Diaspora BondsDiaspora BondsAs a New Funding Vehicle for As a New Funding Vehicle for

Developing CountriesDeveloping Countries

Suhas KetkarSuhas KetkarVanderbilt UniversityVanderbilt University

&&

Dilip RathaDilip RathaThe World BankThe World Bank

Privatization of Development Finance Conference at NYU, December 4 and 5, 2009

Main messagesMain messages

Israel and India have used diaspora Israel and India have used diaspora bonds to raise nearly $40 billion bonds to raise nearly $40 billion

. . . 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 – home biasRisk management – home bias 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 $26 bn via this Since then, Israel has raised over $26 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 ratescoupon until 1990 regardless of US interest rates

Patriotic discount has declined of late as (1) Patriotic discount has declined of late as (1) Jewish Diaspora with less direct links to the Jewish Diaspora with less direct links to the Holocaust is making investment decisions based Holocaust is making investment decisions based on total returns; and (2) secondary market in on total returns; and (2) secondary market in Israeli government bonds has emergedIsraeli government bonds has emerged

Israel: Diaspora Bond SalesIsrael: Diaspora Bond Sales

982 1,000924

872785

1,145

1,310

1,569

1,283

1,049

1,2021,119

0

200

400

600

800

1,000

1,200

1,400

1,600

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

US$ million

Israel: Bond Sales by TypeIsrael: Bond Sales by Type

Fixed rate

Floating rate

Notes

0

10

20

30

40

50

60

70

80

90

100

fixed rate floating rate notes

% of total

Discount on Israel BondsDiscount on Israel Bonds

0

2

4

6

8

10

12

14

fixed rate 10-year U.S. Treasury

annual average rate %

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 Indian While SEC registration is not optional, the Indian

case raises an interesting issue of giving case raises an interesting issue of giving investors the choice of law and foruminvestors the choice of law and forum

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 recent market failuresUnlikely in short run given recent market failures But market pressure may eventually come into But market pressure may eventually come into

playplay

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 successIndia 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 Ethiopia, Ghana, Grenada, Jamaica, Liberia, Ethiopia, Ghana, Grenada, Jamaica, Liberia,

Morocco, Nepal, Philippines, Rwanda, Sierra Morocco, Nepal, Philippines, Rwanda, Sierra Leone and Sri Lanka are exploring the possibility Leone and Sri Lanka are exploring the possibility of issuing diaspora bonds at present.of issuing diaspora bonds at present.

SEC registration required in the short runSEC registration required in the short run