Empowering Local Economies Through Financial Innovation

Emerging Markets and Developing Economies (EMDEs) frequently encounter significant barriers when seeking external financing for sustainable projects. Foreign currency loans often come with lower interest rates but expose borrowers to substantial foreign exchange rate risks. When local currencies depreciate, it can devastate the financial stability of borrowers, from renewable energy projects to small businesses. The solution lies in affordable and accessible local currency financing, a critical element for resilient domestic financial systems.

Pioneering Solutions from Historical Lessons

In the early 2000s, the US Overseas Private Investment Corporation (OPIC) introduced an innovative forex liquidity facility to protect a Brazilian hydroelectric project from currency devaluation. This mechanism established a ‘floor’ value for the project’s cash flows, ensuring debt obligations could be met despite volatile exchange rates. If the real exchange rate rebounded, the facility was reimbursed. Building on this foundation, the IADB, in partnership with Brazil’s National Treasury and the UK’s Foreign and Commonwealth Development Office, has updated this concept to address modern-day challenges.

Brazil, as the largest economy in Latin America, is leading the charge with bold innovation and ambition. Recognizing the urgency of systemic vulnerabilities tied to FX risks, Brazil’s G20 2024 presidency has prioritized local currency solutions. Launched as part of its Ecological Transformation Plan, the Eco Invest Brasil Programme offers a cutting-edge approach to solving currency risk and capital mobilization challenges.

Linking International Capital to Local Institutions

The Eco Invest Brasil Programme links international capital markets to local financial institutions through a “derivatives pipeline,” lowering the cost and increasing access to long-term FX hedging instruments. Structured within Brazil’s Fundo Clima, this programme combines innovative financing mechanisms with a robust institutional framework to reduce capital costs, enhance FX liquidity for local companies, provide FX hedging, and support green investments.

One of the most innovative features of the programme is the foreign exchange derivatives line. By connecting international capital markets to local financial institutions, Eco Invest Brasil lowers the cost and increases access to long-term FX hedging instruments. This is further strengthened by catalytic capital that mitigates counterparty risk, ensuring local banks can confidently engage in the FX market. Together, these mechanisms create conditions for accelerated price discovery and, crucially, lower hedging costs for projects delivering environmental and social benefits.

Fostering Innovation in Green Finance

The fourth line of the programme focuses on fostering innovation within Brazil’s green finance landscape. It encourages the development of private equity and venture capital instruments through targeted incentives. This aims to catalyse investments in innovative sustainable projects and support early-stage financing, creating a robust ecosystem for scaling large-scale initiatives. With Eco Invest Brasil, Brazil is sending a clear message: the tools to fix the local currency problem exist.

This approach not only addresses a critical market gap but also lays the foundation for Brazil’s transition to a low-carbon economy. The importance of this programme was underscored at a recent G20 event in São Paulo, where IADB President Ilan Goldfajn joined Brazil’s Treasury Secretary Rogério Ceron, Minister of Environment and Climate Change Marina Silva, and Central Bank President Roberto Campos Neto to sign letters of intent aimed at attracting foreign investments while mitigating exchange rate risks.

A Replicable Model for Global Impact

Eco Invest Brasil offers a replicable model for EMDEs struggling with similar challenges. The innovative use of derivatives, combined with concessional funding and liquidity mechanisms, creates a framework for other countries seeking to deepen their local capital markets while attracting foreign investment. Donors play a critical role in providing capital for local currency financing solutions and enabling capacity-building and institutional reforms necessary to strengthen local financial systems.

Without these efforts, the potential of programmes like Eco Invest Brasil will remain limited to a handful of well-prepared markets. Scaling these initiatives requires a coordinated push to mobilize domestic actors, align incentives, and deliver the technical assistance needed to build a resilient ecosystem where local actors can thrive. For EMDEs hoping to unlock their own ecological transformations, this programme offers a glimpse of what’s possible when the financial system works with, and not against, environmental sustainability.

Future Prospects and Global Collaboration

The Eco Invest Brasil Programme features as one of the key case studies outlined in the OECD’s upcoming report ‘Unlocking local currency financing: What role can donors, development finance institutions and multilateral development banks play?’ This report will be launched at the OECD’s Community of Practice on Private Finance for Sustainable Development Conference in Paris. Scaling successful initiatives such as the Eco Invest Brasil Programme will be essential moving forward, offering a blueprint for global collaboration in sustainable development.