Using risk mitigation instruments to raise local currency for infrastructure finance in low-income countries
Room: BB1 Marie and Irene Curie
Description
Low income countries continue to face a growing financing gap between infrastructure investments needed and the financial resources available for them.
A key driver of this is the significant and largely unmet need to increase the volume and duration of local currency finance for infrastructure investment. Most infrastructure projects in low-income countries earn revenues in local currency. Therefore, the significant foreign exchange risk associated with hard currency financing is eliminated when debt interest and principal are also payable in local currency.
Guarantees provide an important catalyst and multiplier effect on expanding local bank, pension fund and institutional investor participation in offering local currency financing to capital intensive industries such as infrastructure – where longer maturity profiles are a necessity.
Guarantees encourage this by offering credit enhancing attributes that improve the risk profile and rating of local currency credit, allowing local currency investors with regulatory restrictions a framework to be able to participate in financing these projects. Local currency guarantees, through novel approaches such as liquidity or tenor extension products, are also able to facilitate the extension in maturity of local currency transactions, thereby allowing local banks to offer longer maturity profiles to infrastructure projects; addressing the liquidity and short-term lending restrictions many of them currently face.
Therefore, guarantees are strongly positioned to act as a critical component in scaling up risk mitigation in low income countries and allowing the growth of local currency financing. And in the face of the debilitating finance gap in low income countries, providing comfort to pension fund and private institutional investors is crucial in growing long-term local currency financing.
