Inter-American Development is eager to replicate its new currency hedging tool in other Latin American countries after last week’s inaugural transaction in Brazil, CFO Gustavo De Rosa told LatinFinance.
“It is definitely interesting for Mexico, Colombia, Chile,” he said in an interview. “It could be interesting for Uruguay and other countries where we can extend the tenor, not just lower the pricing. Sometimes there is a combination.”
In last week’s deal, IDB said it enabled Brazilian development bank BNDES to convert $437.5 million US dollar-denominated loan to Brazilian real (BRL) with an expiration date in 2030.
FX swaps help shield borrowers with loans in foreign currency from the financial cost of exchange rate volatility. Nevertheless, it may not be a one-size-fits-all in the region. Experts say the instrument requires a financially solid counterpart that has the necessary technical expertise.
“It is not something that we would offer to everyone, but it is definitely something where we do see potential, especially in the bigger countries,” De Rosa said.
“When it comes to providing instruments for currency risk hedging, we are definitely interested in exploring more options, but structured products like this transaction with BNDES will be used selectively.”
CURRENCY SWINGS
IDB is also planning to launch a comprehensive FX platform by the end of the year jointly with the Brazilian government. It will offer technical support, a contingent liquidity facility to absorb large currency swings, and financial derivatives to hedge foreign exchange risk.
“It is not just about hedging any single movement in the currency, but providing hedging or liquidity to projects” that could be affected by currency spikes or excessive depreciation, De Rosa said, adding: “The platform provides all those under a single instrument.”
Meanwhile, De Rosa said an initiative to use special drawing rights, or SDRs, from the International Monetary Fund to leverage the lending capacity of IDB and African Development Bank AfDB could take effect next year.
The Fund’s board approved the use of SDRs for hybrid capital instruments last month. IDB said the IDB-AfDB financial instrument could leverage them by up to four times their value in the form of loans to finance social and climate projects.
However, before the arrangement can be officially implemented, it requires five countries that provide contingent liquidity support to officially start the process.
“Our base case scenario is identifying these five countries by the end of the year and moving towards implementation next year, although that would even be an optimistic scenario,“ De Rosa said.