Diaspora Bonds As a New Funding Vehicle for Developing Countries Suhas Ketkar Vanderbilt University & Dilip Ratha The World Bank Privatization of Development Finance Conference at NYU, December 4 and 5, 2009 Main messages Israel and India have used diaspora bonds to raise nearly $40 billion . . . Often in times of crisis . . . Often at a discount There is scope for other countries with large diaspora abroad to issue diaspora bonds for financing development Diaspora Bonds: Introduction Definition: Bonds issued by a country to its own Diaspora to tap into their assets in the adopted developed countries Examples: State of Israel bonds, RIBs and IMDs from India, also bonds issued by Lebanon and Sri Lanka Distinct from FCDs but similar to Islamic bonds placed in int’l capital markets Diaspora Bonds: Agenda Rationale: why would countries issue and investors buy Diaspora bonds? Israeli and Indian track-record: significant differences and regulatory issues Minimum conditions for the issuance of Diaspora bonds and potential issuers Attraction for issuing countries Patriotic discount: why not seek charity? Stable source of finance, esp. in bad times Support to sovereign credit rating Israel: S&P believes such support to be important but not decisive. Moody’s believes that it is more relevant now that the economic house has been put in order India: Did not prevent downgrading in 1998 Attraction for investors Patriotism management – home bias Risk management – Diaspora investors are likely to view the risk of receiving debt service in local currency with much less trepidation Desire to do “good” in the country of origin Risk Diaspora Bonds: Israeli experience DCI established in 1951 to raise funds from Jewish Diaspora Since then, Israel has raised over $26 bn via this stable source of finance ..receiving significant patriotic discount – 4% coupon until 1990 regardless of US interest rates Patriotic discount has declined of late as (1) Jewish Diaspora with less direct links to the Holocaust is making investment decisions based on total returns; and (2) secondary market in Israeli government bonds has emerged Israel: Diaspora Bond Sales US$ million 1,569 1,600 1,400 1,310 800 1,202 1,145 1,200 1,000 1,283 982 1,119 1,049 1,000 924 872 785 600 400 200 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Israel: Bond Sales by Type % of total 100 Notes 90 80 70 60 50 Fixed rate Floating rate 40 30 20 10 19 51 19 54 19 57 19 60 19 63 19 66 19 69 19 72 19 75 19 78 19 81 19 84 19 87 19 90 19 93 19 96 19 99 20 02 20 05 0 fixed rate floating rate notes Discount on Israel Bonds annual average rate % 14 12 10 8 6 4 2 19 53 19 56 19 59 19 62 19 65 19 68 19 71 19 74 19 77 19 80 19 83 19 86 19 89 19 92 19 95 19 98 20 01 20 04 20 07 0 fixed rate 10-year U.S. Treasury Diaspora Bonds: Indian experience Issued by SBI with 5-y bullet maturity & minimum $2000 -- India Development Bonds (1991) $1.6 bn -- Resurgent India Bonds (1998) $4.2 bn -- India Millennium Deposits (2000) $5.5 bn -- Investors received 7.75% on RIBs vs. 7.2% on BB U.S. corporate bonds -- Investors received 8.5% on IMDs vs. 8.9% on BB U.S. Corporate bonds Diaspora Bonds: Indian experience SBI limited sales to investors of Indian origin. Why? -- Marketing gimmick -- Indian Diaspora to show greater forbearance -- SBI reason KYC Diaspora Bonds: Indian experience SBI decided to forego SEC registration on the ground that RIBs/IMDs were bank CDs and hence were subject to U.S. banking rather than securities laws RIBs were sold to U.S. retail investors IMDs were not sold in the U.S. despite the word deposit in the name Diaspora Bonds: Indian experience Deterrents to SEC registration include: -- High costs (but $500K not material) -- Stringent disclosure requirements (but no problem for SBI) -- Long lead time of up to 3 months -- Plaintiff-friendly U.S. court system -- India rejected U.S. courts as well as U.S. laws