A non-convertible currency, also known as a “blocked currency”, is the legal tender of a country that is not traded at all on the international foreign exchange market, usually because of government restrictions.
It is normally a method of protection as a non-convertible currency’s economy is usually particularly vulnerable to market movements.
If the non-convertible currency decreases or increases sharply in value, its potential adverse effects could be devastating for a country.
A flight of capital is one of the principal fears of governments that leads to the blocking of currency convertibility.
The only way to trade a non-convertible currency is on the black market.
The Brazilian real and Chilean peso are two examples of non-convertibles which represent considerable challenges for businesses operating in Brazil and Chile.
Non-convertible currencies are very often exotic currencies but do have some different characteristics.
In order to conduct business within such countries, companies use a financial product known as a “non-deliverable forward contract” (NDF).
NDFs are the principal way to hedge local currency risks in emerging markets that operate with a non-convertible currency.
It is crucial, however, to highlight that the non-deliverable currency can never be removed from the country of its denomination.
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