Why and how should Bangladesh issue sovereign bonds?

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.
Conjecturally, all discussions on 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 step in the right direction for easing pressure 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 to finance business activities from overseas sources. It would also help them get familiar with the foreign lenders or bond purchasers.
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 of sovereign bonds in international markets in foreign currencies also gained popularity. 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 our region. It is expected to reach middle-income status by 2021 with an annual growth rate of 8-10$. The Sixth Five-Year Plan (2011-15) targets 8% GDP growth by the end of the period. To achieve this, share of investments in GDP has to be somewhere around 32.5% by 2015 from its current level.
As per the estimation of the finance ministry, the amount of investment deficit is Tk.97, 900 crores till 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 a relatively lower interest rate, and ensuring utilisation of collected money in the set area 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 too.
In addition, developing corporate bond market is sine qua non for creating balanced sources of finance. However, like other developing countries, the real sector of the Bangladesh economy 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 emerging market governments believe that they first need to establish an active sovereign bond market both in local and in foreign currencies.
Besides developing a vibrant bond market, Bangladesh Bank also encourages corporate units to collect funds from 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 foreign sources at the corporate level, sovereign bond can also be used as the benchmark bond for the local corporate bond market too.
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, stated 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 2007 and 2009. Recently, the country raised $1 billion by issuing 10-year sovereign bond, although foreign markets are hardly favourable now because of on-going deepening of financial crisis in the Euro zone, in particular. The offer attracted $7.5 billion worth 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%.
One 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 programme, 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 a strong road show and raised this amount of hard currency at a competitive yield for a war-torn country like Sri Lanka.
A lion's share (78%) of the Sri Lankan bond was allocated to five managers and the remaining offering was distributed among banks (8%), retail investors (7%) and insurance and funds (4%) and others (3%). In terms of geographical distribution, US investors bought 48% of the deal, EU based investors bought 31% and Asian Investors bought 25% of the issue.
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.

The writer is a Fulbright Scholar and Professor and Director (Research, Development and Consultancy), Bangladesh Institute of Bank Management.