Diaspora Bonds: Indian experience “In addition to class action mechanisms to aggregate individual claims not prevalent in other countries, U.S. procedures – including rules of discovery, pleading requirements, contingent fees, and the absence of ‘loser pays’ cost rule – are far more favorable to plaintiffs than those of foreign courts.” Roberta Romano (1998) Diaspora Bonds: Indian experience While SEC registration is not optional, the Indian case raises an interesting issue of giving investors the choice of law and forum Make such choice another attribute of the security to be priced in the market Can be supported on efficiency grounds Unlikely in short run given recent market failures But market pressure may eventually come into play Diaspora Bonds: Israel vs. India Israel India Annual issuance since 1951 Opportunistic issuance in 1991, 1998 and 2000 Development oriented borrowings Balance of payments support Large though declining patriotic discount Small patriotic discount, if any Fixed, floating rate bonds and notes Fixed rate bonds Maturities from 1 to 20 years with bullet repayment Five year with bullet maturity Direct distribution by DCI SBI distribution in conjunction with int'l banks Targeted towards but not limited to diaspora Limited to diaspora SEC registered No SEC registration Non-negotiable Non-negotiable Non-volatile Non-volatile Diaspora Bonds: Potential Minimum conditions for issuing diaspora bonds: -- Absence of civil strife -- Minimum governability -- Ability to meet SEC registration requirements -- Sizable first generation diaspora Diaspora Bonds: Potential Major migrant pools in the U.S., thousand, 2005 estimates 1,600 1,200 800 1,608 1,143 1,111 1,108 914 776 737 629 577 541 529 473 400 Ph ilip pi ne s In di a Ch in a Vi et na Do El m Sa m in ica lva d n Re or Ko pub lic re a, Re Ja p. m ai Co ca lo m G bi ua a te m al a Po la nd Ha iti 0 Source: Ratha and Shaw, 2007, South-South Migration and Remittances Diaspora Bonds: Potential Table 1: Countries with large diasporas in the OECD Emigrant Emigrant stock stock High- Emigrant HighSkilled stock Skilled 2000 as 2000 as 2000 % of pop. % of pop. Governance 1 Philippines 2 India 3 Mexico 4 China 5 Vietnam 6 Poland 7 Iran, Islamic Rep. 8 Jamaica 9 Russian Federation 10 Ukraine 11 Colombia 12 Pakistan 13 Romania 14 Turkey 15 Brazil 1,126,260 1,037,626 922,964 816,824 506,449 449,059 308,754 291,166 289,090 246,218 233,536 222,372 176,393 174,043 168,308 1.49 0.1 0.94 0.06 0.64 1.16 0.48 11.24 0.2 0.5 0.55 0.16 0.79 0.26 0.1 2.22 0.17 6.56 0.13 1.61 2.94 0.83 26.3 0.39 1.51 1.33 0.42 2.51 2.92 0.22 -0.52 0.09 -0.48 -0.47 -0.45 0.32 -0.76 -0.55 -0.84 -0.6 -0.71 -0.81 -0.29 0.07 -0.41 Diaspora Bonds: Potential Table 1: Countries with large diasporas in the OECD (continued) Emigrant Emigrant stock stock High- Emigrant HighSkilled stock Skilled 2000 as 2000 as 2000 % of pop. % of pop. Governance 16 South Africa 168,083 0.38 0.61 0.19 17 Peru 163,750 0.63 1.35 -0.77 18 Dominican Republic 155,176 1.88 7.08 -0.66 19 Egypt, Arab Rep. 149,432 0.22 0.38 0.02 20 Serbia and Montenegro 148,229 1.82 8.78 -0.81 21 Morocco 141,168 0.51 3.93 -0.1 22 Lebanon 138,214 4.07 9.15 -0.36 23 El Salvador 127,707 2.03 10.67 -0.37 24 Hungary 124,426 1.22 3.12 0.7 25 Trinidad and Tobago 120,327 9.37 18.35 -0.07 26 Haiti 152,710 1.92 4.93 -1.62 27 Nigeria 149,494 0.13 0.2 -1.38 28 Cuba 332,673 2.99 7.76 -1.14 Source: Governance data from Kaufman, Kraay and Mastruzzi High-skilled migrants abroad in high-income OECD from Docquier and Marfouk. Conclusions Diaspora bonds have been used by Israel & India with success A number of other countries are potential candidates for issuing diaspora bonds Ethiopia, Ghana, Grenada, Jamaica, Liberia, Morocco, Nepal, Philippines, Rwanda, Sierra Leone and Sri Lanka are exploring the possibility of issuing diaspora bonds at present. SEC registration required in the short run