Impact Investing in Africa: Innovative Strategies to Manage

Currency Risk

Hosted by NAB & NABC

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Impact investing in Africa presents an opportunity to achieve financial returns alongside measurable social and environmental impacts. However, investors frequently encounter significant challenges, particularly currency risk (FX risk), due to the volatility of local currencies relative to more stable currencies like the US dollar. 

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On April 3rd, the NAB co-hosted “Impact Investing in Africa: Strategies to Deal with FX Risk” with the Netherlands African Business Council (NABC) at TCX Offices at the KIT. Our speakers for this session included Roy Forney (TCX), Luz Leyva Urenda (Symbiotics/REGMIFA), and Tsito Raharison (Signature-Agri Investments), and were followed by a panel discussion. 

The clear consensus from the event was that proactive management of currency risk is essential, "doing nothing is not an option." Effective strategies and innovative partnerships can transform these financial challenges into opportunities to foster sustainable, long-term growth. 

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Detailed Overview of the Workshop Presentations: 

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1. Understanding Currency Risk: Roy Forney from TCX explained currency risk as the financial risk arising from fluctuations in currency exchange rates, significantly impacting both investors and borrowers. For instance, the USD-NGN exchange rate drastically increased from 160 to 1600 over ten years, highlighting severe risks for investors and borrowers. Forney demonstrated how TCX mitigates these risks by offering currency hedging solutions in over 110 currencies, executing over 5,000 trades worth more than USD 15 billion since 2007. A specific case study from Sierra Leone illustrated how a local currency loan at a higher nominal interest rate could be significantly more cost-effective than a USD-denominated loan when factoring in currency depreciation. 

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2. Blended Finance and Dynamic FX Management: Luz Leyva Urenda detailed the Regional MSME Investment Fund for Sub-Saharan Africa (REGMIFA), a blended finance fund investing across 22 countries. Leyva discussed the fund’s evolution, from initial open currency strategies to adopting more structured approaches due to currency volatility and high hedging costs. REGMIFA successfully employs a systematic approach, balancing risks and opportunities through rigorous scenario analysis and macroeconomic assessments. The fund strategically selects currencies and sets clear limits, resulting in optimized financial performance and robust FX risk management. 

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3. Natural Hedging through Agricultural Investment: Tsito Raharison from Signature-Agri Investments presented a compelling strategy of natural hedging using agriculture. By aligning cash flows from export-oriented agricultural investments with local currency realities, Raharison demonstrated how institutional investors could mitigate FX risk while achieving substantial returns. The Ulimi Agri Fund case study in Malawi showed a tailored investment structure optimized for pension funds, with substantial returns in hard currency despite local currency volatility. This approach addresses FX scarcity effectively, turning local currency investments into impactful, dollarized returns. 

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Key Takeaways  

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• Targeted Diversification: Comprehensive market and historical analyses are crucial for developing viable hedging solutions, ensuring stability and impact. 

• Blended Finance Structures: Combining concessional or public capital with first-loss tranches mobilises private investments in Africa and effectively mitigates currency volatility, even for unhedged portfolios. 

• Natural Hedging: Assets like farmland and export-oriented value chains naturally protect against currency fluctuations, offering stable, long-term returns. 

• Local engagement: Leveraging partnerships with local investors to align revenue and expenses reduces currency risk and enhances local economic engagement. ​

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Addressing FX risk is pivotal for investor confidence, financial resilience, and tapping into Africa’s extensive investment potential. Structured vehicles, adaptable strategies, and local-currency solutions, as underscored by workshop experts, form the foundation of successful, impactful investments in Africa. 

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We extend our gratitude to our speakers for their contributions and practical insights shared during this comprehensive workshop. 

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* You can access the speakers' presentations here.

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