Caspian Energy (CE): Mr. Tsitsiragos, how successful was 2015 for IFС? What plans do you have for 2016?
Dimitris Tsitsiragos, IFC Vice President, Global Client Services: Despite the challenging environment and current volatility in many emerging markets, we made progress by staying engaged and bringing our financing, as well as global knowledge and expertise to our clients. Our financing in emerging markets in FY15 increased by 17 percent, reaching almost $18 billion. Over $7 billion of this amount was mobilized from other investors who joined us because of IFC’s 60-year track record of successful results.
By investing in our private sector clients, we contributed to economic growth, new jobs, better services, improved access to finance, and mitigating climate change. By the end of calendar year 2014, our clients employed 2.5 million people (including creating 1 million new jobs in 2012-2014), generated power for 56 million customers, distributed water to 23 million people, provided gas to 35 million people, and enabled 56 million micro, small and medium enterprises (MSMEs) to get credit.
Lower growth prospects, turbulence, lower commodity prices, weaker currencies, political instability and other factors continue to make our work challenging. Despite the difficult global business environment, our financial position remains solid, demonstrating that developmental success can be achieved alongside commercial success even in challenging areas. We will continue focusing on our strategic priorities to help countries create new sustainable jobs, improve infrastructure, boost small and medium enterprises, increase access to financing, and mitigate climate change.
CE: How would you assess the impact of long-term low oil prices on the global economy and investment activity?
Dimitris Tsitsiragos: Many oil-rich developing countries are currently facing lower incomes, a weakening of their currencies against the dollar or euro, lower investment prospects and constrained growth. Brazil’s economy, for example, is being hurt by the commodities slowdown. The World Bank has predicted a 3 percent contraction in its GDP this year.
While challenging, the new global economic outlook should also create incentives for these countries to change their economic growth model by diversifying their economies and developing non-extractive industries. In addition, many countries are reconsidering, and trying to rebalance, the roles of the public and private sectors in their economies. If we take Azerbaijan as an example, the country has used its oil revenues prudently – increasing social transfers, investing in infrastructure, and accumulating significant savings, and thus making remarkable progress in terms of reducing poverty and enhancing shared prosperity. However, the country didn’t diversify its exports and didn’t do enough to diversify its economy to increase competitiveness in the global market. With lower oil prices and a volatile regional environment, Azerbaijan’s economy, like many others in the region, is facing strong headwinds in the years ahead. The country needs to develop an economic growth model that relies more on a competitive private sector and non-oil exports.
Another country that is rethinking its economic model is Uzbekistan, which recently announced plans to privatize more than 1200 state-owned companies and attract more foreign and domestic private capital. Kazakhstan has announced similar plans. Privatization is just the means to an end - to create a more efficient and competitive economy. To achieve this, it is essential that privatizations are conducted transparently, creating a level playing field for everyone, whether local or foreign investors. In certain cases, countries must ensure an appropriate institutional and legal framework is in place before beginning the process.
CE: Given the current low levels of investment, subdued growth rates in many parts of the global economy and low inflation in developed markets, do you expect another economic crisis?
Dimitris Tsitsiragos: It is difficult to predict the future; however, we need to be able to think about what may happen and set our goals in line with this expectation. The general consensus among economists is that current volatility and low growth are the new normal and countries should develop their long-term strategies accordingly. As I mentioned before, many countries, especially those that centered their development on natural resources, need to reinvent themselves and become more competitive in the global economy.
I want to also highlight what the World Economic Forum calls the “fourth industrial revolution,” which we believe the world is now entering. Technology is becoming the engine of transformation in society, changing the ways people learn, produce and socialize. Whether countries get trapped in the “new normal” or take advantage of the “fourth industrial revolution” will depend on their ability to adjust their economic development models. To do this successfully, they will need significant private sector development and financing so they can invest in productive assets like new technologies, as well as in infrastructure, healthcare and education.
CE: How long will the current oil crisis last? What are IFC’s expectations regarding this?
Dimitris Tsitsiragos: As you know, global oil prices dropped by 35 percent in 2015. The International Energy Agency (IEA) estimates that oil prices may fall further this year because of Iran’s re-entry into the market, post-sanctions. So far, major oil producers have not been able to reach an agreement on cutting production levels, which makes it unlikely that oil prices will rise in the short/mid-term.
