TCX, the fund that shields emerging countries against currency risk

Badly hit by the economic crisis caused by the Covid-19 pandemic, several African countries have seen their currencies depreciate over the past year. This unfavorable situation is a reminder, if need be, that the continent’s currencies are often vulnerable to external shocks. However, there are solutions, such as the exchange rate hedges offered by the Dutch development fund TCX, a financial vehicle designed to combat currency volatility in emerging countries. For Ressources, Isabelle Lessedjina, Senior Vice President at TCX, explains the concept of the fund as well as its ambitions for Africa. Interview.

Ressources Magazine: At the heart of the TCX project is the hedging of exchange rate risk in emerging countries. What exactly is it all about?

Isabelle Lessedjina: In many parts of the developing world, particularly in Africa, companies or states that wish to borrow money on international markets can often only do so in foreign currencies (dollars, euros…) even though their source of income to repay this debt is in local currency. This difference results in an exchange rate risk, i.e. uncertainty about the evolution of the exchange rate between currencies, which can quickly become problematic. In such a scenario, foreign currency borrowers in these countries can very quickly find themselves weakened by sudden exchange rate movements. It is precisely to avoid this type of damaging situation that TCX exists.

Ressources Magazine: How did the idea for the fund come about and when was it launched?

Isabelle Lessedjina: As is often the case, a solution is born out of a given need. In the case of TCX, the need was that of the Development Finance Institutions (DFIs), which wanted to hedge their commitments against the exchange rate risk of the countries where they operated. From this possible hazard arose the idea of launching a dedicated hedge fund; a solution that – until then – did not exist. As most DFIs preferred not to carry out this type of transaction themselves, it was decided to launch an ad hoc financial vehicle, TCX, to share this risk in a global way. Thus, our fund was created in 2007, in Amsterdam (Netherlands), supported by a group of development financial institutions and investment companies specialized in microfinance. Since then, we have hedged more than 3,500 transactions worldwide through forward contracts and currency swaps and now have a global exposure in excess of $5 billion.

Exotic currencies, a real risk of depreciation. Below is a % loss in value against the dollar at the peak of the Covid crisis.

Credit : TCX Fund

Ressources Magazine: On this global volume, what is your African exposure?

Isabelle Lessedjina: For the continent as a whole, this represents a little less than one billion dollars, or about one-fifth of our total commitments. We cover almost all of the continent’s currencies and benefit primarily the microfinance, energy and housing sectors. These are all business segments that generate their revenues in local currency and for which we relieve the burden of foreign exchange risk in each case. It is also important to note that we do not compete with local financial institutions, as our mandate is to deal with currencies and maturities for which domestic banks and capital markets do not offer hedging.

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Ressources Magazine : If TCX takes on the foreign exchange risk of third parties, it means it is ultimately borne by you. How do you manage it?

Isabelle Lessedjina: Given our global exposure (Asia, Eastern Europe, Africa and America) and the wide range of hedging products we offer, we operate on a model where diversification is de facto integrated into our portfolio. This risk acceptance makes us insurers more than a traditional hedge fund: our role is to pay claims that occur from time to time. The Covid crisis, which occurred at the beginning of the year, is a perfect illustration of this. « We are like an insurance company: when a house catches fire, the insurance pays off.  In March, the house caught on fire and we paid off », says our CEO, Ruurd Brouwer. In the end, we absorbed more than $130 million in losses across our entire portfolio, but in doing so, we protected our beneficiaries and their clients by the same amount. This has strengthened our vocation as a hedge against currency risk.

Ressources Magazine : Given the impact of Covid on your results, what was the reaction of your shareholders and investors?

Isabelle Lessedjina: They have continued to support us, notably by subscribing to a new $200 million fund-raising campaign, which was completed in November. Combined with our previous capital increase in 2019, this new financial contribution will enable us to increase TCX’s risk management capacity by 65%. This is clear proof of the commitment of our partners (the European Commission, the German development bank KfW, the International Finance Corporation, Proparco, etc.) to protect their borrowers-particularly African borrowers-against the exchange rate risk associated with international loans.

Ressources Magazine: What are your ambitions for Africa and the challenges you still face?

Isabelle Lessedjina: With the recent strengthening of our balance sheet, we aim to double our African transactions over the next five years. As for the regions targeted, we are focusing our efforts on four countries in particular: Ghana, Kenya, Uganda and Rwanda, as well as the CFA zone, states or community areas that we consider strategic and that could benefit directly from some of our initiatives. For example, we are now able to offload some of our foreign exchange risk by helping our shareholders (DFIs) to issue bonds in exotic currencies on the international markets, high-yield products that are popular with some sophisticated investors. This reduces our exposure, allowing us to offer new currency hedges to our clients. This will nevertheless be a long-term process and in light of the continent’s immense needs, one of the main challenges to be met on a daily basis remains the need to build a lasting relationship of trust with local financial players.