Investec is a member of the UN’s Global Investors for Sustainable Development Alliance and Mark Stafford, Head of Global Markets has been leading the currency risk stream to identify solutions to reduce the currency risk element of development finance. They presented the findings to over 50 world leaders at the UN’s fourth International Conference on Financing for Development in Seville.
Why the current model doesn’t work
Development finance has long leaned on concessional loans, official development assistance (ODA) and multilateral development bank and this model is fraying.
“More of that aid is now being used for climate projects, so countries are left with even less for other needs,” says Kuben Naidoo, Head of Corporate Payments at Investec SA. What was originally meant to be additional climate finance has ended up cannibalising general development funding.
The war in Ukraine further diverted global attention and resources away from vulnerable regions that were already struggling to meet basic needs. Grants have declined. Infrastructure loans have increased modestly but seldom support critical services like public health or early childhood education. Although some countries have responded by improving tax collection and diversifying revenue, the reality is that private sector funding remains stubbornly lacking.
Currency risk is a hidden barrier
One of the most fundamental obstacles is currency risk as most development projects earn revenue in local currency but are usually funded in US dollars, sterling or euros. Stafford led a workstream on this area to devise possible solutions.
“This isn’t something the developing countries can control; it adds risk to their projects, which makes them more expensive. So sustainable development projects that would otherwise be viable, are rendered unviable due to the currency risk.”
- Mark Stafford, Head of Global Markets at Investec Bank plc.
When local currencies depreciate, the burden of repaying foreign loans skyrockets which has led to waves of debt distress in countries like Zambia, Ghana, Kenya and Nigeria, undermining progress and deepening financial vulnerability.
Investors consider this risk a deterrent, especially given current regulatory capital requirements that penalise perceived risk regardless of underlying project fundamentals.
“Credit rating agencies apply uniform standards to countries with vastly different fundamentals. The investments in projects in developing countries typically come with higher capital than perhaps the data would suggest they should” says Mark Stafford, Head of Global Markets at Investec Bank plc.
This currency-based mispricing of risk has led to a structural mismatch in the global development finance ecosystem.
A proposed solution: The Delta Initiative
In the lead-up to the conference in Spain, three critical workstreams were convened to tackle the key barriers holding back private capital from development investment. Investec is a member of the UN’s Global Investors for Sustainable Development Alliance (GISD) and led the currency risk stream. One of the potential solutions highlighted by that is the Delta Initiative which proposes a central platform to help development banks pool and manage currency risk, allowing them to extend local currency loans more reliably and affordably across multiple markets.
“The Delta Initiative would operate as a centralised risk management and expertise hub for development finance organisations and multilateral development banks. That then enables them to make local currency loans with much less friction than if they had to do all of this work themselves."
- Mark Stafford, Head of Global Markets at Investec Bank plc.
The platform relies on existing tools, such as hedging contracts, currency swaps and credit enhancements to shift risk to actors better equipped to bear it. Over time, the initiative also seeks to deepen local capital markets by encouraging banks, governments and private issuers to raise funding and issue longer-term debt in their own currencies.
Although not a silver bullet, Stafford believes the Delta Initiative is a strategic enabler that could help unlock billions in stalled capital and make long-term, infrastructure led growth more feasible for low- and middle-income countries.
Local currency lending could be a crucial part of the answer, but the Delta Initiative is but one suggestion of a much wider reform effort to improve the impact of development finance.
What the SDGs need now is not another round of declarations, but real-world implementation. If multilateral reform remains slow, regional partnerships, between sovereign wealth funds, pension funds and national development banks, must step in to drive momentum.
As Stafford explains, “If we address currency risk, we unlock a wave of viable, scalable investment, and I’m hopeful this will get off the ground, but it’s only a small piece in the larger puzzle that needs to be solved to deliver on the SDGs.”
Collaborative, sustainable finance can deliver real results, but success depends on action.
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