Developing countries must develop local currency markets to help wean companies off borrowing in dollars that will leave them vulnerable to a rise in debt interest costs if the US currency surges, the head of the International Financial Corporation has warned.
Philippe Le Houérou, the chief executive of the World Bank Group’s private sector arm, said the move was a priority for the IFC over the coming year, he told GlobalMarkets. “Developing local capital markets is critical,” he said. “It is not a miracle solution but you have to start somewhere.”
The danger of borrowing in dollars when revenues are in local currency is known in the investment community as original sin. Many borrowers in eastern Europe that had borrowed in Swiss francs were hit during the euro crisis. “We want to pursue this with renewed energy because when you have exchange rate troubles, it is a trouble only because you borrowed it in foreign exchange,” he said. “If you borrow in your own currency that is not a problem but for that you need local capital markets.”
Le Houérou said that he was keen to expand the volume of its local currency lending . “We have grown our local currency book but are limited by the lack of capital markets in some countries so we would like to develop that much more because it would give us better protection for our clients.” The IFC has lent $20bn in 70 currencies. Local currency commitments have climbed from $800m in 2009 to $3.5bn in 2018.
The scale of borrowing by both governments and corporates in emerging and developing countries will be high on the agenda at this weekend’s meetings of the Development Committee. Le Houérou said that debts were going up especially in the Highly Indebted Poorer Countries (HIPC).
“That is a source of weakness when the interest rate goes up,” he said. “It will be countries that are heavily indebted on a short schedule and that means refinancing is important and there would be a lot of stress in the system and they will have to adjust and that is never easy.”