Bolstered by advances in transportation and communication and an increasingly mobile workforce, globalization is contributing to the rise of interconnected societies and economies. As a result, developing countries in need of financing can look to expatriates in wealthy countries for support. This is the idea behind issuing diaspora bonds, in which migrants receive discounts on government debt from their home countries. India and Israel have had successful issuances of diaspora bonds, with expatriates from each country investing billions of dollars.

However, along with these successes, there have also been failed attempts in issuing diaspora bonds. Emigrants who fled countries with oppressive governments can’t be expected to invest in corruption. This proved to be the case with Ethiopia’s failed diaspora bond in 2008. As an investment vehicle, diaspora bonds have promising potential for economic growth in developing countries. The most recent attempt at raising funds through diaspora bonds has come from Nigeria, which recently considered doubling its initial $100 million issuance.

Diaspora Bonds

Developing countries rely heavily  on remittances and foreign direct investment as sources of funding. The World Bank Migration and Development Brief reports remittances from 232 million international migrants are expected to reach $516 billion in 2016. Increasingly large amounts of remittances help friends and families in times of need as well helping nonresidents acquire assets back home. For these developing countries, access to international markets and foreign debt markets isn’t always a given. Developing countries depend on aid for disaster relief and infrastructure building, among many other reasons.

However, due to little credibility, an inability to back assets, and/or political instability, developing countries can’t always obtain the capital required to proceed with vital projects. A major aspect of diaspora bonds is a country's ability to raise low-cost capital through patriotism. Expatriots can overlook many shortcomings of the financial stability of a country when they’re helping their home country’s economic growth. These bonds are typically offered to expatriates with long-term maturities and low yields. Provided that expatriates hold some patriotism and knowledge of their home economies, they’ll be willing to accept a below-average investment compared to a low-risk U.S. treasury bond.

India’s Take

In the case of India, reaching out to its diaspora in times of need has had significant benefits. India only issues bonds to Non Residential Indians (NRI).  Issuing these bonds exclusively to Indians give them incentives to  invest in an instrument exclusively available to them. Exclusivity, in particular can be attributed to the fact that these bonds pay back in domestic denominated currency rather than a hard currency such as the U.S. dollar. It is believed that the Indians are more inclined to hold local currency as they still hold assets within the country.

This belief is supported by the high level of remittances still pouring into India. As of 2014, a reported $71 billion inflow of remittances entered India. Remittances suggest that expatriates have a lasting connection with individuals in their home country. On three separate occasions, India has issued bonds to its expatriates in order to reconcile balance of payment deficits. The government-owned State Bank of India oversaw these transactions and issued 5-year maturity and varying yields with each bond.

Although migrants benefit from patriotic discounts on diaspora bonds, these financial instruments typically offer low yields. However, in each occasion, yields on bonds were above that of the 10-year U.S. Treasury note. Rather than seeking funding through foreign debt markets, India has avoided the restrictions and pressures for societal and structural reform.

Israel's Approach

In 1951, the Development Corporation of Israel implemented a program seeking aid from its diaspora with the objective of raising foreign exchange for the state. The annual issuances of these bonds are seen as a stable source of overseas borrowing while also allowing Israel to maintain ties to its expatriates. While Israel has sought aid as a means to build infrastructure rather than assistance during financial crisis, investments have jumped steeply during times of need. Annual sales of DCI bonds increased about $150 million during the 1973 Yom Kippur War from the prior year and by $500 million during the 2001 9/11 terrorist attacks. Unlike India’s diaspora bonds, DCI bonds never matched or exceeded the interest rates of U.S. Treasury Notes.

Future Prospects in Nigeria

India and Israel’s success with diaspora bonds hasn’t proven to be a blueprint for other countries. Attracting investors is difficult without an appropriate foundation. Ethiopia’s Millenium Corporate Bond can in part be attributed to political instability, lack of financial backed assets, local currency denominated payments, and low-risk premiums. In 2013 Nigeria issued $100 million in diaspora bonds. Nigeria will face obstacles similar to Ethiopia in raising investments, but Nigeria has approached its issuance in a more credible manner.

Like Israel, Nigeria will register its bonds with the U.S. Securities and Exchange Commission (SEC), which involves complying with many regulations. Registering debt instruments with the SEC requires covering costs of registration as well as stringent disclosure, and transparency of assets. This will give the Nigerian bonds open access to U.S. retail investors, which the Ethiopian Millennium Bond avoided. Along with SEC registration and international support, Nigeria has sought to raise $100 million—a relatively small amount compared to the $20 billion in remittances Nigeria received in 2014. As a result, Nigeria’s initial issuance has proven to be successful as the country has considered a second sale of between $200 and $250 million in bonds.

The Bottom Line

Diaspora bonds can be very useful in the financing of emerging and developing economies. Looking at the success India had with issuing the India Development Bond, Resurgent India Bond and the India Millennium Deposits in balance of payments crises, the patriotic devotion the diaspora has for its country can prove to be very important. Israel conversely, issued its bonds for development purposes and has reissued them on an annual basis since 1951. Tapping the patriotic nature of expatriates allows countries to efficiently raise capital for necessary projects such as infrastructure or crisis relief to name a few.

However, many factors must be apparent for these bonds to be successful including financial stability, international support, widely recognized credit ratings, the structure of the bond itself, and the success of the individual migrants. A combination of the aforementioned factors plays a large role in investor confidence in one’s home country. At a time when developing economies may find it difficult to secure resources outside of humanitarian aid, diaspora bonds as a debt instrument may prove to be an important introduction to the foreign debt market.

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