The FINANCIAL — IFC, a member of the World Bank Group, and The Currency Exchange Fund (TCX) have bolstered their partnership to promote cross-border investment flows by helping investors manage currency risk in the world’s poorest countries.
IFC is investing $10 million in TCX for its own account and $40 million as the implementing entity of the International Development Association’s (IDA) Private Sector Window (PSW). The transaction is expected to increase the availability of affordable long-term local currency for local companies trying to expand and generate new jobs and financial opportunities to entities whose revenues are in local currency.
Cross-border capital flows are a vital source of funding for developing countries, which have become more reliant on foreign capital. De-risking cross-border investments for companies with local currency revenues through local currency financing is fundamental and requires instruments like currency and interest-rate swaps. Yet, the market for these instruments is extremely limited in IDA countries, posing a significant challenge to the integration of these markets into international financial markets.
“Long-term local currency funding is indispensable for businesses that generate revenue locally but is often strikingly absent from certain markets,” said Stephanie von Friedeburg, Interim Managing Director and Executive Vice President, and Chief Operating Officer of IFC. “Our partnership with TCX aims to fill that pressing gap and offer a lifeline for the private sector in some of the poorest counties.”
IFC’s investment is part of a $200 million capital increase for TCX, which also includes investment by the European Commission (EC), Kreditanstalt für Wiederaufbau (KfW), and Proparco. The investment deepens IFC’s relationship with TCX, which began in 2011, when IFC invested $29.7 million in the fund.
Ruurd Brouwer, CEO of TCX, said, “IFC’s investment increases TCX’s hedging capacity, allowing us to offer more long-term hedging products in IDA PSW countries. We expect the availability of risk management products to promote cross-border investment flows, reducing the gap of local currency financing in IDA countries. Especially the poorest countries that lack reserves are vulnerable to currency depreciations. Sudden devaluations, such as seen during the Covid pandemic, put many households and other local entities that have borrowed in foreign currency at risk of default. Allowing them to borrow in their local currency instead increases financial resilience and, ultimately, improves the investment climate of the country.”