Diaspora BondsDiaspora BondsTrack Record and PotentialTrack Record and Potential
Suhas KetkarSuhas KetkarVanderbilt UniversityVanderbilt University
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Dilip RathaDilip RathaThe World BankThe World Bank
Migration and Development ConferenceMigration and Development ConferenceWorld Bank, Washington DC World Bank, Washington DC
May 23, 2007May 23, 2007
Main messagesMain messages
Israel and India have raised $35-40 Israel and India have raised $35-40 billion financing billion financing
. . . Often in times of crisis . . . Often in times of crisis . . . Often at a discount. . . Often at a discount There is scope for other countries There is scope for other countries
with large diaspora abroad to issue with large diaspora abroad to issue diaspora bonds for financing diaspora bonds for financing developmentdevelopment
Diaspora Bonds: IntroductionDiaspora Bonds: Introduction
Definition: Bonds issued by a country to Definition: Bonds issued by a country to its own Diaspora to tap into their assets in its own Diaspora to tap into their assets in the adopted developed countries the adopted developed countries
Examples: State of Israel bonds, RIBs Examples: State of Israel bonds, RIBs and IMDs from India, also bonds issued by and IMDs from India, also bonds issued by Lebanon and Sri LankaLebanon and Sri Lanka
Distinct from FCDs but similar to Islamic Distinct from FCDs but similar to Islamic bonds placed in int’l capital marketsbonds placed in int’l capital markets
Diaspora Bonds: AgendaDiaspora Bonds: Agenda
Rationale: why would countries issue and Rationale: why would countries issue and investors buy Diaspora bonds? investors buy Diaspora bonds?
Israeli and Indian track-record: significant Israeli and Indian track-record: significant differences and regulatory issues differences and regulatory issues
Minimum conditions for the issuance of Minimum conditions for the issuance of Diaspora bonds and potential issuersDiaspora bonds and potential issuers
Attraction for issuing countriesAttraction for issuing countries
Patriotic discount: why not seek charity?Patriotic discount: why not seek charity? Stable source of finance, esp. in bad timesStable source of finance, esp. in bad times Support to sovereign credit ratingSupport to sovereign credit rating
Israel: S&P believes such support to be Israel: S&P believes such support to be important but not decisive. Moody’s important but not decisive. Moody’s believes that it is more relevant now that believes that it is more relevant now that the economic house has been put in the economic house has been put in orderorder
India: Did not prevent downgrading in India: Did not prevent downgrading in 19981998
Attraction for investorsAttraction for investors
PatriotismPatriotism Risk management – Diaspora investors Risk management – Diaspora investors
are likely to view the risk of receiving debt are likely to view the risk of receiving debt service in local currency with much less service in local currency with much less trepidationtrepidation
Desire to do “good” in the country of originDesire to do “good” in the country of origin
Diaspora Bonds: Israeli experienceDiaspora Bonds: Israeli experience
DCI established in 1951 to raise funds from DCI established in 1951 to raise funds from Jewish DiasporaJewish Diaspora
Since then, Israel has raised over $25 bn via this Since then, Israel has raised over $25 bn via this stable source of finance stable source of finance
..receiving significant patriotic discount – 4% ..receiving significant patriotic discount – 4% coupon until 1990 regardless of US interest coupon until 1990 regardless of US interest ratesrates
Patriotic discount has declined of late as Jewish Patriotic discount has declined of late as Jewish Diaspora with less direct links to the Holocaust is Diaspora with less direct links to the Holocaust is making investment decisions based on total making investment decisions based on total returns returns
Israel: Diaspora Bond SalesIsrael: Diaspora Bond Sales
962 1,000924 872
785
1,145
1,310
1,569
1,200
1,000
0
400
800
1200
1600
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
$ million
Israel: Bond Sales by TypeIsrael: Bond Sales by Type
0%
20%
40%
60%
80%
100%1
95
11
95
31
95
51
95
71
95
91
96
11
96
31
96
51
96
71
96
91
97
11
97
31
97
51
97
71
97
91
98
11
98
31
98
51
98
71
98
91
99
11
99
31
99
51
99
71
99
92
00
12
00
3
Fixed rate
Floating rate
Notes
1
3
5
7
9
11
13
15 PercentUS 10-yr treasury rate
Israel DCI fixed rate bonds
Discount on Israel BondsDiscount on Israel Bonds
Diaspora Bonds: Indian experienceDiaspora Bonds: Indian experience
Issued by SBI with 5-y bullet maturity & Issued by SBI with 5-y bullet maturity & minimum $2000minimum $2000-- India Development Bonds (1991) $1.6 bn-- India Development Bonds (1991) $1.6 bn-- Resurgent India Bonds (1998) $4.2 bn-- Resurgent India Bonds (1998) $4.2 bn-- India Millennium Deposits (2000) $5.5 bn-- India Millennium Deposits (2000) $5.5 bn-- Investors received 7.75% on RIBs vs.-- Investors received 7.75% on RIBs vs.
