ADB and Local Currency Financing: A 20-Year Journey

Twenty years ago, ADB issued its first local currency bond. The Indian rupee bond represented about $110 million equivalent at the time. Over the following three years, ADB raised funding from onshore bond issues in Malaysian ringgit, Thai baht, Chinese renminbi and Philippine peso – acting as an “icebreaker” to open these markets to foreign issuers.

Such borrowing exercises introduced a new funding stream for ADB’s development assistance, allowing borrowers to mitigate potential currency risks associated with borrowing in foreign currencies.

Fast forward to today, and local currency finance has gone mainstream. Development partners are no longer surprised when ADB issues bonds denominated in currencies as diverse as the Azerbaijan manat, the Indonesian rupiah or the Mongolian togrog and they recognize the invaluable role that local currency finance plays in crowding in foreign investment to developing countries.

About a third of ADB’s private sector loans are currently delivered in local currencies, with the Thai baht, Indian rupee, Chinese renminbi, Kazakhstan tenge, and Georgian lari featuring prominently. ADB’s aggregate local currency portfolio reached more than $3.75 billion equivalent as of 31 October 2024 across more than 15 local currencies with local currency loans expected to reach 50% of private sector lending over the next years.

What has catalyzed local currency finance?

Over the last 20 years, local capital markets have evolved and developed significantly  across Asia and the Pacific. These developments were driven by the experience of the 1997/98 Asian financial crisis, which was at least partially caused by excessive foreign currency exposures.

Since then, regulators, banks, and investors have made significant strides to develop local currency bond markets and improve the local currency capital market infrastructure.

Over the last 20 years, local capital markets have evolved and developed significantly across Asia and the Pacific.

ADB can reach certain target borrowers more effectively when it offers loans in their own currencies rather than in dollars, euros, or yen. For many of the projects that ADB supports, foreign currency denominated loans would not be feasible: a dairy business owner in Mongolia has no understanding of the risks involved in borrowing a foreign currency. Equally, a female worker in rural Kazakhstan would not begin to consider borrowing a home loan in a foreign currency. For both of these projects, ADB was able to provide suitable local currency financing solutions to meet borrower needs and avoid foreign currency mismatches.

Importantly, the rapid development of derivative markets in the region, which include the availability of both interest rate and cross-currency swaps in several markets, has facilitated the management of liquidity by decoupling funding and disbursement transactions, while also allowing for tailored back-to-back funding transactions.

The availability of longer-tenor financing solutions has also improved significantly in a number of the more developed Asian markets: for example, ADB was able to derive a 20-year Thai baht funding solution through the cross-currency swap market to finance a project in Lao People’s Democratic Republic, which delivered a perfect hedge for the borrower.

Similar liquidity of varying tenors is now available in swap and bond markets in the People’s Republic of China (PRC), India, Indonesia, Malaysia, and the Philippines.

A capital market innovation: the emergence of currency-linked bonds

Another important innovation has also improved the availability of local currency financing: the so-called “currency-linked bond” has been a game changer for development finance.  In essence, this is a debt security denominated in a local currency but settled in US dollars.

It relies on international documentation usually under English law, settlement occurs in international central securities depositaries, and the bonds are listed on major international stock exchanges. The impact of such structures is to crowd in international investors into local currencies by providing an easily accessible trading infrastructure.

ADB issued its first Indian rupee currency-linked bond in 2014 and since then has issued such instruments in Armenian dram, Azerbaijan manat, Georgian lari, Indonesian rupiah, Kazakhstan tenge, Kyrgyz sum, Mongolian togrog, Pakistan rupees and Philippine pesos. In Indian rupees alone, ADB has raised more than one billion US dollars equivalent to finance private sector projects.

Issuing innovative local currency bonds

In countries such as Georgia and Kazakhstan where the environment is enabled, ADB has issued multiple domestic bonds including fixed rate, floating rate and even inflation-linked. Furthermore, ADB auctioned the first green (2020) and gender (2021) bonds on the Kazakhstan Stock Exchange, delivering a new asset class to the local market.

In Georgia, ADB was the first organization to issue its domestic bonds through the Georgian Securities Settlement System (GSSS) in 2015, which operates delivery versus payment Real Time Gross Settlements (RTGS) with central bank money through the National Bank of Georgia.

In Kazakhstan, ADB settled its domestically issued bonds through the Kazakhstan Securities Depositary, which crucially has an operational “bridge” with Clearstream in Luxembourg.

These innovations have fostered knowledge sharing and the shift of local currency issuance infrastructure towards international best practices.

Creating local currency liquidity pools

Liquidity pools are commonly used to warehouse the proceeds of bond issues in mainstream currencies until project disbursements happen. ADB has developed liquidity pools in Chinese renminbi and Indian rupees, which have played an important role in shepherding in high levels of local currency development finance by providing continuous availability of funding, decoupling such availability from any specific funding transactions Further liquidity pools are in the making, as ADB’s pipelines in local currency grow and evolve.

Working closely with national regulators and market participants, ADB’s engagement in local currency markets over the last 20 years has made significant progress.

The next frontier: sovereign local currency loans

Local currency finance is already well established as a financing source for ADB’s private sector loans, but it has been deployed much less in the sovereign context, which for ADB represents the largest share of lending activity. A number of sovereign borrowers have recently started to avail  local currency solutions from ADB, including a recently  completed $1.45 billion sovereign local currency loan conversion.

Working closely with national regulators and market participants, ADB’s engagement in local currency markets over the last 20 years has made significant progress: ADB is now able to offer funding solutions in more than 15 local currencies in Asia and the Pacific. As local currency markets will further develop, the future of local currency financing in the Asia-Pacific region looks bright. 

Authors: Roberta Casali, ADB Vice-President for Finance and Risk; Tobias Hoschka, ADB Treasurer; Jonathan Grosvenor, former ADB Assistant Treasurer

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