WASHINGTON, Nov. 12, 2020—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."
IFC—a member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work in more than 100 countries, using our capital, expertise, and influence to create markets and opportunities in developing countries. In fiscal year 2020, we invested $22 billion in private companies and financial institutions in developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity. For more information, visit www.ifc.org.
About the IDA Private Sector Window
As part of the 19th replenishment of the International Development Association (IDA), the World Bank Group is continuing the IDA Private Sector Window (PSW) created under IDA18 to catalyze private sector investment in the poorest and most fragile countries. Recognizing the key role of the private sector in achieving IDA's objectives and the World Bank Group's twin goals, the window provides a source of co-investment funding and guarantees to de-risk private investments supported by IFC and the Multilateral Investment Guarantee Agency (MIGA). The IDA PSW is an option when there is no commercial solution and the World Bank Group's other tools and approaches are insufficient. For more information, visit: http://ida.worldbank.org/psw
TCX is a global development finance initiative which offers long-term currency swaps and forwards in 80+ financial markets where such products are not available or poorly accessible. The Fund started operations in 2007 and has since then provided hedging instruments with a total volume of $8.5 billion, spread over 3500+ transactions. Today the fund has a total exposure of $5 billion in 60 frontier-market currencies. By selling parts of this exposure to private investors it creates markets and gives frontier countries access to the international capital market.