evelopment Finance via Diaspora Bonds Suhas L.

Ketkar and Dilip Ratha

A diaspora bond is a debt instrument issued by a country or potentially, a sub-sovereign entity or a private corporation to raise financing from its overseas diaspora. Israel and India have raised $35-4 billion using these bonds. !he rationale behind the "overnment of Israel#s issuance of diaspora bonds has been different from that of the "overnment of India#s. !he "overnment of Israel has offered a fle$ible menu of diaspora bonds since %&5% to 'eep the (e)ish diaspora engaged. !he Indian authorities, in contrast, have used this instrument for balance of payments support, to raise financing during times )hen they had difficulty in accessing international capital mar'ets. *iaspora bonds are not yet )idely used as a development financing instrument. +onds issued by the *evelopment ,orporation for Israel -*,I., established in %&5% to raise foreign e$change resources from the (e)ish *iaspora, have totaled )ell over $/5 billion. *iaspora bonds issued by the government-o)ned 0tate +an' of India -0+I. have raised over $%% billion to date. Israeli Experience. !he (e)ish diaspora in the 1nited 0tates -and to a lesser e$tent ,anada. has supported development of Israel by buying bonds issued by the *evelopment ,orporation for Israel -*,I.. !he *,I )as established in %&5% )ith the e$press ob2ective of raising foreign e$change for the state from (e)ish diaspora abroad -as individuals and communities. through issuance of non-negotiable bonds. *,I offerings of diaspora bonds are 3uite e$tensive )ith multiple maturities and minimum subscription amounts that range from a lo) of $% to a high of $% , . !he *,I bonds ma'e up roughly 3/ percent of the government#s outstanding e$ternal debt of $3%.4 billion as of end-*ecember / 5. ,urrently, Israel uses proceeds from bond sales to diaspora (e)ry to finance ma2or public sector pro2ects such as desalination, construction of housing, and communication infrastructure. !he 4inance 5inistry periodically sets interest rates and more recently other parameters on different types of *,I bonds to meet the annual borro)ing target. 0till, the Israeli government does not consider borro)ings from diaspora (e)ry as a mar'et-based source of finance. Accordingly, it does not see' credit ratings on these bonds from rating agencies such as 067 and 5oody#s. 8o commercial9investment ban's or bro'ers have been involved in the mar'eting of Israeli diaspora bonds. Instead, these bonds are sold directly by *,I )ith +an' of 8e) :or' acting as the fiscal agent. ,urrently, there are about / *,I employees in the 1nited 0tates )ho maintain close contacts )ith (e)ish communities in the various regions of the country so as to understand investor profiles and preferences. !hey host investor events in (e)ish communities )ith the e$press purpose of maintaining ties and selling bonds.

Table 1: Bond Offerings in Israel

+ond !ype 4i$ed rate 4i$ed rate 4i$ed rate ;*I 4i$ed rate -- <ero ,oupon 4i$ed rate (ubilee

*ates %&5%-= %&& on %&&3 %&&3 %&&=

5aturity % -%5 yrs % yrs % yrs % yrs 5-% yrs

5inimum 89A $/5, $/5, 89A $?,

@ate +asis 4. 5't. based 5't. based, ?-month

5id-%&> s 8otes

$%5 , $/5 , $%, , $/5, $5, 89A , $5,

4loating rate 4loating rate 4loating rate Source: Bank of Israel

%&= -%&&/ %&&3-&& 0ince ;nd %&&&

% yrs > yrs 5 yrs % -%/ yrs % yrs % yrs

5't based, at redemption 5't. based, ?-month

7rime based

7rime based 7rime based Aibor base

Indian Experience. !he Indian government has tapped its diaspora base of non-resident Indians -8@Is. for funding on three separate occasions India *evelopment +onds -I*+s. in %&&% -$%.? billion., @esurgent India +onds -@I+s. in %&&= -$4./ billion., and India 5illennium *eposits -I5*s. in / -$5.5 billion.. !he conduit for these transactions )as the government-o)ned 0tate +an' of India -0+I.. !he I*+s provided a vehicle to 8@Is to bring bac' funds that they had )ithdra)n earlier that year as the country e$perienced a balance of payments crisis. !he I*+s and subse3uently the @I+s and I5*s paid retail investors a higher return than they )ould have received from similar financial instruments in their country of residence. India also benefited because the diaspora investors did not see' as high a country ris' premium as mar'ets )ould have demanded. !he I*+s, @I+s and I5*s all had five-year bullet maturity. !he issues )ere done in multiple currencies 10 dollar, +ritish pound, *eutsche 5ar'9;uro. Bther relevant characteristics of the offerings are set out in !able /. 1nli'e the (e)ish diaspora, the Indian diaspora provided no patriotic discount on @I+s and only small one on I5*s.
Table 2: Diaspora bonds issued by India

Bond Type Amount India *evelopment +ond bn 10* "+7 $%.?

