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Global capital markets overprice risks and overreact to shocks: Tharman

Janice Lim
Published Tue, Oct 4, 2022 · 06:39 PM

THE tendency of global capital markets to overprice risks in emerging economies, as well as to overreact to shocks, have not only prevented gaps in climate finance from being filled, but also widened them, said Senior Minister Tharman Shanmugaratnam.

“The reality is, today, there’s very little private investment in infrastructure in the developing world outside China. There’s really a paltry sum that’s being invested,” he said on Tuesday (Oct 4).

As an example, Tharman, who is also Coordinating Minister for Social Policies, noted a “remarkable exit” of capital market investments, amounting to about US$65 billion, from the developing world in the last six months, as investors react to higher interest rates and a stronger US dollar.

“So think about that. You’re not just not achieving the task of meeting that gap in climate finance, we’re moving backwards each time there is a little twitch in global capital markets,” said the minister, who was one of the panellists at a transition finance conference organised by the Monetary Authority of Singapore.

He called for a major pivot to how public-sector institutions operate, starting with how shareholders of multilateral development banks (MDBs) “need to pivot these institutions towards thinking of themselves, not as lenders of first resort, which is what they typically are, but as catalytic finance”.

Even investments by institutions like the World Bank and International Finance Corporation (IFC) do not mobilise private finance to the scale that is required. Only about six cents for every dollar invested by the World Bank is mobilised in private finance; the IFC generates roughly the same amount in private finance for every dollar invested.

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“Shareholders (of MDBs) understand this intellectually, but there is great inertia, a lack of realism about the scale of the challenge we face and a lack of urgency,” said Tharman.

Egypt’s Minister of International Cooperation Rania Al-Mashat, who was the other panellist, said that what could distinguish one country from another, as they compete for private capital, is a government’s commitment and transparency around its policies.

“So if the government, which may be tight on public finances, has a good narrative, is committed, shows that it’s doing the necessary regulatory reforms or creating the enabling environment for the private sector to come in, I believe that that is a very important initial condition for drawing in capital,” she added.

Tharman also commented on the traditional financial regulatory framework that mainly involves “requiring these financial institutions to recognise the risks to their own balance sheets”. “That’s a very good start, for banks to be able to factor in the risks of climate change on their own balance sheets. But frankly, it’s not going to be enough,” he said. “We really have to think of central banks and financial regulators as part of public policy.”

“This is a race for our lives. We need all instruments of public policy to accelerate action, even if it’s not risk to your own balance sheet. We need catalytic finance,” he added.

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