Taka-linked bonds to attract foreign investors: IFC
The International Finance Corporation has now formally proposed to Bangladesh to launch $1 billion taka-linked bonds, saying they would attract new foreign investors.
Positive investor and media responses to an inaugural IFC issuance could potentially catalyse further investments and dollar inflows into Bangladesh, IFC said in the proposal it recently sent to the finance ministry and the central bank.
“A successful implementation of the bond issuance will signal the confidence offshore investors have in the stability of the Bangladesh economy and the taka.”
Not only that, an IFC bond will allow foreign investors to gain easier access to investments in the taka.
Many investors are constrained by minimum rating limits at AA and subsequently are unable to invest in Baa3/BBB-/BB+ rated Bangladesh government bonds even if they wish to gain exposure to the taka.
These investors will, however, be able to invest in IFC's AAA rated bonds, it said, adding that sovereign wealth funds and foreign central banks are likely to be attracted to the taka-linked bonds.
While initial feedback from investors has signalled appetite for shorter tenors (2-5 years), IFC's intent is to build a longer yield curve over time.
“Based on our experience in other countries such as China and India, as the market matures, investors will gain more comfort with taking risk for longer tenors.”
For instance, in India the IFC successfully created an offshore rupee yield curve starting from three years issuances of benchmark sizes and gradually extending to longer maturities of five, seven and ten years by regularly tapping the market over a one year period.
Proceeds from longer tenor bonds could be utilised in infrastructure projects within Bangladesh, it said.
Furthermore, by establishing this programme, the IFC can provide a successful benchmark for other issuers from Bangladesh, who could then access the offshore investor base.
Potential exists for such issuers to be able to source funding for longer tenors and larger sizes (given the more diversified investor base) than would be possible in the domestic capital markets, the IFC said.
The World Bank's private sector arm cited the case in India, where the success of its bond programme demonstrated to the Indian government and its central bank the potential of the offshore markets as a new and significant funding source for entities.
Lastly, a deep and liquid offshore taka market will provide a channel for foreign investors to invest dollars that can be used for investment in Bangladesh.
The primary objective of the bond issuance is to mobilise capital to fund IFC investments in projects in the country.
This will be done by converting the dollar proceeds of the bonds into taka and then using the resulting taka funds to provide financing for projects in Bangladesh.
“However, our experience shows that it is difficult to align the timing of the bond issuance with the disbursement schedules for specific projects.”
The issuance will be successful when market sentiment is positive. However, the projects may not be ready at such time to utilise the issuance proceeds.
To manage the timing mismatch, the IFC will either invest the bond proceeds in liquid instruments such as treasury bills, government bonds and so on, or swap the local currency bond proceeds into dollars and use it as part of its dollar lending programme.
An IFC team led by its Executive Vice-President Jin-Yong Cai floated the idea of the taka-linked bonds to Finance Minister AMA Muhith last month in a meeting on the sidelines of WB-IMF spring meetings in Washington DC, which the minister agreed to right away.
Meanwhile, Bangladesh Bank Governor Atiur Rahman told The Daily Star that he has sent a proposal to the National Board of Revenue to make the bonds income tax-free.
He has also sought tax waiver for the overall bond market to make it more vibrant.