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Prashanta Kumar Banerjee Discussions on the sovereign bonds have been confined only to the university classrooms in Bangladesh until recently. For the first time, the Bangladesh Bank has brought this issue before the financial community and the practitioners by suggesting that the government should issue sovereign bonds in foreign currencies in the international markets. This is seemingly a good step in the right direction for easing pressures on the foreign exchange reserve. Issuance of sovereign bonds will also enable the government to maintain stable exchange rate, create a vibrant local corporate bond market, establish a benchmark-bond for the Bangladeshi enterprises planning for financing business activities from the overseas sources. It would also help them get familiar with the foreign potential lenders or bond purchasers. The sovereign bond was first issued by the British Government in 1693 to raise money to fund the war against France. This type of bond is issued with guaranteed payments by governments or government agencies, primarily, in local currency. Later, issuing sovereign bonds in international markets in foreign currencies also gained popularity in conjunction with the issuance of such bonds in local currency. Currently, bonds issued by national governments in key foreign currencies are normally referred to as sovereign bonds, although the term sovereign bond may also refer to bonds issued in a country's own currency. A distinguishing feature of a sovereign bond is that it bears only macroeconomic risks for a given country unlike both macroeconomic and firm-specific risks for the corporate bond. Bangladesh is considered as one of the emerging economies in the region. The country is expected to embrace a middle-income status by 2021 with an annual growth rate of 8-10 per cent. The Sixth FiveYear Plan (2011-15) of the country targets 8 per cent of GDP growth by the end of the period. To achieve this, share of investments in GDP has to be somewhere around 32.5 per cent by 2015 in Bangladesh. As per the estimation of the finance ministry, the amount of investment deficit is
Tk.979.00 billion till the fiscal year 2014-2015. It is, therefore, necessary to make up for the deficit by increased supply of foreign currency. But uncertainty of world economy, inconsistency in Foreign Direct Investment (FDI), variability in foreign aid and loan from the donor agencies are matters of concern in ensuring this investment rate as these create pressure on the foreign currency reserve. In this context, issuing sovereign bonds can be beneficial to Bangladesh economy subject to selecting right areas of usage of bond- money, generating funds at the relatively lower interest rate, ensuring quick utilisation of collected money in the set areas as per announced time schedule. Failing these, currency mismatch and maturity mismatch may occur. Of course, future probable debt service capacity of the country is an important factor to be considered before issuing this type of bond. In addition, developing corporate bond market is sine qua non for creating balanced sources of finance. However, like other developing countries, real sector of the economy of Bangladesh does not depend on the corporate bond market to raise capital because the bond markets in their current states are extremely shallow and thin. To facilitate the growth of the corporate bond market, many governments believe that they first need to establish an active sovereign bond market both in local and foreign currencies. Besides developing a vibrant bond market, Bangladesh Bank also encourages corporate units to collect funds from the foreign sources on the ground that apart from bringing foreign currency, collecting finance from the foreign sources is cheaper compared to local sources. Recently, the Bangladesh Bank Governor urged local firms to borrow from abroad for the aforementioned. In case of collecting funds from the foreign sources at the corporate level, sovereign bond can also be used as the benchmark bond for the local corporate bond market, also. In 2004, the Chinese government issued a $1.5 billion ten-year and $500 million five-year global bond, denominated in Euros, although they do not have shortage of foreign currency reserve. The purpose, quoted by a Chinese officer in charge of foreign debt under the Ministry of Finance, is to establish a benchmark bond with more liquidity for those Chinese enterprises planning to get finance from overseas instead of just raising money locally. Lessons from Sri Lanka: Sri Lanka first entered the sovereign bond market in 2007, followed by issues in 2009 and 2007. Recently, the country has raised $1 billion by issuing 10-year sovereign bond, although foreign markets are hardly favourable now because of the deepening of financial crisis in the Euro zone, in particular. The offer attracted $7.5 billion of orders from 315 accounts, which is an exceptional achievement for Sri Lanka, given the worldwide volatile market backdrop. The deal was done at a coupon of 6.25 per cent. Someone may think about the reasons behind overwhelming response of the investors to the bond. Sri Lanka received a vote of confidence from the rating agencies. Moody's and Standard & Poor's both revised their outlooks on Sri Lanka to be positive but kept their ratings at B1 and B+, respectively. Fitch directly upgraded its rating on Sri Lanka to BB- from B+. Fitch considered the country's economic stability and recovery under the IMF program, as well as its efforts to address its budget deficit in upgrading its rating. Moreover, an expectation of growth from the post-war restructuring of the country acted as a positive factor in this regard. In this deal, Bank of Ceylon acted as a co-manager. In addition, Sri Lanka appointed Bank of America, Merrill Lynch, Barclays Capital, Hong Kong and Shanghai Banking Corp, and Royal Bank of Scotland as
