Diaspora bonds represent fixed income securities that are issued by a country to its expatriates to access their wealth that is invested overseas. They enable the issuing country to diversify its funding, mobilise foreign exchange and benefit from a potential ‘patriotic’ discount in pricing from a loyal investor base.
The explicit focus on a retail investor base that often proves more resilient than institutional investors in economically challenging times can also improve a country’s sovereign risk rating.
From the investor’s perspective, access to such investments enables them to achieve enhanced rates of return on sovereign instruments that would otherwise not be available since bond issuances typically target a wholesale investor base and require prohibitively large investments (the usual face value of bond is $250,000).
Israel and India have historically had the most success in mobilising considerable funds through diaspora bonds
Israel and India have historically had the most success in mobilising considerable funds through diaspora bonds. The former has raised $30 billion through regular issuance since 1951 while the latter has issued opportunistically and mobilised $11.3bn through three issuances since 1991.
In 2011, recoiling from a drastic economic crisis, Greece launched a $3bn issuance programme in the United States that targeted Greek-Americans. More recently, in 2017, Nigeria successfully raised $300 million in a transaction that was significantly over-subscribed.
Pakistan, with inward remittances of almost $20bn in 2017 (according to World Bank data), ranks as the eighth highest beneficiary country for such inflows and therefore appears to have the basic ingredients for a successful issue. Therefore, why has the response to Pakistan Banao Certificates (PBCs) been tepid and what can be done to revive the issuance?
The Ministry of Finance must review its execution of the scheme. Despite the retail focus, diaspora bonds are a capital market instrument that requires specialised expertise for execution.
Much as offerings of wholesale sovereign issuances appoint banks as global bookrunners and co-ordinators to organise investor meetings and solicit orders, PBC roadshows should have been set up for the targeted jurisdictions in the Middle East.
Reduced reliance on the PBC’s website for information and appointing at least one international bank to act as global bookrunner would provide the requisite cohesion and consistency in distribution strategy. Critically, the consortium of distributing banks should be financially incentivised to sell the instrument as is the case with all international bond executions.
In addition, the PBC’s website currently does not contain the terms and conditions related to the offering and provides only sparse information on the applicable legal framework.
Ideally, a full prospectus should have been produced and to ensure full transparency and disclosure, the website should specify the gazetted legal, regulatory and commercial terms of the offering.
Investors must understand where they rank in relation to other creditors of the sovereign and that their status has the necessary legal protection. Equally important, the detailed commercial terms of the offering in relation to its tenor and pricing should be formally presented in a legally sanctioned document.
Assurance should also be provided that the National Bank of Pakistan (NBP) has established the requisite back-office infrastructure to efficiently handle registration, inclusive of ‘know-your-customer’ formalities (especially considering the Financial Action Task Force’s increased scrutiny), and seamlessly effect periodic payments, premature redemptions, and maturities in rupees and dollars.
International bonds usually have a unique international securities identification number that enables them to trade while clearing occurs through settlement systems such as Euroclear and Clearstream.
The Ministry of Finance must review its execution of the Pakistan Banao Certificates. Despite the retail focus, diaspora bonds are a capital market instrument that requires specialised expertise for execution
Such processes are intrinsic to the development of vibrant secondary markets. Eschewing established systems places greater emphasis on the robustness of NBP’s processes which should be clearly explained both on the PBC’s website and in offering documents. The preferred system should also accept non-Pakistani investors as the scheme should look to access the largest possible pool of investors.
Consideration must also be given to structuring a Shariah-compliant tranche of the PBCs. A 2014 report by the Organisation of Islamic Corporation (OIC) estimated that remittances to OIC member countries amounted to $136bn, representing 23pc of remittances globally and 32pc of those to developing countries.
Within this pool of liquidity, the retail segment exhibits the highest propensity for Islamic products which could significantly increase PBCs distribution.
Enhancing the offering of the PBCs requires improved execution which should focus on creating the right incentivisation for banks, greater investor awareness, robust operational support, better distribution and more product diversity that caters to all segments.
An improved offering should also positively impact the forthcoming amnesty scheme. By providing an attractive investment avenue, Pakistan’s taxpayers could be further incentivised to repatriate their funds. In addition, remedying current concerns will improve the chances of success for future issues of diaspora bonds being contemplated by other government organisations.
The writer is a financial sector expert at the World Bank
Published in Dawn, The Business and Finance Weekly, March 13th, 2019