Dilip Ratha (and Suhas Ketkar) Financing for Development, Doha December 1, 2008 Main messages Developing countries, especially private entities, need access to international capital markets.
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Dilip Ratha (and Suhas Ketkar) Financing for Development, Doha December 1, 2008 Main messages Developing countries, especially private entities, need access to international capital markets. There is need for both taxbased and market-based innovative financing instruments. Shadow ratings will encourage countries to seek sovereign ratings and improve access to international capital. Securitization of future exports and remittances can be a friend in foul weather. GDP-indexed bonds can reduce the pro-cyclicality of debt burden. Diaspora bonds can be a useful tool for tapping the wealth of the diaspora. Early Innovations Petro-dollar recycling & resolution of debt crisis Syndicated loans Brady bonds Recent Innovations Future-flow securitization Diaspora bonds Financing Developmen t GDPindexed bonds Shadow sovereign ratings Discount on Israel diaspora bonds 15 Percent US Treasury 10-year 13 11 9 7 5 3 20 03 19 98 19 93 19 88 19 78 19 73 19 68 19 63 19 58 19 53 1 19 83 Israel DCI bond Israel and India have raised nearly $40 billion via diaspora bonds Diaspora bonds: Top Candidates By emigrant stock (thousands) Colombia 1,082 Poland 1,702 Serbia & Montenegro 1,815 Vietnam 1,839 Morocco 2,228 India 2,380 Philippines 2,475 China Turkey Mexico 2,705 3,725 10,476 Diaspora bonds: Top Candidates By emigrants as % of population Philippines 2.9 Romania 4.3 Poland 4.5 Turkey Morocco Dominican Republic Mexico El Salvador Serbia & Montenegro Jamaica 5.2 7.4 9.7 10.2 14.7 22.6 35 Potential for Diaspora Bonds Sub-Saharan Africa Country South Africa Nigeria Ghana Kenya Ethiopia Somalia Senegal Zimbabwe Sudan Angola Diaspora stocks ($ thousands) 713 837 907 427 446 441 463 761 587 523 Potential savings ($ billions) 2.9 2.8 1.7 1.7 1.6 1.6 1.3 1.0 1.0 1.0 GDP-indexed bonds (GIBs) Fixed vs. GDP-indexed coupons 18 Indexed 16 Coupon (%) 14 12 GDP-Indexed 10 8 6 4 2 0 0 1 2 3 4 5 6 Growth rate (%) 7 8 9 10 GDP-indexed bonds (GIBs) Debt service on indexed bonds varies with ability to pay It also allows countries to pursue counter-cyclical economic policies Concerns about GDP-indexed bonds Accuracy of GDP data – under-reporting, data revision moral hazard/adverse selection? How to price GIBs Low liquidity GIBs: Role of public policy • Ensure reliability of GDP data. • Reduce product uncertainty and the resultant low liquidity associated with introduction of new products. • Investors would require that a large number of countries issue GIBs so as to diversify risk. IFIs can provide help. • Provide seed money to financial institutions. Importance of sovereign credit ratings Borrowing cost rises exponentially as credit rating deteriorates Interest spread, basis points 700 2003 600 Below inv. grade 500 400 Investment grade 300 200 2007 100 CCC+ B- B B+ BB- BB BB+ BBB- BBB BBB+ A- A A+ AA- AA 0 Importance of sovereign credit ratings Sovereign ratings impacts private flows They affect: Debt FDI Performance-based aid They act as rating ceilings for subsovereign entities Importance of sovereign credit ratings 70+ developing countries are not rated 15+ are rated, but not recently Several factors affect a country’s decision to get rated: – – – – Information requirement Need for debt Cost of rating Fear of low rating Hence the need for SHADOW RATINGS Predicting shadow ratings Fit a regression model of Sovereign rating as a function of – macro variables – rule of law – debt and international reserves – volatility R is high 2 Shadow ratings results Predicted Actual Albania BB to BB+ Ba1 [BB+] Cambodia B+ B+ and B1 Brazil BBB to A- BBB- Peru BBB- to BBB BBB- Gabon BBB- to BBB BB- Ghana BB- to BB B+ Africa premium? Predicted shadow ratings Shadow ratings for the 55 unrated countries reveal: – 8 investment grade – 18 B to BB – 15 CCC – Only 14 CC or lower Predicted shadow ratings Shadow ratings for the 55 unrated countries reveal: – 8 investment grade!!! – 18 B to BB!!! – 15 CCC – Only 14 CC or lower Improving ratings 1. Counting all relevant flows 2. Partial guarantees from donor agencies 3. Securitization of future flows of remittances and other receivables Improving ratings Lebanon Remittances Rating Rating Spread (% of GDP, excluding including reduction 2004) remittances remittances (basis pts) 14 B+ BB150 Haiti* 28 CCC B- 334 Nicaragua* 11 CCC+ B- 209 Uganda* 5 B- B 161 * Calculated using the benchmark model of Ratha, De and Mohapatra (2007) Improving ratings: FF Securitization Year Issuer 1998 Banco Cuscatlan Amount Flow type Transa(US$ ction mn) rating 50 Remit. BBB Sovereign rating BB 2004 Banco Salvadoreño 25 DPRs BBB BB+ 2002 Banco do Brasil 250 Remit. BBB+ BB- Future flow securitization Risks involved in exposure overseas include: Sovereign risk Performance risk Product risk Diversion risk FF securitization structure mitigates sovereign risk. Choice of collateral, excess coverage and reputation of issuer mitigate other risks Future export securitization structure Foreign buyer Local exporter Foreign Local Future export securitization structure Foreign buyer Local exporter SPV/ Trustee Foreign Local Future flow securitization Structure of FF Securitization Customers Product Payment Future Product Special Purpose Vehicle (SPV) Future Product Trust P&I Proceeds Investors Notes Excess Collection Off-shore On-shore Issuer Hierarchy in Future-Flow-Backed Transactions Heavy crude oil receivables Diversified payment rights (DPRs), airline ticket receivables, telephone receivables, credit card receivables, and electronic remittances Oil and gas royalties and export receivables Paper remittances Tax revenue receivables Securitization Potential in Sub-Saharan Africa (US$ billions) Receivable Potential Fuel exports 51 10 Agrl. raw materials exports 6 1 Ores and metals exports 16 3 Travel services 13 1 Remittances 8 1 Total 95 17 Source: Authors’ calculations Note: Based on average for 2003–06. Summary Developing countries need access to international capital markets Shadow ratings could encourage several countries to seek sovereign ratings removing a constraint on their access to int’l capital markets Securitization of future exports and remittances can improve ratings on external financing transactions Diaspora bonds and GDP-indexed bonds also offer additional innovative financing mechanisms