7.2% on BB U.S. corporate bonds7.2% on BB U.S. corporate bonds-- Investors received 8.5% on IMDs vs. 8.9% -- Investors received 8.5% on IMDs vs. 8.9%
on BB U.S. Corporate bonds on BB U.S. Corporate bonds
Diaspora Bonds: Indian experienceDiaspora Bonds: Indian experience
SBI limited sales to investors of Indian SBI limited sales to investors of Indian origin. Why?origin. Why?
-- Marketing gimmick-- Marketing gimmick
-- Indian Diaspora to show greater -- Indian Diaspora to show greater forbearanceforbearance
-- SBI reason KYC-- SBI reason KYC
Diaspora Bonds: Indian experienceDiaspora Bonds: Indian experience
SBI decided to forego SEC registration on SBI decided to forego SEC registration on the ground that RIBs/IMDs were bank CDs the ground that RIBs/IMDs were bank CDs and hence were subject to U.S. banking and hence were subject to U.S. banking rather than securities lawsrather than securities laws
RIBs were sold to U.S. retail investorsRIBs were sold to U.S. retail investors IMDs were not sold in the U.S. despite the IMDs were not sold in the U.S. despite the
word deposit in the nameword deposit in the name
Diaspora Bonds: Indian experienceDiaspora Bonds: Indian experience
Deterrents to SEC registration include:Deterrents to SEC registration include:-- High costs (but $500K not material)-- High costs (but $500K not material)-- Stringent disclosure requirements (but -- Stringent disclosure requirements (but
no problem for SBI)no problem for SBI)-- Long lead time of up to 3 months-- Long lead time of up to 3 months-- Plaintiff-friendly U.S. court system -- Plaintiff-friendly U.S. court system -- India rejected U.S. courts as well as-- India rejected U.S. courts as well as U.S. lawsU.S. laws
Diaspora Bonds: Indian experienceDiaspora Bonds: Indian experience
““In addition to class action mechanisms to In addition to class action mechanisms to aggregate individual claims not prevalent aggregate individual claims not prevalent in other countries, U.S. procedures – in other countries, U.S. procedures – including rules of discovery, pleading including rules of discovery, pleading requirements, contingent fees, and the requirements, contingent fees, and the absence of ‘loser pays’ cost rule – are far absence of ‘loser pays’ cost rule – are far more favorable to plaintiffs than those of more favorable to plaintiffs than those of foreign courts.” Roberta Romano (1998)foreign courts.” Roberta Romano (1998)
Diaspora Bonds: Indian experienceDiaspora Bonds: Indian experience While SEC registration is not optional, the While SEC registration is not optional, the
Indian case raises an interesting issue of Indian case raises an interesting issue of giving investors the choice of law and giving investors the choice of law and forumforum
Make such choice another attribute of the Make such choice another attribute of the security to be priced in the marketsecurity to be priced in the market
Can be supported on efficiency groundsCan be supported on efficiency grounds Unlikely in short run given Enron, MCI etc.Unlikely in short run given Enron, MCI etc. But market pressure will come into playBut market pressure will come into play
Diaspora Bonds: Israel vs. India Diaspora Bonds: Israel vs. India IsraelIsrael IndiaIndia
Annual issuance since 1951Annual issuance since 1951 Opportunistic issuance in 1991, Opportunistic issuance in 1991, 1998 and 20001998 and 2000
Development oriented borrowings Development oriented borrowings Balance of payments supportBalance of payments support
