The EBRD's investment in the Currency Exchange Fund (TCX Fund) has helped Kyrgyz and Azeri small businesses flourish. Two recently-signed local currency loan transactions are landmark deals in terms of the benefits they bring to the small and medium-sized businesses and the support they will give to partner banks lending into the real economy.
In July 2009, ATF Bank Kyrgyzstan signed a loan in Kyrgyz som equivalent to US$ 5 million for lending to small and medium-sized businesses. Unibank Azerbaijan signed an Azeri manat loan worth US$ 18.5 million, also for onlending.
These are the first local currency loans made by the EBRD in these countries and have been made possible by the EBRD's investment in the Currency Exchange Fund (TCX). This is a specific foreign exchange currency fund which allows the EBRD to access local currency derivatives mainly in the Early Transition Countries (ETCs) and the Western Balkans.
“There are currently around 10 further local currency loans in the EBRD's pipeline in Armenia, Azerbaijan, Georgia, the Kyrgyz Republic and Moldova likely to be signed in 2009. Other sectors and countries could also benefit,” says Chikako Kuno, EBRD Director for Small Business Group. And Ben Leikis from the EBRD Client Risk Management team is keen to point out that these aren’t the only countries in which the TCX Fund could prove useful: deals in Albania, Bosnia-Herzegovina, Croatia, FYR Macedonia and Mongolia are also eligible.
“The recent financial crisis has shown the real risks that many borrowers in the EBRD countries of operations face servicing loans when they borrow in hard currency but have local currency revenues,” said Grant Metcalfe-Smith, Head of Client Risk Management in EBRD's Treasury Department.
Who is involved?
The TCX Fund has 21 investors, of whom the four principals are the EBRD, the African Development Bank, FMO (the Dutch development finance company) and Germany’s KfW. The EBRD is the first international financial institution to implement the fund in the region where it operates.
The EBRD has a particularly important part to play in the Fund’s development: with its expertise in local currency funding and in regional markets, the Bank has been instrumental in establishing local interest rate indexes in Kazakhstan, Russia and Ukraine and in identifying optimal indexes. Through the Bank’s discussions with TCX, the rates referenced in hedging are revised to ensure the client has the most representative cost.
Educating clients is a key factor in promoting the use of local currency hedging instruments. “Financial institutions and ETC corporate training seminars are also being led by the Bank this month in Tbilisi and later in the year in Bishkek. This will emphasise the importance of managing foreign exchange and interest rate risks for our partner banks’ clients,” confirms Alfonso Vega, Associate Banker in the EBRD Small Business Group.
“Events in 2008 and this year are still uppermost in many of our clients’ minds and sharp currency devaluation has proven that many local currencies’ historically high interest rates indicate real risks,” says Mr Metcalfe-Smith. “Interest rates have fallen in many of the countries where the Bank operates and this is likely to encourage further interest in taking local currency loans. Admittedly, clients have felt cautious about trying anything new in such an uncertain climate, but we have worked hard to show them the benefits of a different approach," he added.
Ms Kuno adds: “Particularly in this volatile environment, companies and institutions need to manage the risks they can control to stay in business and TCX provides a way for the EBRD to mitigate currency risks for its clients in the smaller countries of operations.”
Could the TCX Fund help you? Funds are limited, so contact the EBRD Treasury Department to register your interest.