Loading in 2 Seconds...
Loading in 2 Seconds...
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 tax-based 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.
Recent Innovations Future-flow securitization Diaspora bonds Financing Development GDP-indexed bonds Shadow sovereign ratings
Discount on Israel diaspora bonds US Treasury 10-year Israel DCI bond Israel and India have raised nearly $40 billion via diaspora bonds
Diaspora bonds: Top Candidates By emigrant stock (thousands)
Diaspora bonds: Top Candidates By emigrants as % of population
Potential for Diaspora Bonds Sub-Saharan Africa
GDP-indexed bonds (GIBs) Fixed vs. GDP-indexed coupons Indexed GDP-Indexed Coupon (%) Growth rate (%)
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
Importance of sovereign credit ratings Sovereign ratings impacts private flows • They affect: • Debt • FDI • Performance-based aid • They act as rating ceilings for sub-sovereign 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 • R2 is high
Shadow ratings results 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 • Counting all relevant flows • Partial guarantees from donor agencies • Securitization of future flows of remittances and other receivables
Improving ratings * Calculated using the benchmark model of Ratha, De and Mohapatra (2007)
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 Trust Product Payment Future Product P & I Special Purpose Vehicle (SPV) Proceeds Investors Notes Future Product Excess Collection Off-shore Issuer On-shore
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) 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