In Focus: Kingdom gets riel about risk

TCX Fund Senior Vice President Harald Hirschhofer at the Cambodiana Hotel in Phnom Penh. Photo by: Wesley Monts

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I can hedge the whole MFI industry ... provided the price is right

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via CAAI

Friday, 14 January 2011 15:00 Jeremy Mullins

OPERATING in two different currencies has long been a risky proposition for firms in Cambodia, but that could be set to change as an exchange fund expands its presence.

TCX Fund aims to reduce the risk for companies operating in multiple currencies, such as the Kingdom’s microfinance institutions which often make loans in riel but are funded in dollars.

The fund allows organisations, such as MFIs and loan wholesalers, to hedge – or protect against – a significant decline in the value of the riel through financial mechanisms such as forwards or swaps.

The firm has partnered with organisations such as Agence Francaise de Developpement and wholesale loan provider BlueOrchard SA. It made its first hedge fund arrangement in the Kingdom just months ago.

A wholesaler such as BlueOrchard would provide funding in riel to MFIs. It would then hedge the foreign exchange risk with companies such as TCX – which holds the risk on its balance sheet – paying interest for the service. “[Partners such as AFD and BlueOrchard] don’t want to keep the exchange rate risk on their books,” TCX senior vice president Harald Hirschhofer said

“I’m not talking hedge of three months or four months here, I’m talking terms of up to four years,” he said.

“We don’t believe there will be a strong depreciation [in the riel] but the Cambodian economy is a smaller developing economy, by nature it has risks.”

TCX claims to be funded to the tune of US$700 million through equity financing, with 24 shareholders.

It also claims to have already provided hedging on three transactions in Cambodia in deals worth some $3 million.

Hirschhofer, however, declined to reveal the interest rates that were paid on the recent hedges.

“To limit our exposure, we can only have transactions of about $80 million in Cambodia, which is still a huge amount for Cambodia,” he said. “I can hedge the whole MFI industry, and we are willing to do it, provided the price is right.”

The interest rates the company charges could be brought down through better data collection on the Cambodian economy, he said, which would assist TCX in measuring risk.

“We want to have the data improved, we want to have as much transparency in policy making, this is very important for us to be active in these markets.”

Hirschhofer recommended that MFIs work to avoid exchange rate risk in lending activities.

“One should only lend to clients in hard currency when they have hard currency income. In other situations, they should not take the exchange rate risk,” he said.

BlueOrchard Cambodia Director Julie Cheng said her firm had not been able to hedge the riel before the launch of TCX.

“Hopefully pricing is at acceptable rates,” she said.