joint lead managers for the bond sale. They arranged for a strong road show and worked efficiently to raise this amount of hard currency at a competitive yield for a war- torn country like Sri Lanka. A lion's portion (78 per cent) of the Sri Lankan bond was allocated to five managers and the remaining offer was distributed among banks (8.0 per cent), retail investors (7.0 per cent) and insurance and funds (4.0 per cent) and others (3.0 per cent). In terms of geographical distribution, US investors bought 48 per cent of the deal, EU based investors bought 31 per cent and Asian Investors bought 25 per cent of the issue. Creditworthiness of Bangladesh in issuing sovereign bond: Ability and willingness to pay are two basic factors in assessing credit worthiness of sovereign bond issuers. In assessing the ability of the issuing country, investors focus on debt-servicing capacity. As a result, the ability to pay is a cash flow analysis of the country's external account. Among the macroeconomic variables that are likely to affect a country's ability to service its debt are: current account balance to GDP (gross domestic product) ratio (+), terms of trade (+), foreign reserves to import ratio (+), outstanding external debt (-), income variability (-), export earning variability (-), and inflation (-). The willingness to pay is, in fact, a choice between the loss that comes from a default and the money saved on debt repayment. On both fronts, Bangladesh has been enjoying reputation for a long time. As evident from Table 1, it is revealed that compound annual growth rate (CAGR) of external debt stocks to export earning during 2000-2009 was -4.58, whereas the same for Pakistan and Sri Lanka were -3.35 and 3.45, respectively. It means that outstanding amount of external debt stocks has been decreasing as compared to the country's growing export earning and this net negative growth rate is better than that of Pakistan and Sri Lanka. Bangladesh has, therefore, been maintaining a relatively better position as compared to Sri Lanka and Pakistan with respect to outstanding external debt stocks to export earning. It reflects growing strong ability of Bangladesh to service its external debt. This ability is further supported by the percentage of debt service to export earning (Table 2). Bangladesh held the lowest debt service to export earning in 2009 among the South Asian countries, meaning Bangladesh is in the best position among the countries under review in servicing its external debt. With respect to CAGR of debt service to export earning ratio, Bangladesh also enjoys a better position compared to Pakistan and Sri Lanka. It indicates that the capacity of Bangladesh to pay off foreign debt has been increasing over time. The increase in export earning and a steady growth of debt led to a decrease in the ratio of outstanding external debt to export earning, and debt service to export earning. In addition, the global rating agency, the Standard and Poor's assigned Bangladesh 'BB-long term and 'B' short-term foreign and local currency sovereign credit ratings in 2011 and they retained the same rating in 2012 for Bangladesh. Recently, Moody's has given Bangladesh Ba3 rating for the third consecutive year. The continuation of the same rating by the agencies shows optimism about the country's macroeconomic stability and growth prospects. It is significant in the sense that both the S&P's and the Moody's have kept Bangladesh rating unchanged, although it downgraded ratings of many countries during the global economic crisis. Bangladesh ranks the second highest in South Asia behind India and ahead of Sri Lanka and Pakistan. Other countries in the BB category along with Bangladesh include Turkey, the Philippines, Indonesia and Vietnam.
To conclude, considering the present and the future requirements for hard currencies to support development activities of the country, present interest rate on sovereign bonds in the international market, current tendency of western investors to invest in developing countries' bonds, proven ability of Bangladesh to service external debt for a long time and existing credit rating of Bangladesh assigned by the Standard and Poor's, and the Moody's, it seems that timing is right for Bangladesh to move forward for issuing sovereign bonds. It is, therefore, expected that government along with the Bangladesh Bank should go ahead with this initiative. No doubt, proper structuring of bonds in terms of types, interest rate and maturity is important to receive encouraging response from the bond investors. The experiences of Sri Lanka may be helpful to Bangladesh in this regard. As for the types of bonds, Bangladesh may consider issuing coupon bonds, zero coupon bonds, Sukuk bonds etc., in different currencies, namely, US dollar, UK's pound sterling and euro. Issuing Sukuk bonds is expected to receive promising response from the investors in the Middle East. In addition, keeping option for TIPS (Treasury Inflation Protected Securities) might also be considered for enhancing acceptability of the sovereign bonds. In this connection, the Government of Bangladesh may also consider issuing Diaspora Bond, as this type of bond tends to be less prone to convertibilityrisk because investors are likely to have current and contingent liabilities in their home countries. Another aspect for issuing sovereign bond is to offer bond to investors at relatively lower interest rates. In setting interest rate on sovereign bonds, interest rate on treasuries, default risk and restructuring risk, and compensation for inadequate liquidity should be taken into consideration. Duration of bonds, time value of funds, depreciation of local currency, mid and long-term capacity of the country in earning key foreign currencies are also critical issues that require to be considered prudently. In this regard, appointing capable lead managers is a primary task for assuring proper guidance. Strong debt market capabilities of the lead managers and their sufficient experiences in international bond market are required to be ascertained while appointing lead managers. For example, HSBC acted as joint lead manager, book runner and sovereign rating advisor for the government of Sri Lanka with its all issues of such bonds. HSBC successfully highlighted post-war excellence in the economic prospects of Sri Lanka along with its economic stabilisation, recovery efforts to address budget deficit, and upgrading of credit rating. A demonstration of strong economic prospect is thus vital to launching sovereign bonds. The sales promotion efforts are expected to target Europe, the USA and the Middle East. However, the prospects in the Euro zone are currently bleak. "PIIGS" (Portugal, Italy, Ireland, Greece and Spain) are not faring well at all on this front. In particular, Greece has become an example of modern tragedy with respect to sovereign bonds. Hence, additional efforts ought to be directed toward BRICS (Brazil, Russia, India, China, and South Africa) in light of their impressive economic performances amid an unsteady global economic recovery.