A fund manager investing in a frontier market has issued a call to action for multilateral development banks (MDBs) to help address foreign exchange risk.
Tim Gocher, CEO of Dolma Fund Management, which manages $108 million invested in Nepal, told a conference focusing on how to mobilise more capital to emerging markets and developing economies, that currency risk is "the elephant in the room".
He called on MDBs to intervene, suggesting they provide "whopping guarantees" to reduce the cost of hedging.
It is difficult for companies in frontier markets to raise capital in their domestic currency, forcing them to raise capital in hard currencies such as US dollars, which leaves them exposed to prohibitively expensive currency hedging costs.
Gocher pointed out that hedging currency risk for the Nepalese rupee can add four percentage points to the cost of capital.
One potential solution would be to back emerging market currency hedging service TCX with a large guarantee, he suggested.
"I have no affiliation with TCX, other than I appreciate their skillset, but it's getting behind TCX with a whopping great guarantee that brings down the cost."
He added: "I know it's difficult to sell to the taxpayer, but unless we can open frontier markets to the depth of the US dollar market liquidity, we are not going to achieve our sustainable finance goals. And that's been my surprise – that the World Bank or Green Climate Fund haven't been getting behind TCX helping to support those costs.
"I think we need to get behind TCX or any other exotic currency solution."
He added: "If we can't at least mitigate the cost of forex risk, then frontier markets – including those with enormous renewable energy potential, like Nepal – will never be able to access the deepest capital market in the world, and therefore, all of the trillions we've heard about today that are required for the SDGs will nowhere near be achieved."
"I think that is absolutely essential that we get behind this. This is a call to action ... that's already been made by the Bridgetown Agenda," he added.
Dolma is raising its newest fund, to invest predominantly in renewable energy infrastructure opportunities. Gocher believes the firm is the first international private equity fund in Nepal.
The conference – Mobilising private finance towards 2030 and beyond – is being held in Paris on 4 and 5 February.
