The Inter-American Development Bank has signed a pioneering agreement with the Brazilian Central Bank to unlock a foreign-exchange hedging “conduit” of up to $3.4 billion to help mobilize private investment for sustainable projects.
The “first-of-its-kind” agreement will allow the IDB to supply long-dated derivatives through the central bank, which will then channel them to beneficiaries via local banks. By reducing currency risk, the mechanism unlocks long-term private capital for investments in areas such as renewable energy, the bioeconomy, resilient infrastructure, and sustainable land use, the development bank said Friday in a news release.
“This structure reduces currency risk for investors while preserving the balance sheets of both the Central Bank and the IDB from FX exposure,” it said.
The hedging mechanism was first announced two years ago and now looks set to be implemented, pending the completion of operational changes at Brazil’s central bank. It is expected to give access to bigger FX hedges than those currently offered by the Brazilian government.
ESG PROJECTS
The new mechanism is designed to support the government’s Eco Invest program, a blended finance scheme to catalyze private capital and attract foreign investment for long-term, sustainable projects.
Eco Invest has already mobilized over BRL75 billion ($13.2 billion), including BRL46 billion from foreign investors, said the IDB, which has been supporting the program along with the UK government. Its fourth public auction took place on Friday during COP30 the United Nations conference on climate change, COP30, and was focused on bioeconomy and ecotourism infrastructure projects in the Amazon region, the Brazilian government said.
The FX hedging agreement “shows how central banks and multilateral development banks can work together to mitigate important market barriers and foster private investments for resilience and sustainable development,” said IDB Group President Ilan Goldfajn, in the release.
IDB also said the experience is replicable. “FX EDGE led by the IDB in partnership with Brazil and the United Kingdom aims to expand to other countries in Latin America and the Caribbean by 2030, drawing on the Eco Invest experience,” it said.