Commodity Price Risk Management Advisory

  • Countries that import or export commodities are frequently subject to commodity price volatility that can impact national income. Fiscal accounts are exposed to government revenue or expenses that are linked to commodity prices or state-owned enterprises (SOEs) that operate a commodity business.

    Countries have exposure to agricultural products, energy, metals, and other traded products like weather and environmental indices. Hedging these risks can stabilize a sovereign’s revenue/expense stream, which allows countries to maintain fiscal space to provide basic services to citizens and deliver on development goals.

    World Bank Treasury provides assistance in building capacity and helping develop customized hedging strategy that meets the country’s specific risk management needs. These services are available to both IBRD and IDA member countries.

  • An important first step in the implementation of a commodity risk management strategy is a risk assessment process that can quantify the financial impact of commodity price volatility on the borrower’s finances.

    Advisory engagements can cover the following services:

    • Risk assessment and design of a customized strategy
    • Analysis of existing institutional and legislative framework
    • Technical support to design a framework for selecting hedging strategies
    • Education for stakeholders and policy-makers
    • Technical support to building a robust infrastructure for hedging risks

    Why Build a Risk Management Program with the World Bank Treasury?

    • We have an extensive experience helping countries achieve fiscal resilience through capacity building on asset management, liability management, and risk management.
    • We have a track record of training and supporting more than a dozen countries with diverse technical commodity risk management issues, from the exchange rate and import complexity of island states like Dominican Republic, to the intricacies of importing energy products for Morocco, to the blended exposure for countries like Uruguay who export agricultural products and import energy.

     

  • Many clients choose to execute trades with the World Bank Treasury, which can help in two formats: 

    • Stand-alone hedging transactions
    • Hedging transactions embedded in an IBRD loan agreement

    Benefits of World Bank Treasury Intermediation Services

    • When a country executes a commodity hedge trade with the World Bank Treasury, the risk is directly transferred to the market. The World Bank does not hold unhedged commodity market risk on the IBRD or IDA balance sheet.
    • World Bank Treasury can provide the best possible execution for the client due to IBRD’s and IDA’s AAA credit ratings and standing in the markets given its deep relationships with dozens of market counterparties with whom it transacts with daily.
    • Because both IBRD and IDA have AAA credit ratings, World Bank Treasury is not required to post collateral with counterparties. As a result, the World Bank does not require clients to post collateral for trades intermediated by IBRD or IDA.