The EBRD is stepping up its support of local capital market development and local currency lending in countries where local financial markets are at early stages of development.
The EBRD Early Transition Countries Local Currency Loan Programme includes two elements: working with governments and central banks to initiate improvements to local capital markets; and making local currency loans to shelter unhedged businesses, and more broadly the financial sector and the economy, from exchange rate risk.
The Programme, launched in May 2011, has so far covered five early transition countries (ETCs): Armenia, Georgia, the Kyrgyz Republic, Moldova and Tajikistan. The governments and central banks in these countries have signed Memoranda of Understanding with the EBRD, stating mutual intent to further develop capital markets and local currency lending.
In its first year, the Programme has signed the equivalent of US$ 100 million worth of loans in local currency, with 95 per cent of funds already disbursed at record speed. This demonstrates strong demand in participating ETCs for local currency finance, which is usually not available or prohibitively expensive.
The local currency loans provided by the EBRD have been made possible due to a unique risk-sharing arrangement with donors to the ETC Local Currency Loan Risk Sharing Fund. Of the targeted €30 million of risk-sharing funds, around two-thirds have already been committed from the EBRD Shareholder Special Fund, the multi-donor ETC Fund, the US government SME Special Fund and the Swiss State Secretariat for Economic Affairs (SECO).
Laurent Guye, Regional Director for SECO in the Kyrgyz Republic, says: “Small and medium-sized companies that borrow in hard currency, when their revenues are in local currency, take a formidable risk that they are not able to evaluate. A bank such as the EBRD is in a much better position to hedge against exchange rate risks. This is why it is really good news that the EBRD has started making loans in local currency in countries like the Kyrgyz Republic. Switzerland is happy to support this endeavour.”
The EBRD-donor partnership provides local currency loans to banks, microfinance institutions and local companies in the countries most vulnerable to foreign currency exchange risks.
“The Bank is pleased by the outstanding support received from donors. The programme is a unique partnership where we combine our resources to deliver innovative financing solutions to decrease the risk on the micro level (to the borrowers) and over time decrease systemic risk on the macro level,” says Christopher Clubb, Director of the ETC Initiative team.
Part of the EBRD’s strategy in the financial institutions sector is to develop local capital markets over the medium to long term and to support lending in local currency, which especially benefits small and medium-sized enterprises. The Bank has been supporting local capital markets and the use of local currency in an increasing number of countries under its Local Currency Capital Markets Initiative and it stands ready to extend its expertise further.