Economic Issues
1. Market forecasts: IFC should pay very careful attention to market forecasts, including the competitive forces affecting overall demand and purchasing patterns. In particular, the following types of projects may be vulnerable:
projects relying on local markets, especially those depending on natural protection or economic distortions;
projects with historical price cycles; and
projects in countries facing extreme economic distortions and/or structural adjustment and liberalization (e.g. the former Soviet Union), or in weak, volatile economic environments.
2. Inflation/devaluation: IFC's evaluation of projects in an inflationary economy should more fully consider the impact of inflation on project profitability as well as the impact of currency devaluation, particularly when financing is in foreign currency. Institutions should not be considered to be profitable or be allowed to pay dividends if inflation is reducing their net worth in real terms.
3. Structural changes: Where major structural change is likely, financial projections should be discounted further to allow for additional uncertainty. In addition, IFC should:
limit its exposure to firms with the highest probability of success;
undertake special monitoring, particularly of the project's market; and
seek more liquid instruments in equity investments, if available.
4. Minimum economic requirements: Promoting development through private initiative requires a minimum of stability and prosperity. If IFC does invest in a country with economic instability, the following measures can help:
investing in projects with strong sponsors;
investing in companies with strong management;
conservative financing structures; and
investing in companies with diversified operations.
The above lessons are based on 46 lessons from past IFC investments.
Last updated December 1998.
