The World Bank provides local currency financing to a client by directly funding in that client’s own currency. The bond issue contributes to the deepening of domestic capital markets and allows domestic pension funds and international investors to diversify their portfolios. The transaction allows the government of Uruguay to manage its foreign currency exposure in the absence of a sufficiently developed swap market. Uruguay has made substantial progress in achieving Uruguay approached IBRD for a loan to support the macroeconomic stability since the economic crisis of implementation of priority economic and social sector 2002. As it consolidated its macroeconomic stability, reforms. The World Bank’s Executive Board of the main challenge for the country was to transition Directors approved the First Programmatic Reform to sustained growth by improving its business Implementation Development Policy Loan in May climate and setting the conditions for private sector- 2007 in support of reforms in Uruguay’s tax structure; led growth. Capital markets reform was, therefore, business climate and capital markets; and the social an important priority for the government. protection system. With reasonable access to funding in both US dollar Uruguayan authorities were keen to reduce their (USD) and Uruguayan peso (UYU), it was important exposure to foreign currencies by increasing the for Uruguay to have a sound debt management percentage of local currency debt in their portfolio strategy. The authorities had strengthened their debt based on their debt management strategy. Therefore, management policies and gradually improved the they wanted the IBRD loan proceeds to be structure of public debt. denominated in UYU rather than USD. cost of funding. Uruguay’s largest pension fund, República AFAP, purchased a significant portion of the issue, allowing IBRD generally provides local currency conversions the country’s pension fund system to diversify the on loans if it can hedge its foreign currency risk credit risk of its portfolio by investing in a AAA-rated through the swap market. In this case, the swap investment denominated in local currency. market in UYU was not sufficiently developed. This transaction also played an important role in Therefore, the Treasury had to adopt an alternative helping Uruguay limit its foreign currency exposure strategy to meet Uruguay’s needs without exposing and generate greater international awareness about IBRD to currency risk. It issued a UYU1,982 million the potential of its capital markets. (USD 100 million) inflation-indexed Euronote, carrying a coupon of 3.4% and maturing on April 15, 2017, and passed on the proceeds to the Uruguay government as a loan. Amount UYU 1,981.53 million The terms of the loan exactly replicated the bond (USD 100 million) (i.e. bullet maturity, payment dates, etc.). A 30 basis Start Date June 4, 2008 point contractual spread was added. Maturity April 15, 2017 Bond Coupon 3.40% This was the first time that the World Bank provided Loan Interest Rate Bond coupon plus 0.30% local currency financing to a member country by Notional Linked to inflation in directly funding in that country’s own currency. The Uruguay bond issue was very well received by both domestic and international investors. The transaction was oversubscribed, with demand reaching three times the fixed notional amount on offer. Due to IBRD’s superior credit rating (AAA), the bond was ultimately priced lower than the government of Uruguay’s own Miguel Navarro-Martin, Head of Banking Products, mnavarromartin@worldbank.org, +1 (202) 458 4722 Photo Credits Front: Gerard Pesantez / World Bank