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Analysis

Sovereign bonds to aid refugee crisis

by Gary Kleiman

Sovereign bonds to aid refugee crisis

 

The global refugee crisis, spreading from the Middle East to Asia, was in the spotlight at this year’s annual meetings of the International Monetary Fund and World Bank in October. Jim Yong Kim, president of the World Bank, emphasised the development-lender mantra of ‘turning billions into trillions’ through innovations and risk management tools to better mobilise private capital. The Institute of International Finance says foreign inflows into emerging debt and equity markets will again reach $500bn in the light of their bullish performance this year.

The International Development Association estimates that $2bn may be needed to meet host-country needs in responding to the crisis. Bangladesh’s finance minister submitted an initial request relating to the influx of Rohingya refugees which may cost $1bn. The World Bank may issue additional emergency bonds alongside the global concessional financing facility, created by the Bank, European Bank for Reconstruction and Development and the Islamic Development Bank, to allow discount borrowing by middle-income states like Jordan and Lebanon.

However, conventional emerging market investors could more easily be drawn on for larger sums through dedicated ‘refugee bonds’, through which the World Bank should instead emphasise credit enhancement. Jordan’s government has shown interest in a pilot programme which could raise hundreds of millions of dollars in long-term funding.

Drawing on private investors
Sovereign bonds are a logical starting point for refugee capital market development, but public and private equity participation through investment funds is feasible as well. Several large listed companies are already providing goods and services to refugees in affected cities and camps. Jordan has issued external bonds both cleanly and with US government guarantees. A $500m issue in April at 7% yield was oversubscribed, and fell within the guidelines of Jordan’s IMF programme.

Preliminary discussions with traditional emerging market investors, as well as those focused on impact investing and ‘socially responsible’ instruments, suggest the Jordanian government could offer a lower yield for a refugee bond that ties the cost to detailed and independently-verified reporting on the allocation of proceeds. The instrument would be designed to promote best practice in relief and to identify revenue streams, such as tax-producing job entry and business creation, that generate repayment cash flow.

For collateral, buyers could potentially control limited ownership rights in housing, road, power and sanitation facilities built to handle extended refugee influxes into host countries. According to United Nations data, refugees remain resident in host countries on average for longer than 10 years.

Bangladesh, which has accessed international markets once, is a compelling candidate for development bank guarantees and risk support through an inaugural refugee bond. The Asian Development Bank could help arrange a local currency alternative as well, reflecting its mandate to strengthen domestic and intra-regional bond markets. Its work contributed to turning India, Indonesia, Malaysia, Pakistan and Thailand into mainstream fixed-income investor destinations.

Malaysia has become the global hub for sukuk activity, and a debut Bangladesh bond with sharia-compliant features could be structured through Kuala Lumpur. Annette Dixon, the World Bank’s South Asia director, has said the Bank’s bond policies relating to the refugee crisis are under review, as it continues to settle on the optimal public-private sector mix.

Several creative emerging financial market-based solutions have been presented. They await official, commercial or philanthropic sponsorship to help realise millions, if not billions, of dollars in available foreign investment.

Kleiman chart

Gary Kleiman is Co-Founder and Senior Partner at Kleiman International.

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