These exposures may lead to reductions in cash flows through increased dollar-linked operating expenses and lifecycle costs.

Latin American currencies have already declined versus the dollar across the board. The drop in commodity prices and pressures in key markets (including Brazil) has pushed many exchange rates down. Since July of 2014, the Brazilian real has fallen by almost 76%, the Colombian peso by approximately 60%, and the Chilean peso by 23% versus the U.S. dollar.

For Latin American infrastructure projects, the benefits of foreign currency borrowing are compelling. They often result in better interest rates and attractive financing terms relative to local capital markets. For countries such as Colombia, borrowing in foreign currency may be critical as the local economy cannot support the size and scale of planned infrastructure investments.

Typically, FX risk is mitigated through creditworthy counterparties who assume a significant portion of that risk. These mechanisms may include inflation- and currency-indexed revenue streams or grantor true-up payments in availability-based projects. Fitch generally views these mitigants as sufficient in all but the most extreme devaluation scenarios. However, despite these mitigants, expenses linked to foreign manufactured replacement parts for energy projects or other U.S. dollar-denominated commodities or labor can increase operating expenses and stress project cash flows.

Currency conditions may make these hedges more expensive or more difficult to engage if the counterparties view the currency dislocation as a long-term condition. In the coming weeks, Fitch will publish a complete report detailing the impact on FX risks in Latin America infrastructure and project finance transactions.

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