Large though declining patriotic Large though declining patriotic discountdiscount
Small patriotic discount, if anySmall patriotic discount, if any
Fixed, floating rate bonds and notes Fixed, floating rate bonds and notes Fixed rate bondsFixed rate bonds
Maturities from 1 to 20 years with Maturities from 1 to 20 years with bullet repaymentbullet repayment
Five year with bullet maturityFive year with bullet maturity
Direct distribution by DCIDirect distribution by DCI SBI distribution in conjunction with SBI distribution in conjunction with int'l banksint'l banks
Targeted towards but not limited to Targeted towards but not limited to diaspora diaspora
Limited to diasporaLimited to diaspora
SEC registeredSEC registered No SEC registration No SEC registration
Non-negotiableNon-negotiable Non-negotiableNon-negotiable
Non-volatileNon-volatile Non-volatileNon-volatile
Diaspora Bonds: PotentialDiaspora Bonds: Potential
Minimum conditions for issuing diaspora Minimum conditions for issuing diaspora bonds:bonds:
-- Absence of civil strife-- Absence of civil strife
-- Minimum governability-- Minimum governability
-- Ability to meet SEC registration-- Ability to meet SEC registration
requirementsrequirements
-- Sizable first generation diaspora-- Sizable first generation diaspora
Diaspora Bonds: PotentialDiaspora Bonds: Potential
1,608
1,143 1,111 1,108914
776 737629 577 541 529 473
0
400
800
1,200
1,600
Major migrant pools in the U.S., thousand, 2005 estimates
Source: Ratha and Shaw, 2007, South-South Migration and Remittances
Diaspora Bonds: PotentialDiaspora Bonds: PotentialTable 1: Countries with large diasporas in the OECD
EmigrantEmigrant stock
stock High- EmigrantHigh- Skilled stock
Skilled 2000 as 2000 as2000 % of pop. % of pop. Governance
1 Philippines 1,126,260 1.49 2.22 -0.522 India 1,037,626 0.1 0.17 0.093 Mexico 922,964 0.94 6.56 -0.484 China 816,824 0.06 0.13 -0.475 Vietnam 506,449 0.64 1.61 -0.456 Poland 449,059 1.16 2.94 0.327 Iran, Islamic Rep. 308,754 0.48 0.83 -0.768 Jamaica 291,166 11.24 26.3 -0.559 Russian Federation 289,090 0.2 0.39 -0.8410 Ukraine 246,218 0.5 1.51 -0.611 Colombia 233,536 0.55 1.33 -0.7112 Pakistan 222,372 0.16 0.42 -0.8113 Romania 176,393 0.79 2.51 -0.2914 Turkey 174,043 0.26 2.92 0.0715 Brazil 168,308 0.1 0.22 -0.41
Diaspora Bonds: PotentialDiaspora Bonds: PotentialTable 1: Countries with large diasporas in the OECD (continued)
EmigrantEmigrant stock
stock High- EmigrantHigh- Skilled stock
Skilled 2000 as 2000 as2000 % of pop. % of pop. Governance
16 South Africa 168,083 0.38 0.61 0.1917 Peru 163,750 0.63 1.35 -0.7718 Dominican Republic 155,176 1.88 7.08 -0.6619 Egypt, Arab Rep. 149,432 0.22 0.38 0.0220 Serbia and Montenegro 148,229 1.82 8.78 -0.8121 Morocco 141,168 0.51 3.93 -0.122 Lebanon 138,214 4.07 9.15 -0.3623 El Salvador 127,707 2.03 10.67 -0.3724 Hungary 124,426 1.22 3.12 0.725 Trinidad and Tobago 120,327 9.37 18.35 -0.0726 Haiti 152,710 1.92 4.93 -1.6227 Nigeria 149,494 0.13 0.2 -1.3828 Cuba 332,673 2.99 7.76 -1.14Source: Governance data from Kaufman, Kraay and MastruzziHigh-skilled migrants abroad in high-income OECD from Docquier and Marfouk.
ConclusionsConclusions
Diaspora bonds have been used by IsraelDiaspora bonds have been used by Israel & India with success& India with success
A number of other countries are potential A number of other countries are potential candidates for issuing diaspora bondscandidates for issuing diaspora bonds
SEC registration required in the short runSEC registration required in the short run