Saturday, 18 November 2017

Nikkei Asian Review: Japan to offer dollar-denominated loans to developing nations

Nikkei Asian Review
November 18, 2017 5:00 pm JST

Japan to offer dollar-denominated loans to developing nations

Tokyo eyes increased infrastructure exports by catering to borrowers' needs

The Japanese government hopes the addition of dollar loans will increase the popularity of its official development assistance programs. © Reuters

TOKYO -- Japan's government will start offering dollar-denominated development assistance loans, heeding the wishes of borrowing countries to reduce exposure to exchange-rate risks.

The move will likely increase demand from countries whose currencies are highly vulnerable to the performance of the U.S. economy. Tokyo hopes the change will lead to more infrastructure exports.

First up: Jamaica

As a first step, Japan is looking to lend up to $15 million to Jamaica. The Japan International Cooperation Agency, which handles the government's official development assistance programs, is expected to sign a memorandum of understanding with the Jamaican government by the end of this month.

The loan will be offered alongside a loan from the U.S.-based Inter-American Development Bank for a total of $30 million in lending. Jamaica is expected to use the funds to install energy-efficient air-conditioning systems and solar panels, as well as to expand the use of LED lighting at government buildings, hospitals and other public facilities.

Japan's dollar-denominated development assistance loans will offer three lending durations -- 15, 20 and 25 years. The interest rates will be set at premiums of between 100 and 110 basis points over the six-month London Interbank Offered Rate, or Libor. This would still be lower than the rates that the Jamaican government would pay if it raised the funds on its own.

JICA will be the actual lender of the loans, which will be funded mostly by issuing dollar-denominated, government-guaranteed bonds.

Name of the game -- infrastructure exports

The Japanese government is working toward increasing "higher-quality" infrastructure exports. It anticipates dollar-denominated development assistance loans to boost demand for Japan's official development assistance programs, leading to large-scale construction orders for infrastructure, such as waterworks, power stations, roads and bridges.

Roughly 95% of Jamaica's external debt is denominated in the U.S. dollar. The Caribbean island nation and some other developing countries in the dollar economic zone have conveyed to the Japanese government their desire to borrow development loans in dollars instead of yen. JICA will discuss the matter with Ecuador and other Latin American countries, as well as with the Middle Eastern nations. The agency expects to offer several dollar-denominated loans a year.


The addition of dollar loans is unlikely to have much impact on demand for yen-denominated loans, which offer benefits including longer maturities and lower interest rates. JICA aims to decide which currency to use for loans based on the borrower's needs, since "dollar-denominated loans are not necessarily better," an official said.

With an eye toward lifting infrastructure exports, the Japanese government has beefed up JICA's functions. It has also embarked on reforms to cut the lead time for the execution of development assistance agreements from three years to no more than 18 months, and to enable syndicated loans with private-sector financial institutions.




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