Side event at the International Debt Management Conference, 14th session:
Roundtable on currency risk and debt sustainability

Local currency depreciation can have a profound negative impact on a country’s debt sustainability. It can significantly increase a country’s debt burden when there are high levels of foreign currency-denominated debt.

A recent Economic Outlook by the African Development Bank shows to what degree increases in African public debt burdens are driven by exchange rate depreciation.

IMF data supports the strong relation between currency (FX) risk and debt distress. Empirical data over the past 30 years shows that FX is a highly influential factor affecting the increase in debt servicing costs in developing countries.

Hence, managing FX risk in public debt portfolios is critically important for debt sustainability.

Sourcing local currency financing would mitigate this risk. However, many developing economies have shallow onshore markets wherein the local deposits and savings base are inefficient to absorb the demand for local currency.  

At the same time, access to hard currency is essential to the balance of payments. 

• What other options do Debt Management Offices (DMOs) have available to manage FX risk in the short term?
• How can they source foreign currency-denominated financing without embedded FX risk?
• What practical steps can DMOs take to access offshore capital markets and attract international investors? 
• How does this contribute to domestic capital market development?

Objective and intended outcome

This workshop, targeted for Debt Management Offices, addresses these questions through peer-to-peer learning. Real-life examples will be shared to demonstrate how some developing countries have taken important steps to lower their FX risk exposure.

The session will collect feedback from participants on challenges that their DMOs face in FX risk management and will highlight the importance of capacity building to effectively manage and utilize local currency financing.

Participants will leave the workshop with a better understanding of howto manage FX risk and practical next steps they can take in collaboration with TCX.

Co-organizers

The workshop is facilitated by the Currency Exchange Fund (TCX); a development finance initiative that is impact-driven and protects borrowers in emerging and frontier markets from FX risk.

The Fund specializes in providing FX risk solutions in over 100 emerging and frontier currencies, even in the most challenging markets, without tenor limitations.