Managing the risks of foreign currency financing in Asia and the Pacific

Alberto Isgut ()
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Alberto Isgut: Macroeconomic Policy and Financing for Development Division, United Nations Economic and Social Commission for Asia and the Pacific

No PB131, MPDD Policy Briefs from United Nations Economic and Social Commission for Asia and the Pacific (ESCAP)

Abstract: Managing currency risk is a serious challenge for developing countries that are not able to finance most of their financing needs in local currency. Currency risk can increase substantially the cost of servicing sovereign debts, potentially decreasing fiscal space for much needed investments in sustainable development, and lead to a higher default risk. This can make financing sustainable development and climate ambitions too expensive. Thus, given the urgency of scaling up finance for the achievement of the 2030 Agenda and the goals of the Paris Agreement, addressing the risk of foreign currency financing should be an urgent priority. To reduce exposure to foreign currency debt and associated currency risk, this policy brief discusses the importance of developing local currency bond markets and adopting sound macroeconomic policies. In addition, it highlights the importance of developing hedging tools to mitigate currency risk.

Date: 2024-12
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https://hdl.handle.net/20.500.12870/7675

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