Exchange and interest rate risk

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Description (What is the Risk)

The risk of currency fluctuations and or the interest rate over the life of a project.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner bears all exchange rate and interest rate risk.

The contracting authority does not assume any risk in relation to the devaluation of local currency.

Mitigation Measures (What can be done to minimize the risk)

The Private Partner would look to mitigate this risk through hedging arrangements under the Finance Documents, to the extent possible in the market.

The contractor should also seek to hedge any foreign currency exposure it may have in relation to foreign currency imports.

Comparison with Emerging Market

Exchange and currency convertibility risk is generally regarded as low risk in developed markets.

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Description (What is the Risk)

The risk of currency fluctuations and or the interest rate over the life of a project.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner bears all exchange rate and interest rate risk.

The Government Authority does not assume any risk in relation to the devaluation of local currency.

Mitigation Measures (What can be done to minimize the risk)

The Private Partner would look to mitigate this risk through hedging arrangements under the Finance Documents, to the extent possible in the market.

The contractor should also seek to hedge any foreign currency exposure it may have in relation to foreign currency imports.

Government Support Arrangements (What other government measures may be needed to be taken)

The Contracting Authority may give assurances? as to currency convertibility and availability of foreign exchange. In many emerging markets the power purchase agreement is denominated in USD or another foreign currency or subject to indexation in a foreign currency. This is intended to protect the Private Partner and reduce the tariff and financing costs but exposes the Contracting Authority to the risk of a currency mismatch as its revenues will generally be in the local currency.

Comparison with Developed Market

The Private Partner will generally take interest rate risk in emerging markets and the exchange rate and convertibility risk will be borne by the ?Contracting Authority or shared. Recent developments include new tools to mitigate such risks from IFC and other development banks and DFIs.

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