MFX January 2010 Newsletter
MFX News and Updates
Latest Deals
• 1.5 year USD/DOP (Domincan Peso) deliverable swap
• 3 year EUR/IDR (Indonesian Rupiah) non-deliverable swap
• 3 year fixed EUR/PEN (Peruvian Sol) non-deliverable swap
New Services
MFX can now offer currency delivery services, whether as part of a deliverable swap or as part of a separate spot transaction. For more information on how this works and on rates that you can compare to your current bank or currency provider, please contact Jorge Santisteban (jorge@mfxsolutions.com).
Education Update
MFX received $350,000 grant from the Dutch Development Bank FMO to expand its education mission. MFX will use the grant to training to MIVs and MFIs on liability planning, hedging mechanics, hedge accounting, and the legal process of hedging. If you are interested in participating in training program or would like more information on MFX’s TA program, please contact Sonia Mukhi (sonia@mfxsolutions.com)
MFX at the 2nd Microfinance Summit (NYC) January 25 – 27 2010: Brian Cox (CEO) and Jorge Santisteban (Director of Hedging) will moderate a roundtable on currency risk in microfinance on Tuesday the 26th at 1:00PM at the “Microfinance and Sustainable Development Summit” Those who are interested in attending, please contact us (mfxinfo@mfxsolutions.com) for discounted registration fee
What are MFX Clients talking about ?: Using deliverable swaps to minimize transfer risk
MFX began offering deliverability in select currencies in December and we have seen strong interest among clients in these types of hedges. A deliverable cross currency swap involves a full exchange of currency flows, as opposed to a non-deliverable where only the net difference in the two flows, as determined using a reference exchange rate such as Reuters, is paid.
Both methods effectively hedge currency and interest rate market risk. However, with a non-deliverable swap, the local currency borrower (i.e. the MFI) still incurs the same transaction costs as it would in taking a hard currency loan. In other words, it incurs fees associated with the fx transaction, and must cover any difference between the reference rate provided in the loan agreement and the actual exchange rate the MFI can access from its local bank.
For example, an investor chooses to enter into a non-deliverable swap with MFX, in order to hedge a loan that it is providing to an MFI in the Dominican Republic. The investor channels the funds in USD to the local bank in the DR at an already settled amount of DOP which becomes the principal on the loan. This structure is called a “synthetic” loan since it is paid in dollars, but on local currency terms. The settled amount is based on a reference rate, usually determined by the Central Bank two days prior to the settlement date. The MFI, however, must negotiate its own exchange rate at which it can access the funds from the bank. Since the rate that the MFI receives from the bank generally is less attractive than the reference rate, the MFI can face additional costs. Upon repayment, the MFI also will absorb the transactional costs associated with converting pesos to dollars and transferring them back to the investor.
A deliverable swap eliminates these costs for the MFI. It receives the full amount of the loan in DOP and for repayment must simply make deposits in DOP with a local bank. The investor meanwhile receives its full dollar payments directly from MFX. The transactional costs are carried in the swap price, and are born by the investor or the hedge provider. This cost can be determined by comparing the terms of the deliverable swap vs. the same transaction structured as a non-deliverable. This is an option well worth evaluating in trying to provide MFI clients with the best possible service.
MFX Regional Focus: Caucasus & Central Asia
Following the principle that it is always more cost effective to hedge in good times than in bad, recent interest rate trends in the Caucasus & Central Asia region may present an opportunity to lock-in hedging at attractive rates. Interest rates have come down significantly in recent months in most of the region as economies recover from the crisis. But since underlying vulnerabilities have not disappeared, future stability is by no means assured.
Although the Armenian dram (AMD) depreciated by 22% since February 2009 (showing a slight recovery recently), 1-yr T-bond rates have dropped from roughly 11% to around 8.5-9% in the second half of the year. With low reserves, Armenia is not in a position to defend its currency so any new shocks, including higher rates in the US and Europe, would be felt in currency and interest rate fluctuations. MFX has seen increased demand from clients to hedge AMD. Short term rates on the Georgian lari (GEL) have also dropped dramatically from highs of 15-18% in Fall 2008, to roughly 3% now. The GEL/USD managed float survived the crisis and continues to remain at around 168 GEL/USD. However, Georgia’s IMF program might create political pressure to let the currency float adding to potential volatility this year.
Early in the year, the combination of banking sector problems and low oil prices forced the National Bank of Kazakhstan into a one-off 20% devaluation to 150 tenge/USD where the rate has stayed ever since. The 3 month KazPrime rate meanwhile has dropped from highs of 15% in March 2009 to current levels of 3-4%. The crisis highlighted that attempts at economic diversification have done little to reduce Kazakhstan’s dependency on oil prices. Given the significant drop in interest rates and continued uncertainty on global recovery, this could be an attractive time to hedge KZT exposure. Unlike its neighbor, rates in Kyrgyzstan (KGS) have spiked recently to around 19% from 11% in July. The KGS continues to remain pegged to the USD at around 44 KGS/USD. Although higher rates make hedge pricing less attractive, the rate volatility indicates potential vulnerability of the peg in which case hedging would still make sense.
