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Currency exposure

1. Foreign currency debt: Projects which rely on domestic sales to repay foreign currency debt face foreign exchange risk. This problem can be addressed by:

  • exploring options for providing local currency loans or guarantees;
  • encouraging sponsors to enter into hedge arrangements; or
  • structuring the project conservatively, with a high debt service coverage ratio.
     
    2. Foreign currency exposure: IFC's analysis of projects in an inflationary economy should more fully consider the impact of inflation on project profitability as well as the impact of currency devaluation, particularly when the project features foreign-sourced inputs and/or when a substantial portion of the project's debt is to be denominated in foreign currency.
     
    3. Dividends: In hyperinflationary environments, it is important to protect against the negative effects of inflation and currency devaluations on returns to shareholders. Companies should not be allowed to pay dividends if currency devaluation is reducing their net worth in real terms.


    The above lessons are based on 28 lessons from past IFC investments.
    Last updated December 1998    .

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