Objective and Additionality
The Local Currency Facility (LCF) provides long-term local currency to IFC investments in IDA countries where capital markets are not developed, and market solutions are not sufficiently available. The LCF allows IFC to provide financing in local currency for high impact projects in IDA and FCS countries where local currency solutions are underdeveloped or completely missing. This facility targets clients who operate in markets in which currency hedging options are absent or very limited.
The facility is designed to enable IFC to offer local currency loans, while fostering complementarity with existing solutions, such as domestic banks, The Currency Exchange (TCX), central banks, etc. IFC follows a “solutions hierarchy” when attempting to source local currency for IDA PSW-supported projects. It first seeks to provide the needed currency through existing market solutions, other non-market providers such as TCX, and through existing or new IFC liquidity operations in IDA PSW-eligible countries before resorting to options provided by the LCF (see Figure 5).
This facility is backed by IDA resources set aside to backstop the LCF so that IFC can provide various operations in local currency. The facility acts as a risk transfer vehicle for IFC operations in IDA PSW-eligible countries only up to the designated allocation of IDA PSW’s resources, indicated as US$400 million. While IFC continues to hold the credit risk of the underlying loans and investments, the main operations of the LCF covers the following risks:
Counterparty credit risk.1 LCF resources absorb the counterparty credit losses of IFC’s hedging counterparty if its credit quality does not meet IFC’s standard counterparty criteria or if they are non-traditional counterparties;
Market and credit risk associated with managing short-term liquidity in local currency instruments. The client covers the expected negative changes in value while the IDA PSW covers unexpected changes in the value of the local investments into which the proceeds of its bond issuance were temporarily invested until disbursement.
Transfer/convertibility risk. When using local counterparties, IFC is able to offer a deliverable swap but hedge the market risk with an undeliverable swap obtained offshore; the LCF resources cover the inability to convert/transfer the currency without a loss when the underlying hedged loan matures.
Open currency/interest rate risk. If market-based solutions are not available, IFC hedges its currency and interest rate risk with the LCF, and the latter covers any losses (or receives the gains) related to changes in market rates over the term of the hedged investment. The LCF is actively managed by IFC on a portfolio basis to facilitate diversification of risks borne by the LCF resources, which may include employing strategies to hedge open risks. Should IFC suffer actual, realized losses on local currency investments undertaken with the LCF, IFC submits a payout request to IDA for reimbursement of the amount of the loss.2 The LCF operates on the principle of minimum concessionality and is consistent with the facility’s capital framework, whether IDA acts as a direct counterparty with IFC or another entity that can better play the role.
Contact: Kevin Kime, Principal Financial Officer, IFC, firstname.lastname@example.org