Helping Countries Gain Access to Capital – Dilip Ratha and Private to Private Capital Flows
By Josh Templin
Developing countries need money, and lots of it. Although aid agencies and governments provide nominally large amounts of money to the developing world, Dr. Dilip Ratha (lead economist on the World Bank’s migration and remittances team and blogger; his personal story can be found in this New York Time article from 2008) points to private to private capital flows as a potential alternate, and much larger, source of funding. In a presentation to the MIT Sloan Financial Innovations class tonight, Dr. Ratha laid out what developing countries can do to improve their access to private capital, as well as a few novel instruments that can be used.
Over a third of the countries in the world are not rated by any of the major rating agencies (Fitch, Moody’s, or Standard & Poor’s) and therefore cannot raise money in private capital markets. Another ten percent of countries have ratings, but there cost of borrowing could be lowered significantly if updated, improved ratings could be obtained. Ratings are key to raising money in capital markets since they allow third parties to assess risk and set interest rates required on loans. Dr. Ratha and his team at the world bank have created a set of “Shadow Rankings” that show that seven or eight of the unranked countries already meet the requirements to be deemed investment grade. These countries need help gathering data required by the ratings agencies and funding the rating process, help that the World Bank and other NGOs can provide.
Dr. Ratha and his team have also devised a set of instruments that can be used to improve ratings and raise capital at attractive rates. First amongst the instruments is the securitization of future capital inflow for use as collateral for lending. Many resource producing countries already securitize future export earnings for loans today. For instance, Mexico securitized the state oil company’s future oil production as collateral for loans from the United States during the Tequila Crisis of 1994. However, tourism receipts, remittances, and payment rights also generate foreign currency receivable that can be used to secure better rates on loans from capital markets.
Another innovation available to developing countries is the so called Diaspora Bond. Sold to a nation’s population abroad, the bonds allow a developing country to tap into the patriotic sympathies of its diaspora to pay lower yields than the prevailing market would charge. Many foreign nationals have liabilities in local currencies and therefore do not fear devaluation risk, usually a major source of concern to foreign debt holders. To date, only Israel and India have successfully issued Diaspora Bonds; however, the countries have created a template that can be followed elsewhere. SEC regulations can make issuing bonds in the United States burdensome, however selling the investments as “deposits” rather than “bonds” or simply selling the bonds outside the United States are ways to bring the product to market more quickly. Securitization of future inflows or donor aid could be used to provide collateral, reduce risk, therefore decrease the yield required by investors. By Dr. Ratha’s estimates, every dollar of aid could be leveraged at a ratio of six to one if used as collateral for Diaspora Bonds.
Finally, Dr. Ratha also championed Indexed Bonds as final innovation that could eventually prove useful to developing countries. The idea is to tie the yield of a bond to an internal index such as inflation or GDP growth. Such an index would protect a country experiencing slow growth from high interest payments, while allowing bond holder to take advantage of growth. Argentina issued indexed bonds, but fellow victim to the moral hazard of manipulating inflation statistics to reduce the yield it was required to pay. Dr. Ratha admitted that the market for such bonds will remain small until objective third parties certify the accuracy on the underlying indexes.
