The global financial crisis exposed the dangers associated with foreign currency borrowing as a private sector business model. Sharp fluctuations in exchange rates forced some local borrowers with income denominated in local currency into insolvency.
In general, foreign currency lending has helped increase convergence in the EBRD regions. But large capital inflows have also led to overheating, macro imbalances and the systemic risk of borrowers without foreign currency income (unhedged borrowers) being unable to repay loans.
The EBRD believes that supporting local currencies and promoting the development of functioning capital markets is about fostering resilience in the countries where we work.
A resilient market economy supports growth, avoids excessive volatility and resists shocks and global challenges. Resilience is among the six transition qualities the EBRD has identified as the characteristics of a successful economy, along with competitiveness, inclusion, green, good governance and integration.
Apart from fostering resilience, strengthening local currencies and capital markets also supports other transition qualities; for instance, the development of a competitive market economy.
Capital markets can provide more attractive investing opportunities and alternative sources of funding to financial markets across our regions. They can also contribute to the competitiveness of small and medium-sized enterprises (SMEs).
SMEs are vulnerable to currency exchange fluctuations and this is why the availability of local currency financing is essential for them too. Helping SMEs does not only allow them to expand their activities, but also to create employment, increase economic productivity and promote innovation. Entrepreneurs benefit from competitive rates to finance their projects while being protected against foreign exchange risks.
Lowering the vulnerabilities associated with local currency financing and fostering the development of capital markets can act as a stimulus to economic growth in all sectors.