Analysts back diaspora bonds but warn of challenges

Diaspora bonds

Economic analysts are throwing their weight behind the issuance of a diaspora bond, saying it would be an ideal financing option for the central government in the face of recent developments in the local and international debt markets.

Diaspora bonds are sovereign debt instruments sold by governments almost exclusively to their diaspora populations.

The Minister of Finance, Ken Ofori-Atta, had, in 2020, disclosed government’s intention to raise US$3billion – the equivalent value of the 2021 Eurobond issuance – from the diaspora, even as work continues around its design.

Sharing his thoughts on the feasibility of such an issuance with the B&FT, Senior Economist with Databank, Courage Kingsley Martey, said despite its promise, the prevailing global economic landscape, coupled with the logistics required to galvanise the market makes it a tough sell at this point in time.

“The main challenge would now be how to identify a viable community of expatriates who would be willing and able to invest their earnings into these kinds of bonds back home. The identification process would require government to work with its foreign missions to locate Ghanaian expatriates and determine their potential demand for such a bond. I think the identification of the diaspora investor base has been the key challenge, and the next challenge before we even commence market sounding,” he explained.

In spite of the presence of a ‘home bias’ and the so-called patriotic discount, where investors are willing to accept below-market returns on account of their altruistic ties to the issuer, he argued that prevailing conditions might not allow for significantly lower rates.

“Even for resident Ghanaian investors we see demand for significant yields, inclusive of high-risk premiums… The good thing, however, is that the diaspora investors are more likely to be high net worth individual Ghanaian expatriates living outside the country. Also, the fact that they are not fund managers means that their demand for yields could be managed,” the senior economist added.

With developments in the first quarter of the year, once again, highlighting the vulnerability of the cedi to exchange rate shocks, Mr. Martey backed calls for such a bond to be issued in the local currency.

“It should be issued in the local currency. That way, it also helps to attract foreign currency into the Ghanaian economy and these forex inflows will most likely stay longer than the typical foreign investor inflows on the domestic bond market.

“Since these inflows will come from Ghanaian expatriates, they will consider it as an investment back home and will have a little incentive to repatriate the funds out of Ghana. This helps government to broaden its investor base and tilt its debt service obligations away from foreign currency into local currency, thereby reducing the exchange rate shocks,” he noted.

Burden of proof

That remittance flows into the country increased by 5 percent to US$3.6billion at the height of the pandemic, according to World Bank’s 2021 Migration and Development report, is indicative of the connection the diaspora maintains with the nation, says the Dean of the University of Cape Coast (UCC) Business School, Professor John Gatsi.

However, pointing to the contrasting fortunes of countries such as Israel, which has the most developed diaspora bond market, estimated to have raised in excess of US$46billion as of mid-2021; and Ethiopia, which has failed in its two attempts at issuing diaspora bonds, owing to a lack of trust by the target market. Prof. Gatsi said the state has its work cut out in proving to the diaspora that it will use the bonds for its intended purpose.

He added that it would be a remiss to treat diasporan investors as philanthropists, as they are investors first and foremost, who have alternative uses for their funds.

“Many of our citizens in the diaspora still owe a sense of allegiance to the nation and are interested in its economic development and if an attractive environment is created for them, they would participate.

“Nevertheless, they are interested in the environment to which they are bringing their money, and some recent engagements have shown that they have lingering concerns and they will be guided by investment principles… The onus is on government to be transparent in its engagement with this set of investors, as with all others,” he remarked.

In Prof. Gatsi’s view, the best use cases for the inflows from a successful diaspora bond issuance would be the development of the nation’s transportation, logistics, and supply chain infrastructure.


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