LFS Engagement in Local Currency Finance: Research & Deal Execution for Public- and Private-Sector Stakeholders.

Over the last year, LFS has managed many initiatives to promote the use of Local Currency (LCY) Finance in emerging markets – helping a variety of development finance stakeholders to mitigate the challenges that FX Risk poses to the achievement of the Sustainable Development Goals. 

One ongoing project – with a leading, SME-focused African asset manager – involves developing a conceptual & operational framework to start lending in LCY, and helping its Sub-Saharan African SME investees to manage their complex FX risk exposures. 

In practice, this has required assisting African SMEs to (a) identify / understand in-depth underlying FX mismatches, and (b) fruitfully negotiate FX solutions with local banks and non-bank FX counterparties, while at the same time working with the Asset Manager to critically assess the costs/benefits of setting up FX hedging lines, rigorously evaluating the financial sustainability of impact lending models in multiple currencies (reflecting key informant interviews, research of pricing information, market conditions). As part of the engagement, LFS will also conduct an “Innovative Local Currency Risk Management Ideas” Workshop – looking at practical applications as well as recent literature – in particular (a) Local Currency Bond Issuance, (b) Proxy Hedges for Frontier Currencies, and (c) Use of Non-Linear Currency Hedges. 

Another influential assignment has been with the German Federal Ministry for Economic Cooperation and Development (BMZ) and the German Development Bank, KfW. 

Within this ambitious project, LFS co-authored a Stocktaking Report on Innovative LCY Solutions (as well as the sections on Sustainable Development Bonds, and on Securitization), producing a detailed, operational summary of innovative LCY finance trends, strategies, and solutions, taking into account the lessons learnt from a broad range of approaches by a large variety of development finance stakeholders. As part of the engagement, LFS organized and moderated a LCY Workshop at the OECD PF4SD 2020 Conference in Paris (see picture above), with panelists including representatives from the European Commission, EBRD, TCX, Citibank, the Eastern and Southern African Trade & Development Bank (TDB), and Cardano. It also co-organised and held the first “KfW InnoFin Lab” at KfW’s offices in Frankfurt, presenting innovative LCY finance developments. 

Current preparatory work is ongoing for a further increased engagement of LFS in LCY – specifically, supporting selected development finance counterparties to complete the transition to becoming local currency finance providers, thus addressing the fundamental threat posed by FX mismatches to development finance.