Meaning
Probability that a borrower cannot convert local currency into foreign currency for external debt service despite having sufficient local funds. Evaluating transfer risk is a mandatory part of the credit analysis for any project located in a country with a history of capital controls. This problem is distinct from the borrower’s own financial strength.
It is a macro-economic failure where the local banking system lacks the hard currency needed to facilitate outward payments.
Currency Availability
Shortages of dollars or euros in the local market are the most common cause of this blockage. During a crisis, transfer risk manifests as a long delay in processing wire transfers to foreign creditors. Even if a factory is highly profitable, its inability to move its profits out of the country can lead to a default on international loans.
Economic Barrier
Governments may impose a moratorium on all foreign payments to protect their national reserves. In such a scenario, the transfer risk becomes a legal certainty rather than a probability. Lenders often require political risk insurance to cover this specific eventuality, as it is beyond the control of the project management.
Payment Failure
Consequences for the borrower include a loss of credit rating and a possible seizure of offshore collateral. Because transfer risk is a country-level issue, it often affects all industries simultaneously, regardless of their individual performance. Managing this depends on maintaining a diverse set of banking relationships across several jurisdictions.
