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The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical (English)

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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    Blanco Cossio,Fernando Andres, Sachdeva,Niharika

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    Policy Research Working Paper

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    The World Region,

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  • Doc Name

    The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical

  • Keywords

    business cycle; Country Economics and Engagement; manufacturing, agribusiness, and services; Upper Middle Income Countries; cyclical component; return on capital; private capital flow; volume of investment; global economic crisis; business cycle fluctuation; effect of aid; investment by sector; private sector demand; private sector client; amount of pipeline; international financial institution; working capital finance; long term financing; impact of aid; global economic slowdown; international financial market; country fixed effect; interest rate cycle; offshore financial center; private capital inflow; asset price bubble; source of funding; global financial crisis; global development finance; portfolio risk management; long-term investment opportunities; investment finance; demand for credit; international portfolio investment; time sery; recipient countries; Investment strategies; real gdp; empirical evidence; asset quality; correlation coefficient; sovereign guarantee; risk premium; seasonal adjustment; Capital Inflows; financial sustainability; test statistic; empirical literature; net capital; portfolio performance; macroeconomic monitoring; investment pattern; aid policy; confidence interval; scatter plot; Investment Flow; core objectives; nonperforming loan; short-term risk; investment agreement; time horizon; average process; additive model; empirical analysis; business performance; cyclical fluctuation; literature review; expected loss; regression model; institutional investor; processing time; source country; investment cycle; Learning and Innovation Credit; macroeconomic stabilization; economic expansion; price effect; conservative investment; calendar year; repayment schedule; empirical example; fiscal space; private bank; client needs; project processing; short-term financing; long-term financing; adverse shock; financial product; delivery model; positive correlation; disruptive technology; Natural Resources; portfolio composition; demonstration effect; accurate projection; demand-side factor; macroeconomic indicator; firm-level analysis; project pipeline; firm level; market condition; macroeconomic environment; long-term risk; investment demand; illiquid asset; risk appetite; short-term portfolio; private investor; negative value; Career Compensation; disbursement delay; cyclical bias; institutional objectives; optimization problem; debt restructuring; econometric method; advanced country; advanced economy; important change; performance incentive; portfolio quality; fee income; multilateral development; investment behavior; Research Support; political unrest; large portfolio; risk assessment; macroeconomic shock; Civil War; Macroeconomic Trends; risk aversion; existing credit; private investment; macroeconomic perspective; financial model; demographic trend; long-term perspective; legal obligation; price fluctuation; capital gain; future research; profit seeking; average debt; lower rate; risky investment; debt instrument; internal investment; equity price; fundamental changes; Financing plans; cyclical volatility; credit market; open access; development policy; pending completion; empirical result; gross flows; institutional investment; Macroeconomic Policy; aid flow; international aid; annual increment; bilateral aid; trade shock; empirical investigation; industry group; aid effectiveness; portfolio asset; macroeconomic uncertainty; estimation method; country portfolio; performance objective; macroeconomic volatility; new information; robustness check; syndication fee; industry sector; Financial Stability; monetary policy; investment level; credit constraint; credit condition; empirical findings



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Blanco Cossio,Fernando Andres Sachdeva,Niharika

The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical (English). Policy Research working paper,no. WPS 9746,COVID-19 (Coronavirus) Washington, D.C. : World Bank Group.