The World Bank recently lowered its 2016 forecasts for 37 out of 46 commodity prices, including oil, which is now predicted to average $37 dollars per barrel this year. A gradual recovery in oil prices is expected over the course of the year; however, this is likely to be much smaller than the rebounds that followed the sharp drops in 2008, 1998, and 1986. Furthermore, the price outlook remains subject to considerable downside risks.
CE: What pressure does the migration crisis in Europe put on global financial markets? How will it affect the EU economy?
Dimitris Tsitsiragos: The word ‘crisis’ is increasingly being used for any challenging situation. Let’s look at some numbers: The European Commission says 3 million refugees and migrants could arrive in Europe by the end of 2017, which sounds like a huge number. However, the Commission’s assessment of the potential impact of these newcomers is that it will be “relatively small” in the medium term, with GDP rising between 0.2 percent and 0.3 percent above the baseline by 2020.
While Europe's migrant inflow is likely to put a lot of stress on the host economies in the short term, with their ageing populations and shrinking workforces, migration could also result in long-term economic benefits. I would add that it is not Europe where most of the Syrian refugees have arrived, but Turkey, Lebanon, Jordan and Iraq, which have received 4.5 million refugees from Syria. And in these developing countries, with fewer resources and little experience of dealing with refugees, the effects, so far, have not been positive.
In Lebanon, where one out of 10 residents is now a refugee, the demand for electricity has increased by 27 percent in 18 months. According to a World Bank study, the influx of Syrian refugees cost the local economy $2.6 billion between 2012 and 2014. A 2014 study by the IMF concluded the overall macroeconomic effect of refugees in Jordan has also been negative. The country’s annual growth rate has declined by a percentage point, home prices and imports have risen, exports have dropped, an informal economy has been created, and inflation has increased due to surges in demand without corresponding upticks in production.
Ultimately, the effects of refugee inflow vary from country to country and from region to region. In the long run, they could add momentum to European economic growth. However, without collective efforts to integrate migrants into their host countries’ economies, the current challenging situation could become more difficult.
CE: Do you think Russia’s economic downturn has caused the current devaluation crisis in Azerbaijan?
Dimitris Tsitsiragos: While Russia is a large economy and definitely influences its neighbors’ performances, I would not overestimate its role. Russia’s share in Azerbaijan’s exports is under 3 percent. The devaluation of the manat was due to a combination of factors, with plummeting oil prices being the strongest.
The energy-rich CIS economies enjoyed significant stability and economic growth over the past decade on the back of rising hydrocarbon revenues. As a result, they were perhaps unprepared for a sharp drop in oil and gas prices. With mounting pressures on their international reserves and fiscal balances, a currency devaluation or depreciation and fiscal consolidation were unavoidable.
As I mentioned before, these countries need to diversify their economies and support policies that promote the development of non-extractive industries.
CE: Do you think Azerbaijan’s economy and financial sector deserve more attention from international financial institutions? Could there be some special support measures to boost the country's credit strength?
Dimitris Tsitsiragos: The World Bank Group developed a new Country Partnership Framework for Azerbaijan recently, in which all its members, including IBRD, IFC and MIGA, play a role in helping Azerbaijan diversify its economy, strengthen institutions and achieve sustainable and resilient economic growth. I know the EBRD, with whom we work closely in the Europe and Central Asia region, is also active in Azerbaijan. I think this is a strong signal that international institutions are ready and willing to provide help to the country.
With regard to the financial sector, the general economic slowdown is definitely reducing the appetite for new investments and contributing to lower demand for credit. But this is only part of the challenge for Azerbaijan. The penetration of domestic credit in the private sector remains relatively low, at about 30 percent of GDP, almost twice as low as the average in Europe and Central Asia. Moreover, the structure of bank lending has veered in the past few years towards consumer lending and shrinking lending to the real economy. Lending rates, at 18 percent on average, remain extremely high.
The cost of credit has to be lowered to channel credit into economy. The WBG’s Systematic Country Diagnostic suggests that low competition in the banking sector is one of the factors explaining high operating costs, poor quality loans and large interest spreads. Foreign banks account for only 10 percent of total banking sector assets. While this reduces external vulnerability, it reduces healthy competition and slows down financial sector modernization and innovation.
IFC works with banks in Azerbaijan to expand access to finance for small and medium companies and thus contribute to sustainable economic growth. We provide capital, liquidity, and trade finance to well-managed private banks, prioritizing on-lending to MSMEs, along with energy efficiency and renewable energy projects. We also advise banks on corporate governance and risk management, and help them introduce new innovative banking products, like mobile money services, agri-finance and gender finance, among others.