Year %&&%

Maturity 5 years

Minimum 8ot available &.5 C %3./5C

Coupon

@esurgent India +ond $4./ bn 10* "+7 *5

%&&=

5 years

/,

D >.>5C %, =./5C

DD =.

3,

India 5illennium *eposits bn 10* "+7 ;1@

$5.5 /, / 5 years D =.5 C /, ?.=5C D >.=5C /, D

Rationale for Diaspora Bonds. ,ountries are e$pected to find diaspora bonds an attractive vehicle for securing a stable and cheap source of e$ternal finance. Also, the diaspora is e$pected to provide a EpatrioticF discount in pricing these bonds. !he Israeli and to a lesser e$tent the Indian e$perience is clearly in 'eeping )ith this hypothesis. :et another factor that might play into the calculus of the diaspora bond-issuing nation is the favorable impact it )ould have on the country#s sovereign credit rating. +y ma'ing available a reliable source of funding that can be availed in good as )ell as bad times. @ating agencies believe that Israel#s ability to access the )orld)ide (e)ry for funding has undoubtedly supported its sovereign credit rating. 1nli'e Israel, ho)ever, India has not made diaspora bonds a regular feature of its foreign financing forays. Instead, diaspora bonds are used as a source of emergency finance. Ghile not e$plicitly stated, India has tapped this funding source )henever the balance of payments has threatened to run into deficit. !he country#s ability to do so is no) perceived as a plus. Rationale for the investors.+eyond patriotism, ho)ever, several other factors may also help e$plain diaspora interest in bonds issued by their country of origin. !he principal among these is the opportunity such bonds provides for ris' management. !he )orst-case default ris' associated )ith diaspora bonds is that the issuing country )ould be unable to ma'e debt service payments in hard currency. +ut its ability to pay interest and principal in local currency terms is perceived to be much stronger, and therein lies the attractiveness of such bonds to diaspora investors. !ypically, diaspora investors have current or contingent liabilities in their home country and hence may not be averse to accumulating assets in local currency. 0imilarly, they are also li'ely to be much less concerned about the ris' of currency devaluation. 0till other factors supporting purchases of diaspora bonds include the satisfaction that investors reap from contributing to economic gro)th in their home country. 4urthermore, diaspora bonds allo) investors the opportunity to diversify their assets a)ay from their adopted country. 4inally and some)hat speculatively, diaspora investors may also believe that they have some influence on policies at home, especially on bond repayments. Conditions and Candidates for Successful Diaspora Bond Issuance. !he siHeable (e)ish and Indian diaspora in the 1nited 0tates, ;urope and else)here have contributed to the success of Israel and India in raising funds from their respective diaspora. +ut for diaspora investors to purchase hard currency bonds issued by their countries of origin, it )ould seem that there has to be a minimum level governability. !he Israeli trac' record reveals ho) the patriotic discount is the greatest from first generation diaspora than from subse3uent generations. !hus, the *,I secured large elements of charity in bonds issued in the immediate )a'e of the birth of the nation. !he second and subse3uent generation country diaspora can be e$pected to have much )ea'er ties to their ancestral countries. Also s'illed migrants are more li'ely to invest in diaspora bonds than uns'illed migrants. Conclusion. !his paper discusses the rationale, methodology, and potential for issuing diaspora bonds as instruments for raising e$ternal development finance, mostly dra)ing on the e$periences of Israel and India. !he "overnment of Israel has nurtured this asset class by offering a fle$ible menu of investment options to 'eep the (e)ish diaspora engaged since %&5%. !he Indian authorities, in contrast, have used this instrument opportunistically to raise financing during times )hen they had difficulty in accessing international capital mar'ets -for e$ample, in the aftermath of their nuclear testing in %&&=..

It has been difficult to gather facts and data on diaspora bonds although anecdotally a number of countries are believed to have issued such bonds in the past -e.g., "reece after Gorld Gar II.. Bne difficulty that confounds data gathering is the confusion bet)een diaspora bonds and foreign currency deposits, and some times bet)een diaspora bonds and local currency deposits. ;$horting the diaspora members to deposit money in domestic ban's is different from as'ing them to purchase foreign currency denominated bonds in international capital mar'ets. !here is also a need for clarity on regulations in the host countries that allo) or constrain diaspora members from investing in these bonds. A pertinent 3uestion in this respect is, should these bonds be non-negotiable, or should )e ma'e an effort to develop a secondary mar'et for these bonds.