How multilateral development banks can help promote private investment in emerging markets

Emerging markets urgently need increased private investment to close their financing gap – whether for climate adaptation, achieving the Sustainable Development Goals or rebuilding after natural disasters and conflicts. Public financing and aid, both under strain, cannot meet these needs alone, and domestic banks often lack the capacity to provide sufficient funding. 

The global private sector must have the tools, ability and incentives to increase investments in emerging markets and direct them towards development objectives. This, however, is a shared responsibility. Multilateral development banks and development finance institutions – which we will refer to collectively as MDBs – act as key enablers, collaborating with the private sector and encouraging countries to implement ambitious reforms.
 
Investor perception of emerging market risk remains a significant barrier to mobilising private capital for these countries. Following the global financial crisis, regulatory tightening increased the cost of capital for commercial banks, leading to a shift towards home markets and reduced available capital for emerging markets. Ongoing economic and geopolitical crises undermine investor confidence, resulting in a high inflationary and weakened macroeconomic environment across both developed and emerging markets.

Even in times of greater stability, many investors – particularly international ones, but often local institutional investors as well – view emerging markets as disproportionately risky. This perception partly stems from limited knowledge of local borrowers and financial systems, making it challenging to identify viable opportunities and navigate these markets.
 
At the same time, local borrowers often face difficulties in accessing global capital markets due to limited international networks. In addition, local businesses often rely on revenue in local currency, while investors prefer to hold hard currency, which creates a mismatch between local financing needs and investor preferences.

The regulatory landscape in many emerging markets is complex and fragmented. Financial reporting and transparency requirements can fall short of the standards expected by international investors. Without consistent, detailed and reliable information, investors struggle to accurately assess risk and trust the stability of local markets. Frequent changes in regulations and inconsistent enforcement introduce an element of unpredictability that deters long-term investments.
 
Addressing these barriers is crucial to mobilising private capital and direct investments towards development objectives. MDBs like the EBRD are in the position to help address this challenge by demonstrating that relative positive performance in emerging markets is achievable. 

Emerging markets are projected to grow faster than developed economies over the next four years, according to the International Monetary Fund’s latest World Economic Outlook. This growth opens opportunities for investments, particularly through partnerships with MDBs, given their strong performance record and local expertise.
 
The EBRD originates assets that consistently demonstrate lower loss rates and higher recovery rates than similarly rated investments, even in developed economies, challenging common misconceptions about high risk in emerging market investments. This is largely thanks to our thorough due diligence and negotiation, close involvement in projects and our mission-driven approach, which helps mitigate risks while focusing on long-term economic and social impact.

To prove this and bring comfort to institutional investors in particular, MDBs are increasingly sharing data on how their assets perform: a recent publication by the Global Emerging Markets Consortium shares more granular default and recovery statistics than ever before, highlighting MDBs’ stable loan performance. Four MDBs – the World Bank Group, the Inter-American Development Bank Group, the Asian Development Bank and the EBRD – have taken further steps and released their own data on probability of default and loss given default. This provides investors with greater insights into credit risks in emerging markets and allows them to better guide their asset allocations.

MDBs should also ensure the private sector is able to capitalise on their status as multilateral institutions. For instance, the EBRD can extend its ‘preferred creditor status’ to private investors through different mobilisation products in which the MDB remains the lender of record. These include the A/B loan product and, more recently, products for insurers and reinsurers.

To further broaden investor access to emerging markets, the EBRD is developing innovative financial products tailored to institutional investors. This includes portfolio-based products, such as synthetic risk transfers, which attract investors who are able to take exposure on a portfolio level rather than on a deal-by-deal basis. In addition, the EBRD recently signed two blended finance instruments backed by donors for the benefit of co-lenders: the European Fund for Sustainable Development Plus (EFSD+) Guarantee Programme and Germany’s International Climate Initiative.

Finally, the EBRD provides not only funding but also local expertise and support for regulatory reform, which are key for successful investments in unfamiliar markets. The EBRD maintains long-standing relationships with regional governments and companies, providing a level of trust that can be critical for private investors. Supporting regulatory reform through policy dialogue with governments and aligning legal frameworks with international standards, including in the areas of capital markets development and climate finance, are core activities to make emerging markets more accessible and attractive for private investment.

But more needs to be done. Coordinated actions from development banks, regulators and the private sector are needed to help address common challenges and close financing gaps for climate adaptation, development and post-crisis recovery. By sharing data, innovating and supporting the private sector, the EBRD and other MDBs can help pave the way for greater investment in emerging markets.

Daniel Borrego Cubero leads the Debt Mobilisation Product Development unit at EBRD. Angeliki Koufali and Daria Fagioli are analysts in the Debt Mobilisation Product Development unit.

The views are those of the authors and not necessarily those of ECDPM.