CE: What does IFC do in terms of supporting small and medium enterprises and ensuring sustainable economic development?
Dimitris Tsitsiragos: Small and medium enterprises (SMEs) account for about 90 percent of businesses and more than 50 percent of employment worldwide. They are key engines of job creation and economic growth in developing countries.
IFC supports SMEs through a combination of strategic investment and advisory services. Projects targeting MSMEs account for over 30 percent of our outstanding portfolio, as of February 2016. Over half of our advisory program expenses support activities aimed at improving conditions for SMEs, including their access to finance, cost of doing business, and integration into value chains.
We believe increasing access to finance for SMEs is best achieved by increasing the depth and breadth of local financial markets, and boosting the competitiveness of the financial sector. To support this, IFC invests in, and provides advice to, financial intermediaries to help expand their services to SMEs. Through our programs, we also promote reforms that support the private sector and help remove barriers to SME growth.
We work with banks globally to help them introduce SME lending products. In Azerbaijan, IFC client banks multiplied SME lending with our support, which has reached over 300,000 SMEs across the country. In many countries, we support the largest retail chains and agribusiness producers, which have extensive SME links. For example, agri-producers supported by IFC in Ukraine benefited 21,000 farmers in their supply chain.
IFC is also a technical advisor to the G-20 on SME finance. This includes providing leadership to the Global Partnership for Financial Inclusion and managing the global SME Finance Innovation Fund that was announced by President Obama at the G-20 meeting in Seoul in 2010. The fund provides policy recommendations to increase access to finance for SMEs in a sustainable and scalable manner, and promote new ways to deliver financial services to SMEs.
CE: What is IFC’s opinion of recycling projects in the EU, Azerbaijan and other countries in the region?
Dimitris Tsitsiragos: At IFC, we believe in doing everything we can to help improve the environment and mitigate climate change. In 2013, 3.5 million tones of solid waste were generated globally per day, and this number is expected to almost double by 2025. Poor solid waste treatment negatively impacts the environment and people’s health, and results in the poor use of raw materials and energy. Landfills are associated with high greenhouse gas emissions and local water and air pollution, and also negatively impact the landscape.
Different countries have different levels of recycling. Azerbaijan, like many other Caspian countries, could learn from the experiences of the EU, where these issues have had strong attention from policymakers. EU waste policy has evolved over the last 30 years through a series of environmental action plans, and a legal framework that aims to reduce negative environmental and health impacts and create energy- and resource-efficient economies. In 2012, 42 percent of treated municipal waste in the EU was recycled or composted and that share grows every year.
Globally, more and more private companies and public authorities are developing strategies for not only reducing waste, but also generating revenues from waste and recycling. IFC is looking for opportunities to support recycling initiatives with a range of products, from providing finance to helping structure Public-Private Partnerships and providing advisory services to municipalities willing to improve their performance in this area. We have supported waste management projects in several countries, including India, the West Bank and Gaza, and Turkey, and are very open to doing more in this area.
CE: How do you assess the impact of the Southern Gas Corridor project on investment and business activity in countries across the Caspian-Black Sea and Mediterranean? Does IFC have any plans with regard to funding this project?
Dimitris Tsitsiragos: The Southern Gas Corridor is one of the most complex gas value chains developed in the world, stretching over 3,500 kilometers, crossing seven countries and involving more than a dozen major energy companies. It needs a total investment of approximately $45 billion.
Diversified sources of gas for the region would definitely improve energy security and support sustainable growth. The World Bank Group has been asked to support the Trans-Anatolian Natural Gas Pipeline Project, which accounts for 1,825 km of the Corridor. In view of the financial structure of TANAP, WBG support is expected to be provided by IBRD and possibly also by MIGA.
Historically, IFC has been involved in other landmark regional infrastructure projects, such as the main export Baku-Tbilisi-Ceyhan pipeline. We are open to considering supporting the SGC, subject to defining the role of the private sector in the financing package and compliance with IFC's social and environmental standards.
CE: How do you assess Iran’s financial market prospects, and IFC’s role there?
Dimitris Tsitsiragos: We are gathering data and building our knowledge base regarding the Iranian economy. This includes the financial sector and the potential impact - both on Iran and the rest of the world - of lifting sanctions, in line with the recent agreement between Iran and the P5+1 (the UN Security Council's five permanent members, namely China, France, Russia, the United Kingdom, and the United States; plus Germany.)
Thank you for the interview
Interview made by Sabina Mammadova and Olga Nagiyeva