Borrowers are increasingly demanding financing, guarantees and hedging products denominated in their own currencies from the IDB to better manage assets and liabilities currency mismatches and mitigate vulnerabilities to exchange rate exposures in their loans with the IDB. Please see Local Currency Financing.
In addition to the obvious reduction of currency exposures in borrowers' balance sheets, LC financing enables the development of local capital markets, and facilitates asset/liability management strategies of governments and private sector entities.
The IDB's offering of LC financing depends on the availability of local currencies which the IDB can efficiently intermediate in the financial markets at terms and conditions suitable to borrowers needs. LC availability varies from currency to currency depending on the extent of development of local markets.
Demand for LC financing from the IDB is driven by sovereigns, sub-nationals, and private sector entities. Demand from sovereigns is driven by debt strategies pursued by borrowers, which seekto improve the currency composition of total debt with greater emphasis on LC denominated debt and further the development of local capital markets.
Demand from sub-nationals and private sector borrowers is mainly driven by limited access to internationalor local capital markets, which result in limited amounts of project financing at higher costs, shorter tenors and tighter financial conditions.
At the time of disbursementof a LC loan or conversion of a disbursement or outstanding loan balance (OLB) into LC, the IDB executes a simultaneous funding or hedging operation in LC in the market. The debt service of such financing operation matches the maturity, interest rate type, cash flows and other terms of the IDB's funding or hedging operationsuch that the IDB is entirely hedged from any currency exposure.
By design, the terms and conditions of the LC Financing modalities do not contemplate the acceptance of currency exposure by the IDB.
TheThe IDB's Asset and Liability Management Committee (ALCO) approves and updates on an ongoing basis implementation guidelines and risk limits
Local currency financing options under the FFF include the following modalities:
- Lending in LC
- Hedging through direct currency swaps against existing IDB debt
- Extending LC guarantees