Dilip Ratha(and Suhas Ketkar)
Financing for Development, DohaDecember 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.
Early Innovations
Syndicated loans
Brady bonds
Petro-dollar recycling & resolution of debt crisis
Recent Innovations
Future-flow securitizationFuture-flow securitization
Diaspora bondsDiaspora bonds
GDP-indexed bonds
GDP-indexed bonds
Shadow sovereign
ratings
Shadow sovereign
ratings
Financing Developmen
t
Financing Developmen
t
1
3
5
7
9
11
13
15 Percent
US Treasury 10-year
Israel DCI bond
Discount on Israel diaspora bonds
Israel and India have raised nearly $40 billion via diaspora bonds
Diaspora bonds: Top Candidates
10,476
3,725
2,705
2,475
2,380
2,228
1,839
1,815
1,702
1,082
Mexico
Turkey
China
Philippines
India
Morocco
Vietnam
Serbia & Montenegro
Poland
Colombia
By emigrant stock (thousands)
Diaspora bonds: Top Candidates
35
22.6
14.7
10.2
9.7
7.4
5.2
4.5
4.3
2.9
Jamaica
Serbia & Montenegro
El Salvador
Mexico
Dominican Republic
Morocco
Turkey
Poland
Romania
Philippines
By emigrants as % of population
Potential for Diaspora Bonds
Country Diaspora stocks($ thousands)
Potential savings($ billions)
South Africa 713 2.9
Nigeria 837 2.8
Ghana 907 1.7
Kenya 427 1.7
Ethiopia 446 1.6
Somalia 441 1.6
Senegal 463 1.3
Zimbabwe 761 1.0
Sudan 587 1.0
Angola 523 1.0
Sub-Saharan Africa
GDP-indexed bonds (GIBs)
0
2
4
6
8
10
12
14
16
18
0 1 2 3 4 5 6 7 8 9 10
GDP-Indexed
Indexed
Fixed vs. GDP-indexed coupons
Cou
pon
(%)
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
0
100
200
300
400
500
600
700
AA
AA
-
A+ A A-
BB
B+
BB
B
BB
B-
BB
+
BB
BB
-
B+ B B-
CC
C+
Investment grade
Below inv. grade
Interest spread, basis points
2007
2003
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
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 ratingsRemittances (% of GDP,
2004)
Rating excluding
remittances
Rating including
remittances
Spread reduction
(basis pts)
Lebanon 14 B+ BB- 150
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 Amount(US$ mn)
Flow type Transa-ction rating
Sover-eign
rating
1998 Banco Cuscatlan
50 Remit. BBB BB
2004 Banco Salvadoreño
25 DPRs BBB BB+
2002 Banco do Brasil
250 Remit. BBB+ BB-
Future flow securitizationRisks 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
LocalForeign
Future export securitization structure
Foreign buyer Local exporter
LocalForeign
SPV/ Trustee
Customers
Future flow securitization
Special Purpose Vehicle (SPV)
Trust
Investors
On-shore
Off-shore
Issuer
Structure of FF Securitization
Proceeds
Notes
Excess Collection
Future Product
Future Product P & I
Product Payment
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
Hierarchy in Future-Flow-Backed Transactions
Securitization Potential in Sub-Saharan Africa(US$ billions)
Source: Authors’ calculations Note: Based on average for 2003–06.
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
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
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