How to do business with local currency is a big question for international business platform. In Latin America and the Caribbean, there are increasing requirements for financing in local currency. For development banks, where traditionally their treasury and main currency of financing is the US dollar, solving the puzzle of long-term financing in local currency without a permanent treasury, implies thinking “out-of-the-box “.
It is not the same to do business in local currency, economies of scale as Mexico, Brazil, Argentina, Colombia, Chile or Peru, than to do it in countries like Paraguay, Honduras or Jamaica, where the options to offer local currency are more limited.
How to do business with local currency in various financing area:
In our countries, there is a certain preference for short-term financing, which prevents companies from accessing long-term financing to finance capital investments, which forces them to refinance their debts constantly. There are studies that show that the lack of access to long-term financing affects the growth of companies and productivity. For example, the lack of alternatives for financial products such as financial/operating leasing, factoring, partial credit guarantees, to name a few, are critical factors that limit local financial institutions to support the growth and productivity of companies in the region. A certain country.
Financing long-term assets with short-term products (continuous refinancing) are not optimal for companies, which must deal with liquidity risk and refinancing.
As a solutions bank, in BID Invest we managed to turn the problem of local currency financing, in a systemic and sustainable way. Thus, what seemed impossible to solve, today is a reality. For example, in Paraguay, we realized that local currency financing was not restricted by demand but by supply and transaction costs.
Without having to set up a permanent treasury and all that implies, for some years in Paraguay, we are not only able to offer several long-term financing products in Guaranies (the official currency of the country) but we also do it under local law. To solve this equation we have incorporated the following variables in our analysis: (1) the players, suppliers of local currency in the banking system; (2) the regulatory framework; (3) transaction costs; (4) the depth of the local capital market and its potential; and (5) the business climate.
In version 1.0 of our local currency product , the strategic agreement between BID Invest and the country’s main local currency provider, the Social Security Institute (IPS), allowed us to structure a collaboration framework in which BID Invest (with AAA guarantee) through a loan and guarantee agreement guarantees the credit exposure of IPS in 100% (principal, current and default interest).
How to do business with local currency and business structure:
The pension fund acts as a lender for BID Invest clients, who in turn act as a borrower. Meanwhile, BID Invest is guarantor of the first credit requirement in favor of IPS. This financial structure, apart from being efficient in transaction costs, has several benefits for all parties. For the IPS, in addition to the financial benefits in the transaction, this operation allows it to diversify the placement of its long-term resources against the risk of the balance sheet of a bank with investment grade AAA. For our customers, apart from accessing long-term local currency, structured under local law and with low transaction costs, the main benefit is the elimination of exchange risk, refinancing and liquidity for its capital investments with terms appropriate to the type of asset in question.
The version 1.0 allowed us to approve transactions of about US $ 160 million equivalent in Guaranies. But last year, thanks to the proactive dialogue with national authorities and the adjustments made to the regulatory framework, we launched version 2.0of our local currency product in Paraguay. This is how we became the first multilateral to register a Guarani bond issuance program for the equivalent of US $ 180 million in the Securities Commission of Paraguay.
How to do business with local currency with BID Investment
The structure is even simpler and more attractive than the previous one. On the one hand, it broadens the base of funding in local currency since, BID Invest develops and deepens the local stock market with the issuance of bonds (secondary market, bond trading), the investor that acquires the role of IDB Invest, It makes an investment grade category (AAA) somewhat atypical in Paraguay and finally allows BID Invest to finance long-term assets, directly to our clients.
The registration of BID Invest in the securities commission of Paraguay opened the door for other multi-laterals to do the same and thereby expand the offer of issuers of investment grade in the country’s stock market. To date under this modality, BID Invest has managed to approve transactions for US $ 80 million equivalent in Guarani and our first issuance is scheduled for the coming months.
In conclusion, the good news for Latin America and the Caribbean is that the case of Paraguay is perfectly replicable, we know how to do it and beyond the financial products that we end up offering via loans and bonds or through bond issues, the derivative of the product of Local currency is that the public saving of society is reinvested in the country in productive sectors that generate wealth and add value to the gross domestic product. Now we all know how to do business with local currency. In the end, we all win!