Is it the best time to issue sovereign bond?

FE Team | Published: December 13, 2011 00:00:00 | Updated: February 01, 2018 00:00:00

Mamun Rashid Issuance of sovereign bond has been in discussion for last several years. It gained prominence, when the country went for sovereign credit rating in 2010. Both Standard and Poor's and Moody's rated Bangladesh 'satisfactory' as well as 'stable' and the rating came out better than its South Asian peers except India, at par with Vietnam and one notch down from Indonesia. Despite few challenges emanating from inward remittances and exports, the rating agencies maintained the same rating in 2011 too with good revenue earnings, strong domestic economy and satisfactory balance of payments situation. This humble writer had played a role in shaping opinion, garnering support, getting the country's consent for a sovereign rating and facilitating the rating exercise with Moody's. We were greatly influenced by the rating exercise done for Pakistan and especially Pakistan going for raising funds under Sukuk bond issuance in 2006 as well as Sri Lanka raising a reasonable sum of money to increase foreign exchange funds despite their uncomfortable internal situation. We all heard Shawkat Aziz, the then 'Pakistan Prime Minister saying, Pakistan wants to gauge its standing in the international market and hence decided to raise money under Sukuk bonds'. Maybe Pakistan ventured into the floatation of the bond considering its very good relationship with the Islamic world and recognizing the surplus available with the Middle East countries. Despite our repeated suggestions and attractive proposals, Bangladesh regulators were found lukewarm towards sovereign bond issuance, considering their very good relationship with the development partners, very attractive interest rates available, the development partners being not so 'gaga' about borrowing under sovereign guarantee. The policy planners at the 'watchdog' agency also didn't have much visibility about the usage of the funds to be raised through bond issuance. Now that situation is not `so good' for the government with falling foreign exchange reserve, slowing inward remittances, reduced development assistance, low foreign direct investment and balance of payments coming under pressure, they are now somehow forced to consider the option, other than total dependency on development partners to finance growth especially infrastructure development. Ministry of finance reportedly is reviewing the possible modalities to facilitate a reasonable amount of foreign currency bond issuance for subscription by the international commercial sources at international rates reflective of the true risk of Bangladesh as a sovereign. Sources revealed that the bond size may be to the tune of USD 500 million to 1.0 billion and tenor may be five to six years, with possible one year moratorium. Now the question have justifiably come up: Is it the best time to issue sovereign bond?. Now that financing for Padma Bridge has become doubtful, is the government too hyped up?. How much should we be raising? With a likely recurrence of another global meltdown what would be the interest rates for this bond? Since the bond as well as its pricing would be reflective of the `sovereign rating', can Bangladesh retain the similar rating through a repeat review despite challenging economic scenario? Since the bond would be listed offshore and likely to be traded too, where would we list this bond? How the market would respond to this issuance and most importantly if this is a 'Sukuk' or Islamic bond, do we get any pilot country or institution in Middle East or in the Islamic world to prop up support for us?. If this is a conventional bond, how the Asian or Middle East market respond to this maiden bond from almost an untested entity? Will there be any problem in the repayment with the value of taka sliding, export earnings reducing or inward remittances slowing or in the event of a revenue earning mismatch or administrative failures of the government?. Our ministry of finance prepared a position paper on this. The paper though little upbeat with the sovereign rating of Bangladesh recognises that the country's macro-economic management might face some challenges, with fiscal risks getting tougher to address, if the government issues sovereign bond to help mitigate its balance of payments problems. Seven major economic and fiscal risks, as identified in the policy paper, might emerge if the proposed bond is issued at this stage. Highlighting the risks, the paper said a currency mismatch between liability and income of the government may be evident, with increase in its debt servicing cost due to depreciation of taka against US dollar. The paper also pointed out some negative impact arising out of fluctuations in foreign exchange rate, changes in interest rates amid possible liquidity crunch in the international markets and the fear of becoming a debt-burdened country in the process of selling the sovereign bond and paying high interest on it. Besides, the paper mentioned about possible multiple negative impacts in the domestic fiscal management as the exchequer would be compelled to enhance income to meet the cost of debt servicing, particularly for making interest payments regularly against the funds raised through bond. The risks may adversely affect the country's medium-term debt sustainability and the medium-term macro-economic framework. Yes, Bangladesh needs to evaluate how international investors would react to 'Bangladesh risk' and 'assets'. It also needs to keep open the alternate doors to finance its growth. I have my doubts -- whether this is the best time for Bangladesh to go to the international markets to try her 'luck', especially without proper 'homework'. Yes, the 'in country macro-economic challenges' for Sri Lanka was much higher than Bangladesh while issuing sovereign bond in 2006, but the interest rates in the global markets was low and investors were flushed with liquidity at that time. However, since everything takes time to decide in Bangladesh, there is identified 'capacity' issues among the bureaucracy and more importantly regulatory agencies. Bangladesh can try its' standing in the international markets with a reasonable amount (say USD 250 million or so) of bond issuance. The government here also should remember, at this point in time, any funds raised through bond issuance can't be a real alternate to development assistance. We sincerely need to woo the development partners to cover up for us. Added to this, I would think the issuer should also recognize gradual depreciation of the local currency taka, increasing trend in London Interbank Offer Rate(LIBOR), utilization of the bonds proceeds (long term and short term mismatch)as three important challenges and try their best to address these challenges. Our country needs a lot of funds to finance its growth. USD 1.0 or 2.0 billion from the development partners is nothing with regard to the possible needs. The sovereign bond issuance, its pricing and proper management may also assist our private sector players to get prepared and try the international markets as well. Therefore, we need to explore further, explore possible alternatives and manage well. At the same time, we need to get the pricing right, utilize the funds well and evaluate its impact on our overall macro- economic sustainability and future. (Mamun Rashid is a banker and economic analyst. He can be reached at e-mail : mamun1960@gmail.com)