Sustainable energy access Managing FX Risk in Climate Finance

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Presentation transcript:

Sustainable energy access Managing FX Risk in Climate Finance

Setting the stage FX Risk = FX market risk + inconvertibility & transfer + counterparty risk FX risk is a major cost component and inadequate risk allocation/management slows technology roll-out Social impacts, micro-economic impacts, macro-economic impacts

Currency Risk Threatens Energy Access What to do? Borrow locally Securitize local currency asset Buy a cross currency swap Hike tariffs/rates A 10% devaluation reduces the asset value of the un-hedged company by ~$0.6m. The hedged company faces a reduced asset value and(!) a reduced liability value with a P&L effect close to 0.

The siren call of fx speculation ? 5% USD loan 12% LC loan

Beware! Currencies crash all the time.... The share of countries with annual depreciation rates greater than 15 percent, 1800-2007, Reinhart and Rogoff, 2010

TCX Absorbs and Allocates FX Risk Global risk pools which offers 15y+ hedges in > 70 currencies, > USD 4bn closed, special impact on Micro and SME finance Cooperates with DFIs, commercial banks and institutional investors to deepen local markets: additionality + risk-reflective pricing A scaleable solution: global diversification and stable operating costs. Blending Instruments

TCX Success Factors Diversification and scale Pricing capacity and expertise in challenging environments Patient capital and supportive stakeholders Innovation (pricing models, delivery, etc)

Power of Diversification Period 2006-2016, Annualized avg. monthly return, annualized STDV

Hedging Of Solar Project in Kenya KES SE4All Projects/Firms/SPV LCY Revenues US$ KES loans US$ loans Concessional fx hedges Competing Funders: DFIs. Specialized Funds, Institutional Investors, Commercial banks ISA - Donor Concessional fx hedges TCX: risk pool & market maker Concessional fx hedges Intermediating DFIs, Specialized Funds Market Reflective FX hedges Pension Funds Commercial banks

Future Topics Counterparty Risk Inconvertibility GREG Role of Subsidies – Impact and distortions

Summing up FX Risk is main risk/cost factor in access to energy. TCX provides long-term hedging instruments for most DAC/IDA currencies (http://www.tcxfund.com/products/currencies-capabilities-map) TCX can become a main fx risk solution for climate finance because it is highly scaleable, crisis tested, and crowds in private sector capital.

http://www.tcxfund.com | +31 20 531 4851 Per +31 6 2256 3385 | Jerome +31 6 1269 0406