Moderators of Structural Moderators of Structural Risks in Rural Risks in Rural Development:Development:

Perspectives and Actions from Perspectives and Actions from FAOFAO

Calvin MillerCalvin MillerSenior Officer – Rural FinanceSenior Officer – Rural Finance

Budapest, HungaryBudapest, Hungary11-12 January, 200611-12 January, 2006

Presentation ObjectivePresentation Objective

Moderators of Structural Moderators of Structural Risk Risk

Requirements for Requirements for rural investmentrural investment

Risks we want to Risks we want to mitigatemitigate

Responses of Responses of what has workedwhat has worked

Conclusions and Conclusions and questionsquestions

Key Challenges for Rural Key Challenges for Rural InvestmentInvestment

Environment (political, regulatory and Environment (political, regulatory and macro)macro)

Vulnerability (systemic risk, market Vulnerability (systemic risk, market risk and credit risk),risk and credit risk),

Competitiveness (profitability, Competitiveness (profitability, resiliency and cost), andresiliency and cost), and

Capacity (human, institutional and Capacity (human, institutional and infrastructural)infrastructural)

Requirements for Rural Investment

Supportive operating environmentAttractive and resilient returns to investmentSuitable financial products and services

Operating EnvironmentOperating Environment

Macro economic Macro economic environment environment

Currency risksCurrency risks Country risks and ratingsCountry risks and ratings Regional risksRegional risks Land tenureLand tenure

Social and political risksSocial and political risks

Example of Bolivia vs. HungaryExample of Bolivia vs. Hungary

Bolivia*

Currency rating = B3

Bank deposits = Caa3

Country LT Rating = B1

Risk Premium = 4.5%

Hungary*Currency rating = A1

Bank deposits = A1

Country LT Rating = Baa2

Risk Premium = 1.3%

* Moody’s – 2005 data for currency;

2003 for country ratings

Moderators at Three LevelsModerators at Three Levels

Client/EnterpriseClient/Enterprise Financial InstitutionFinancial Institution Macro/multi-institutionalMacro/multi-institutional

Finance is tool – not a meansFinance is tool – not a meansto an end in rural developmentto an end in rural development

Credit guarantees – are tools forCredit guarantees – are tools forfinancial service growth and financial service growth and enhancementenhancement

Returns to InvestmentReturns to Investment

Enterprise Level ROIEnterprise Level ROI

Capital rotation Capital rotation

Long term lending Long term lending needsneeds

Risk – market, Risk – market, climatic, resource climatic, resource timelinesstimeliness

Profitability and Profitability and reinvestmentreinvestment

Capacity, skill and Capacity, skill and technologytechnology

Returns to InvestmentReturns to Investment

Financial Entity ROIFinancial Entity ROI

High cost with limited returnsHigh cost with limited returns

Lack of economies of scaleLack of economies of scale

High perceived risk – systemic, High perceived risk – systemic, market and clientelemarket and clientele

Lack of acceptable collateralLack of acceptable collateral

Returns to InvestmentReturns to Investment

Guarantee and Capital Investment Guarantee and Capital Investment Enhancement FundsEnhancement Funds

High unit cost/lack of economies of High unit cost/lack of economies of scalescale

Risk of unknown, of systemic risk, Risk of unknown, of systemic risk, market market

Lack of adequate policiesLack of adequate policies

Risk Mitigation ApproachesRisk Mitigation Approaches

CompetitiveneCompetitivenessss

DiversificationDiversification

Value chain Value chain linkageslinkages

Input Supplier

Commercial

Banks

MFIs,

Cooperatives,

NGOs

Farmers

Input Suppliers

Producer groups

Producer groups

Medium/Large

Exporters &

Processors

Commercial

Banks

MFIs,

Cooperatives,

NGOs

Local Traders &

Processors

Farmers