MFX Newsletter February 2014


 Recent Hedging Deals

- 3Y USD/TND (Tunisian Dinar)

- 1Y USD/KZT (Kazakhstani Tenge)

- 3Y EUR/INR (Indian Rupee)

- USD/KES FX Options (Kenyan Shilling)

- 3Y USD/CRC  (Costa Rican Colon)


News and Activities

Year-end surge in hedging activity:  MFX passed the ½ billion mark in total hedging with a surge of year-end hedging activity.   December 2013 was MFX’s strongest month with $36M of loans hedged.   Currency volatility since the beginning of 2014 has rewarded those who hedged last year in currencies like ZAR, IDR and GHS (South Africa, Indonesia and Ghana), with client  positions showing gains of up to  40% of the loan amount. Many of these hedges were contracted during previous periods when these currencies were stable and the possibility of devaluation seemed remote.  It is a good lesson that the best time to hedge may be when the need for it seems far away.

MFX to launch currency exchange delivery service:  MFX  currently provides deliverable hedges (full exchange of cash flows where MFX pays local currency directly to the borrower) in certain markets.  This relieves our clients (the lender) from having to shoulder the burden of buying local currency to deliver to the borrower, or, alternatively, the borrower from having to convert hard currency with their local bank.  Nevertheless, most MFX hedges are “non-deliverable”, so delivering or receiving currency remains a major issue for microfinance lenders and borrowers.   To help our clients who are not receiving satisfactory exchange rates from their banks or want to help their borrowers access better rates, MFX will now provide currency exchange and delivery services separate from any hedging transaction.

For detail on how to access this currency exchange and delivery service please contact MFX’s trading team Jorge Santisteban jorge@mfxsolutions.com or Luz Leyva luz@mfxsolutions.com.  The service will be available starting in March.

MFX launches service to help MIVs manage open currency positions:  MIVs have taken different approaches to offering local currency loans.  Many choose to hedge all of their currency risk.  A few run a completely exposed portfolio, relying on diversification and higher local rates to absorb risk and deliver an acceptable hard currency return.   Some use a mix, either taking limited currency exposure or using an active management approach of seeking out currency risks to enhance profits.  Overall, more and more MIVs see the need to take at least some limited currency risk so as to be able to maintain price competitiveness.

To help our clients manage partially or fully exposed funds, MFX has launched a portfolio risk management service designed specifically for MIVs lending in multiple currencies.  Using a portfolio model, MFX can help its clients simulate different exposure levels, evaluate how new loans affect the portfolio risk and monitor exposure limits.   Along with market research and analytical support from MFX, the new service gives fund managers the right tools to decide where to lend, when to hedge, and how to manage according to their risk tolerance.  It also provides full portfolio reporting functionalities.

If you are interest in more information or a demo, please contact Jorge Santisteban at jorge@mfxsolutions.com.

Expanding risk management training in Africa:  MFX signed a two-year technical assistance partnership with FPM in the Congo (DRC) to reduce financial risk and promote investment flows into the Congolese financial sector. MFX will provide training and tools to Congolese banks and microfinance institutions to improve their Asset/Liability Management (ALM) capacity. The partnership will build out much needed staff and governance capacity as well as policy and decision making. Training will be built around MFX’s Comprehensive Asset/Liability Management (CALM) Tool, a financial statement stress testing model which allows financial institutions to manage their liquidity, interest rate and currency risk. For more information please contact Kevin Fryatt at kevin@mfxsolutions.com

Analysis

Recent volatility in emerging and frontier markets has made lending and hedging decisions for MIVs more difficult.  When the US Fed began tapering (reducing its bond purchases), the logic was that it was liquid markets with current account deficits – Turkey, Brazil, India, South Africa, and Indonesia, the so called “Fragile Five”- that had the most to fear.  Frontier markets, for the most part stayed steady.  In recent weeks however frontier markets that don’t fit the “Fragile Five” profile – Kazakhstan and Nigeria, for example – have been in the news.  Does this signal a widening of the crisis to countries that are big commodity exporters or are these one off events, idiosyncratic to those markets?

 

 

So far it does not look like a second wave of the crisis extending to frontier countries.  Nigeria’s drop was relatively small (around 2%),quickly contained and was primarily a reaction to internal political struggles over corruption.  The worst performer in the region has been Ghana whose decline began well before the current spate of global volatility. (see chart)