Ajay SagarAsian Development BankMarch 2005.ppt

Outline Background Concept Development Impact Issues and Challenges Swap vs Bond Issue – Determining Factors Local Currency Swaps - Schematic Diagram Peso Swap and Financing Project Benefits Role of ADB Background Heightened risk perception of unhedged foreign currency borrowing as a result of Asian financial crisis. Weak macro economic climate affecting FDI and infrastructure projects. Weak banking sector Under developed capital markets Emerging market currencies considered volatile and susceptible to devaluation. Modified accounting standards providing for transparent treatment of currency fluctuations (Developing countries need billions of dollars and their local currency equivalent to build a strong infrastructure to spark an investment boom. They also need to strengthen their financial sector.) Accounting treatment of devaluation losses Background (cont’d) Significant impact of local currency devaluation on balance sheet of borrowers. Project viability threatened. Banks carry both maturity and currency mismatch risks Lending banks traded currency risk for a credit risk. Devaluation pass through in tariffs faced stiff resistance from consumers of “user to pay” projects. Borrowers in emerging markets have a strong preference for local currency denominated borrowing. (While developing countries need to attract capital, investors prefer local currency alternatives due to volatile patterns.) Background — Impact of Maturity Spread represents compensation to cover credit (commercial and political) risks. Consortium participants assumed continued access to $ funding for life of loan at LIBOR disregarding their own long-term credit ratings. Injection of long term funding will strengthen banking sector and spur investment. Concept Provide local currency denominated lending through structured and straightforward alternatives ** developing and accessing local capital markets. ** local currency swaps. ** local currency guarantees. Applicable in count