February/March 2010 Newsletter
Recent Deals
1 Y EUR-AMD (Armenia Dram) non-deliverable swap
3 Y EUR – KES (Kenya Shilling) non-deliverable swap
MFX News
MFX at the 3rd Microfinance Investment Summit (Geneva, Switzerland) March 10-11, 2010
On March 9th, Brian Cox (CEO) and Jorge Santisteban conducted a workshop entitled New Approaches for Managing Foreign Exchange and Interest Risk. Brian was also on the March 11 morning panel called “How Can Investors and MFIs Successfully Manage Key Financial Risks in Today’s Markets?”
Blue Orchard-MFX joint workshop at the 2010 Africa/Middle East Regional Microcredit Summit (Nairobi, Kenya) April 7-10, 2010
MFX and Blue Orchard will present a day-long workshop to MFIs and on April 10. Blue Orchard will present on how to obtain funds from new financial instruments, and MFX will then cover Asset/Liability risk management issues that come up when seeking out new sources of funding. This workshop will include training on the Liabilities Planning Tool that MFX has recently launched. If you will be at the Summit and wish to attend this workshop please contact Sonia Mukhi sonia@mfxsolutions.com
MFX hedging workshop in Paris, April 14th, 2010
MFX will conduct a hedging workshop for MIV investment officers and other microfinance practitioners on April 14th 2010 in Paris. MFX’s Director of Hedging Services, Jorge Santisteban will help attendees to better understand the main derivatives products used to hedge currency risk, strategies for hedging in a microfinance context, and tools you can use to explain currency risk to your clients. We would like to thanks BNP Paribas for hosting the event and CGAP for supporting it. If you would like more information and/or would like to attend please RSVP to Sonia Mukhi sonia@mfxsolutions.com.
What Are MFX Clients Talking About: Collateral Requirements in Hedging
When an MIV or an MFI decides to pursue currency hedging, collateral requirements are among the most critical issues in establishing the hedging relationship. For new clients, banks will generally set a collateral requirement before agreeing to enter into a hedging transaction as protection against default (i.e. an MIV/MFI failing to pay the amount owed under the terms of the swap transaction). The cost of posting collateral for the MIV/MFI is the opportunity cost of setting aside these funds which earn little or no return vs. what the funds would have earned if deployed as normal lending capital. In a hedging relationship, collateral is usually set as a percentage of the amount of the loan being hedged, traditionally between 10-25%. So for example, if an MIV had a collateral requirement of 20% on a $5M 3- yr hedged loan, it would have to provide $1M in escrow to the bank. If that collateral earned 0.5% vs 7% average return on assets, the cost of the collateral would be 6.5% x $1M x 3 years =$195,000.
Emerging from the financial crisis, banks have adjusted their risk models. This has resulting in many of MFX’s clients seeing their collateral requirements increase substantially. In some cases, larger clients that were not previously required to post any collateral now must provide it at levels that can be as high as 30%. This makes hedging a more expensive option for microfinance lenders and institutions.
One of the key advantages MFX offers the microfinance industry is that we are able to remove the cost of collateral from our hedging contracts. The credit guarantee that MFX has from the Overseas Private Investment Corporation (OPIC) allows MFX to act without posting cash collateral and MFX passes on that benefit to its clients. Removing this burden makes for less expensive and more accessible hedging solutions. So when considering hedging options, it is important to understand the differences in collateral requirement and price in the opportunity cost of one option vs. another. Please contact us (mfxinfo@mfxsolutions.com) to receive a simple calculator for comparing hedging quotes with different collateral requirements.
MFX Regional Focus: Southeast Asia
In 2009, Central Banks throughout the region (Vietnam, Philippines, Indonesia and Thailand) lowered interest rates in response to the global economic crisis. But with recovery, fears of inflation have surfaced and how central banks deal with inflation will largely determine the outlook for currency and interest rates for the next year. With central banks tightening in several countries, many analysts see interest rates rising over the course of 2010, creating an incentive to lock in rates through fixed rate hedging. Whether higher rates will draw in external capital and lead to further appreciation or inflation fears will push currencies weaker will likely vary from country to country.
Highlights
- The Indonesian Rupiah (IDR) led a global strengthening of Asian currencies in 2009 appreciating by 23% between early 2009 and February 2010 despite record low JIBOR levels. Recently, the CB announced lending rate increases for the second half of 2010 to fight inflationary pressure. Barring a shock, this would mean that the currency would likely stay strong in the short-medium term.
- In line with the IDR, the Thai Baht (THB) also performed well in 2009 (appreciating by almost 5% between January 2009 and February 2010). According to the Bank of Thailand, volatility will increase in 2010 ; meanwhile political instability continues to add to uncertainty. With foreign capital still flowing in, but counteracted by a narrowing of Thailand’s trade surplus, the future is less clear. This makes hedging Baht loan potentially attractive.
- The Philippines Peso (PHP) was one of the least volatile currencies in the region in 2009 (appreciating 2.2% vs. the dollar). Nevertheless, MFX has seen significant demand for PHP hedging encouraged by the combination of reasonable spreads to USD/EUR interest rates and perceived political risk stemming from upcoming elections.
- Vietnam seems to be suffering the most from inflationary pressures and the Dong (VDN) has been devalued twice in the last few months, most recently by 3.5% in February. Inflation is close to double digits and a general lack of confidence in the ability of the CB to control the exchange rate makes more volatility likely. This is a market where it is good to be protected against further devaluation but where the costs of hedging are rising.