As financial markets in Latin America have grown in sophistication and achieved greater stability, there is a growing effective demand for financing in local currency. Borrowers’ increased awareness of the need to reduce currency mismatches and the resulting vulnerabilities in their balance sheets is underscored by their recent efforts for further development and deepening of local capital markets.
Responding to the needs of its borrowers, the IDB
enhanced its local currency financing framework
on April 1, 2008. The expanded framework offers a
more competitive lending rate and a variety of new,
attractive features. See a description of key features
and a series of frequently asked questions regarding the new facility.
The new policy significantly enhances the local
currency financing options previously provided.
For the first time in its history, the IDB now has
a specific facility and policy framework that authorizes
a local currency loan from the inception of an
operation.
Local currency financing enhances the ability of
sub-national governments — such as provinces
and municipalities — and the private sector to have
greater access to multilateral financing.
Products
The IDB offers four basic local currency products:
• loans and guarantees denominated in borrower’s
own currency from the inception
of an operation;
• loans and guarantees denominated in an alternative
Currency of the region;
• conversion of foreign currency loans (either outstanding
balances or at the time of disbursement);
and
• direct currency swaps against existing IDB debt
Leveraging the IDB's Triple-A Rating
The IDB executes local currency financing operations
via the matched funding approach,. To match the cash flows desired by
borrowers in each disbursement or conversion,
local currency loans are negotiated on a case-by-case
basis.
Loan Terms
Sovereign Borrowers
Lending costs are based on the IDB’s cost of funds in local
currency plus a lending spread equal to that charged on foreign
currency financing for other IDB operations with sovereign guarantees.
All loans and guarantees are subject to market availability at the time
of execution.
Non-Sovereign Guarantee Borrowers
Lending costs are market-based to reflect risks associated with projects. The IDB commits to pricing in either local currency or US dollars (the equivalent in local currency is determined at the time of disbursement). Such commitments depend on the currency desired and the length of the disbursement period
Hedging Currency Risk
In the case of direct currency swaps against existing IDB debt,
the IDB negotiates an ISDA Master Agreement* with its borrowers.
The agreement serves as a tool for borrowers to execute local currency
hedging operations with the IDB.
To provide access to local currency financing for borrowers in countries with relatively less developed capital markets, the IDB seeks to identify hedging services that may serve as a swap counterparty to the Bank.
For more information on the IDB Local Currency Facility,
call +1 202.623.2863, send email to lcf_fin@iadb.org or visit us online at http://www.iadb.org/fin
* International Swaps and Derivatives Association
