More investments in Africa through currency risk hedging: KfW provides a guarantee

• Significantly better access to local currency financing for African borrowers
• Reducing the root causes of migration
• Expanding measures to mitigate climate change

KfW signed a guarantee agreement with the European Commission and TCX (the Currency Exchange Fund, the Netherlands), which will enable additional funding of EUR 130 million to be provided to TCX from the European Fund for Sustainable Development (EFSD).

Financing in local currencies is not sufficiently available in sub-Saharan Africa, which represents an obstacle to investment and financial system development. Through the EFSD funds, TCX can help solve this problem, as TCX can eliminate the risk of exchange rate fluctuations in investments in Africa, thereby facilitating additional financing from investors and private companies. More specifically, the EFSD funds will increase TCX’s hedging capacity for interest rate risks related to local currency loans to microfinance institutions, local banks and energy companies in sub-Saharan Africa. This also indirectly leads to a significant reduction of the root causes of migration, the reintegration of migrants and the expansion of measures to mitigate climate change.

““Through this guarantee to TCX, KfW supports the European Commission in realising the goals for sustainable development in accordance with the United Nations' Agenda 2030. Furthermore, the TCX-backed financings contribute to the implementation of the Paris Climate Change Convention, and the importance of TCX for the financial system development of African countries is enormous. TCX helps to strengthen the African financial markets and to meet the increased demand for hedging exchange rate risks, especially against the background of the Covid-19 pandemic," said Dr Günther Bräunig, Chief Executive Officer of KfW Group.

TCX enables financing partners to grant local currency loans through its hedging products. This is an enormous advantage and security for lenders, as it prevents exchange rate fluctuation of many African currencies against hard currencies like the USD or EUR. This makes it possible for local borrowers to repay their debts in local currency, greatly facilitating lending and investment in these countries.

KfW in turn covers its risks through a reinsurance agreement with the EU under the European Fund for Sustainable Development (EFSD). This takes place in the context of the European External Investment Plan (EIP), which the Federal Republic of Germany supports through the EU budget. The EIP aims to mobilise an investment volume of up to EUR 44 billion in Africa and the EU’s neighbouring regions by 2020. The goals are to reduce the root causes of migration, mitigate climate change and promote the private sector. The EFSD is an additional offer from the EIP to assume risk.

Background information on TCX:
TCX is a global development finance initiative that offers long-term currency swaps and forward transactions in more than 80 financial markets where these kinds of hedging opportunities are not available or difficult to access. The fund was launched in 2007 and has since provided hedging instruments for a financing volume of USD 8.5 billion, spread over more than 3,500 transactions. Today, the fund has a total exposure of USD 5 billion in 60 currencies of developing countries and emerging economies. By selling part of this exposure to private investors, TCX creates markets, thereby giving these developing countries and emerging economies access to the international capital market.

Information about KfW Development Bank can be found at: www.kfw-entwicklungsbank.de/en