...
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2021
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| 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 |
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okr-10986-360572021-08-06T05:10:29Z The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical Blanco, Fernando Sachdeva, Niharika BUSINESS CYCLE PROCYCLICAL POLICY IFC INVESTMENT INTERNATIONAL FINANCE CORPORATION 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. 2021-08-05T13:06:35Z 2021-08-05T13:06:35Z 2021-07 Working Paper 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 English Policy Research Working Paper;No. 9746 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
BUSINESS CYCLE PROCYCLICAL POLICY IFC INVESTMENT INTERNATIONAL FINANCE CORPORATION |
| spellingShingle |
BUSINESS CYCLE PROCYCLICAL POLICY IFC INVESTMENT INTERNATIONAL FINANCE CORPORATION Blanco, Fernando Sachdeva, Niharika The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical |
| relation |
Policy Research Working Paper;No. 9746 |
| description |
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. |
| format |
Working Paper |
| author |
Blanco, Fernando Sachdeva, Niharika |
| author_facet |
Blanco, Fernando Sachdeva, Niharika |
| author_sort |
Blanco, Fernando |
| title |
The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical |
| title_short |
The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical |
| title_full |
The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical |
| title_fullStr |
The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical |
| title_full_unstemmed |
The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical |
| title_sort |
cyclicality of ifc investments : to be, or not to be, procyclical |
| publisher |
World Bank, Washington, DC |
| publishDate |
2021 |
| url |
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 |
| _version_ |
1764484338457509888 |