1. Moderators of Structural Risks in Rural Development: Perspectives and Actions from FAO Calvin Miller Senior Officer – Rural Finance Budapest, Hungary 11-12 January, 2006

2. Presentation Objective Moderators of Structural Risk Requirements for rural investment Risks we want to mitigate Responses of what has worked Conclusions and questions

3. Key Challenges for Rural Investment Environment (political, regulatory and macro) Vulnerability (systemic risk, market risk and credit risk), Competitiveness (profitability, resiliency and cost), and Capacity (human, institutional and infrastructural)

4. Requirements for Rural Investment Supportive operating environment Attractive and resilient returns to investment Suitable financial products and services

5. Operating Environment Macro economic environment Currency risks Currency risks Country risks and ratings Country risks and ratings Regional risks Regional risks Land tenure Land tenure Social and political risks Example 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

6. Moderators at Three Levels Client/Enterprise Client/Enterprise Financial Institution Financial Institution Macro/multi-institutional Macro/multi-institutional Finance is tool – not a means to an end in rural development Credit guarantees – are tools for financial service growth and enhancement

7. Returns to Investment Enterprise Level ROI Capital rotation Long term lending needs Risk – market, climatic, resource timeliness Profitability and reinvestment Capacity, skill and technology

8. Returns to Investment Financial Entity ROI High cost with limited returns Lack of economies of scale High perceived risk – systemic, market and clientele Lack of acceptable collateral

9. Returns to Investment Guarantee and Capital Investment Enhancement Funds High unit cost/lack of economies of scale High unit cost/lack of economies of scale Risk of unknown, of systemic risk, market Risk of unknown, of systemic risk, market Lack of adequate policies Lack of adequate policies

10. Risk Mitigation Approaches CompetitivenessDiversification Value chain linkages Input Supplier Commercial Banks MFIs, Cooperatives, NGOs Farmers Input Suppliers Producer groups Medium/Large Exporters & Processors Commercial Banks MFIs, Cooperatives, NGOs Local Traders & Processors Farmers