02 September 2023

Study: the impact of currency risk on PDBs and their ability to maintain sustainable resilience.


Intro and Highlights findings

TCX Fund, in collaboration with the Finance in Common initiative, Deloitte and AFD Group, has conducted a comprehensive study to examine the influence of currency risk on the ability of Public Development Banks (PDBs) to attain the Sustainable Development Goals (SDGs) while maintaining resilience. Data collected through a survey held amongst 100+ representatives of PDBs in Africa, Asia and LATAM region show that two-thirds of PDBs are exposed to currency risk and that 64% of respondents consider this a significant threat to their organization's profitability.

To put that into context, PDBs often rely heavily on foreign currency financiers to fund major development projects. Since PDBs generate income from these projects in local currency, the depreciation of their local currency can lead to financial losses as well as complicate repayment of hard currency debt. On top of that, foreign exchange volatility disrupts the pace of financing, leading to 25% of respondents indicating postponement or all-round cancellation as a result of currency fluctuations.  

Still, most financing happens in hard currency as only 17% of respondents currently receive financing from MDBs in local currency and 80% report limited or no availability of currency loans or currency hedging products. While regular stress tests on currency risk are common practice in nearly half of respondents, results show only one-third of surveyed PDBs actively use hedging strategies to manage currency risk. Yet, despite regulatory, financial and human resource constraints, two-thirds of surveyed PDBs expressed a desire to have access to such de-risking solutions.


The way forward

These findings highlight how crucial it is for participants in the ecosystem to join forces and offer concrete, actionable solutions for PDBs to reduce currency risk. Finance in Common, together with the International Development Finance Club (IDFC), AFD Group, Deloitte and TCX Fund, put forth these recommendations to scale PDBs resilience and effectiveness in achieving the SDGs: 

  • Scale up the local context and regulatory frameworks by strengthening capital markets, ensuring effective regulation and supervision.
  • Highlight existing responsible financing solutions by promoting LCY financing and lending from MDBs to PDBs, enhancing the use of solutions offered by FX hedging providers and emphasizing the role of blended finance in drawing in additional sustainable capital.
  • Improve PDBs' capacities to mitigate currency risk by supporting and reinforcing internal capabilities through training, knowledge sharing and promoting inter-PDB cooperation.


Collective action

To spur further cooperation on the topic on local currency financing and drive forward the abovementioned goals, :

  1. The co-sponsors of this study commit to work together to try to mobilize resources for i) a blended (first-loss, concessional, risk-sharing) finance program, ii) a collateral guarantee program to the reduce financial barriers associated with using hedging products and/or iii) a capacity building program focused on improving data and reporting systems, risk management and collaboration between PDBs.
  2. The co-sponsors of this study aim to sign a Memorandum of Understanding to formalize continued cooperation on executing the five recommendations set out in the report.
  3. FiCS, with TCX support, will lead the way and commit to exploring LCY solutions for smaller PDBs as soon as possible while encouraging MDBs to do the same. The other co-sponsors of this study commit to providing subject matter support.