WASHINGTON, June 15, 2016 — The World Bank and the Ministry of Economy and Finance of Uruguay announced the completion of an oil hedging program, aimed at protecting the Uruguayan economy from abrupt changes in the international price of crude oil. The program was implemented through a financial derivative contract intermediated by the World Bank. This is the first commodity hedge transaction between an emerging market sovereign and the World Bank.
The transaction, which covers around half of Uruguay’s total annual oil imports for the next 12 months, will help moderate the impact of significant oil price increases on Uruguay`s fiscal budget and the overall economy.
“As a net crude oil importer country, oil price increases can have a big impact on individual consumers, on businesses, and on the government´s budget. Protecting the economy against global volatility is a key pillar of the government`s risk-management framework, underpinning macro-financial resilience and reducing fiscal risks. The support and active involvement of the World Bank was instrumental in setting up this full-fledged oil hedging program, providing technical expertise to manage it and sustain it over time“, said Danilo Astori, Minister of Economy and Finance of Uruguay.
The World Bank´s Country Partnership Framework with Uruguay, which runs through 2020, is focused on achieving sustainable growth in an increasingly complex environment. Boosting Uruguay’s resilience to external shocks is a key pillar of the framework. The oil hedging program is part of a broader engagement between Uruguay and the World Bank to manage these risks, which includes the innovative weather derivative transaction completed in 2013 to mitigate the negative impact of drought on the energy production and financials of the state hydro-power company.
“Notwithstanding Uruguay`s progress in diversifying its energy matrix towards renewable resources, a significant hike in oil prices could force the government to divert financial resources from priority areas to respond to immediate needs,” said World Bank Country Director for Argentina, Paraguay and Uruguay Jesko S. Hentschel. “This transaction is an important example of how the government of Uruguay and the World Bank are working together to build resilience to external shocks in a systematic way.”
“Uruguay's strategy of minimizing the fiscal impact of terms of trade shocks represents best practice in prudent risk management for small, open economies,” said World Bank Chief Economist for Latin America and the Caribbean, Augusto de la Torre.
The World Bank Treasury is partnering with countries to develop risk management strategies and employ market-based financial solutions that help build fiscal buffers and reduce countries’ vulnerability to currency, interest rate, and commodity price fluctuations, as well as climate-related events and other global challenges.
“We bring value with market expertise, by providing customized risk management solutions to each client,” said World Bank Vice President and Treasurer Arunma Oteh. “In an increasingly challenging and uncertain global economic environment, risk management remains essential. We are pleased to partner with a member country like Uruguay to help reduce its exposure to commodity price volatility and build capacity to manage such risks.”
Working with the World Bank as a transaction intermediary can improve market access and financial terms for member countries, expediting execution in a fast-changing environment. Bank collaboration also helps developing countries build capacity and strengthen confidence in the implementation of hedging programs, facilitating their access to capital markets.
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