Currency Risk in Project Finance

This research paper analyzes the impact of currency risk on infrastructure projects in developing markets, arguing that hard currency loans from International Financing Institutions (IFIs) create dangerous asset-liability mismatches. The authors propose that IFIs shift their strategy from direct lending to developing local capital markets and providing credit guarantees. This approach aims to leverage private commercial capital and reduce the financial burden on host governments and end-users.

• Hard currency loans in infrastructure projects create an asset-liability currency mismatch when revenues are generated in local currency, leading to increased liabilities if the local currency depreciates.
• Optimal risk allocation for currency risk is difficult because neither private developers nor government agencies are typically well-positioned to manage it; developers lack influence over exchange rates, and government control is often limited.
• Existing currency risk management strategies, such as natural hedges, local currency swaps, exchange rate-indexed contracts, and currency pegs, are typically costly to the end user through higher tariffs or taxation.
• The paper proposes a paradigm shift for IFIs to move away from direct lending—which the author describes as a suboptimal use of resources—toward providing guarantees and credit enhancements to address market failures.
• IFIs can stimulate local currency financing by supporting local currency bond issuance, acting as market makers for currency derivatives to provide liquidity, and offering guarantees to help local banks access long-term international liquidity.
• Different financial actors require different risk mitigations: local financial institutions primarily need project risk addressed, while international commercial banks require political risk insurance and currency hedging.

APA

Verdouw, W., Uzsoki, D., & Ordonez, C. D. (2015). Currency Risk in Project Finance. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/currency-risk-project-finance-discussion-paper.pdf

Chicago

Verdouw, Wim, David Uzsoki, and Carlos Dominguez Ordonez. Currency Risk in Project Finance. International Institute for Sustainable Development, 2015. https://www.iisd.org/system/files/publications/currency-risk-project-finance-discussion-paper.pdf.

Wikipedia

{{cite report |last1=Verdouw |first1=Wim |last2=Uzsoki |first2=David |last3=Ordonez |first3=Carlos Dominguez |title=Currency Risk in Project Finance |publisher=International Institute for Sustainable Development |date=August 2015 |url=https://www.iisd.org/system/files/publications/currency-risk-project-finance-discussion-paper.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{verdouw2015currency, author = {Verdouw, Wim and Uzsoki, David and Ordonez, Carlos Dominguez}, title = {{Currency Risk in Project Finance}}, institution = {International Institute for Sustainable Development}, year = {2015}, month = aug, url = {https://www.iisd.org/system/files/publications/currency-risk-project-finance-discussion-paper.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }