WASHINGTON, D.C., June 16 -- The use by developing countries of sophisticated financial hedging instruments for managing risk is increasing, according to a new discussion paper by the International Finance Corporation (IFC). In the past, firms in developing countries have had limited access to a wide range of risk management techniques, which have been used almost exclusively by businesses in advanced market economies. The study reports that developing country firms are slowly overcoming obstacles created by credit considerations, lack of information, and domestic financial regulations to gain better access to risk management techniques. IFC is playing a facilitating role in this process. The study is titled How Firms in Developing Countries Manage Risk (Discussion Paper 17) and was written by Jack Glen of IFC's Economics Department. Says Glen, "IFC has developed expertise in using derivative products and managing the risks associated with them... the Corporation has developed the ability to assess and manage
the credit risk of private sector companies in developing countries." IFC's role in introducing and educating management in developing country firms to these innovative measures is described, although the paper warns that "these barriers are only slowly being overcome." The study lists the sources of risk: exchange rate, interest rate, and commodity price risk, and also discusses insurable risk, economic and political risk, inflation risk, and country risk. Under "Measurement and Management of Risk," it examines how risk management instruments, also known as "derivative securities", emerged in response to increasing volatility in international markets. This section gives an overview of forward contracts, swaps and options, and the international risk management markets.
Chapter IV: "Managing Risk in Developing Countries" observes that, despite impediments, risk management is a growing field in developing countries. It describes how some firms are managing financial risks and illustrates, through specific examples, that failure to do so could be costly. The final chapter "Managing Economic Exposure" considers how real exchange rate fluctuations can adversely affect the ability of firms to compete. It also relates how economic exposure can be managed with attention to financial planning and management of operations, procurement, marketing and personnel. The study concludes by noting that "the experience of developing country firms shows that the mystery surrounding derivative securities is rapidly fading and that firms are becoming quite adept at managing risk." Although the access of developing country firms to some of the more sophisticated financial instruments is still limited, "indications are that this will change for the better as economic and financial liberalization p
roceed." IFC is a member of the World Bank Group and is the largest source of equity and loan financing for private sector projects in developing countries. In the area of risk management, IFC's services include providing advice on defining hedging strategies and instruments, intermediating the purchase of hedging instruments, mobilizing the participation of international banks in such transactions on a risk sharing basis, promoting the development of local capital markets by bringing these techniques to local financial institutions, and, transferring technical know-how.
