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AfDB approves first Guarantee of Risk Management Product
The African Development Bank (AfDB) has approved its first Partial Credit Guarantee of risk management product. The Financial Sector Development Department, led by Stefan Nalletamby, has embarked on a groundbreaking operation that will result in the institution’s first guarantee to cover the exchange risk on foreign borrowing.
The AfDB’s Partial Credit Guarantee (PCG) will be for currency risk hedging for a Regional Member Country’s funding for infrastructure. The PCG will support the Government's efforts to promote macroeconomic stability and sustainable growth, maintain debt sustainability and strengthen the financial sector. It will not only enable private banks to offer maturity dates aligned to the due date of the foreign borrowing but also to improve the country’s credit rating, which will reduce the cost of the hedging instrument. This is the first time the Bank will use the PCG in this kind of transaction.
The project aligns with the AfDB’s overall Ten Year Strategy to promote inclusive and green growth, develop infrastructure and the private sector; and its Financial Sector Development Policy & Strategy 2014-2019 which aims to help the Bank’s Regional Member Countries (RMC) build robust and vibrant financial systems as well as catalyze innovative financing.
There has been a steady increase in African countries tapping alternative sources of funding through capital markets to help plug the gap for needed infrastructure financing. Currency risk remains an important consideration for African sovereigns looking to tap the international markets. Stella Kilonzo, Manager of the Bank’s Financial Markets Division, notes that this is one of the areas where the AfDB has an increasingly important role to play in helping RMCs manage these risks.
The AfDB is responding by developing innovative products to meet the needs of RMCs looking to capital markets for long-term financing.