Currency devaluation (political risk)
A sharp drop in a currency's value, decided or suffered by the state. Inconvertibility cover never pays for it: it belongs to foreign exchange risk.
On March 6, 2024, the Central Bank of Egypt let the pound float: in a single day it went from about 30.9 to about 49.5 pounds per dollar. Nine months earlier, in June 2023, Nigeria had unified its exchange rates, and the naira lost more than 40% in that month alone. In both cases the state made the call, and the currency lost overnight what the parallel market had been taking from it for months. Devaluation, in the political risk sense, is that loss of value traceable to a government decision: dropping a peg, unifying multiple rates, a float required under an IMF program. For a political risk underwriter, the friction point never changes. Currency inconvertibility and transfer cover pays when local currency cannot be converted or moved out of the country; it never pays for a loss of value. An investor who converts dividends at 49.5 instead of 30.9 has lost close to 40% in dollar terms, and the CPRI policy owes nothing, because the conversion went through. Most wordings say so expressly, with an exclusion for depreciation or devaluation. That exposure is hedged in the financial markets (forwards, options, local currency borrowing), when those markets exist, which is rarely the case for the currencies that devalue. The one qualification is timing: devaluation usually follows a stretch of hard currency shortage, and it is during that shortage, while transfers sit at the central bank for months, that inconvertibility cover can respond. Not to be confused with capital controls, which block currency from leaving without moving the official rate, and which do open the transfer discussion.
Textbook case: an Egyptian subsidiary needs to upstream 300 million pounds of dividends in early 2024. In January, the central bank is not supplying hard currency: the request waits, and if the wait runs past the policy's waiting period, the transfer cover can be triggered. On March 6, the pound floats and dollars become available again. The transfer goes out at the new rate: about $6.1 million instead of $9.7 million. The gap, close to $3.6 million, stays entirely with the investor.
- Central Bank of Egypt, statement of 6 March 2024 (floating of the pound)
currency devaluation, devaluation risk, currency float, currency depreciation, devaluation
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