Alongside IMF Talks, Government Prepares First Sovereign Bond: Dollar, Samurai or Panda Bond?

Alongside talks with the International Monetary Fund (IMF) over a new 4.5 billion dollar loan programme, the government is now looking at other alternative routes to borrow in foreign currency. To that end, Bangladesh is preparing to issue a sovereign bond in the international market for the first time.

According to Finance Division sources at the Ministry of Finance, alongside issuing bonds in US dollars and euros, issuing Samurai bonds in Japanese yen and Panda bonds in Chinese yuan is also under consideration. The euro bond will be dollar-based. The initiative aims to raise a total equivalent of 1 billion dollars by issuing bonds, to widen foreign borrowing sources and create financing alternatives.

To meet that goal, the government wants to hold discussions, or roadshows, with investors in London, New York and Hong Kong. But which bond will cost less to borrow through will depend on the interest rate, the term, the exchange rate and Bangladesh's acceptability to international investors.

A bond that a foreign government or institution issues in Japanese yen in Japan's domestic market is known as a Samurai bond. It allows money to be raised from Japanese investors. A bond issued in Chinese currency yuan by a foreign government or institution in China's domestic market is called a Panda bond. And the conventional route to raise money by issuing bonds in US dollars in the international market is the dollar-based euro bond. Here, euro bond does not mean a bond in the European currency, the euro.

A move has been made to appoint US investment bank JP Morgan and Hong Kong-based consultancy Bridgeworks International to manage the bond issue. The firms will handle tasks such as determining the bond structure, selecting legal advisers and trustees, communicating with investors and coordinating with international credit rating agencies.

Finance Division sources say that if the loan is taken in dollars, principal and interest must be repaid in dollars; if in yen, in yen; and if in yuan, in yuan. But if the exchange rate is unfavourable, the real cost of the loan can rise.

To take the bond process forward, the government is organising an international debt conference jointly with the Asian Development Bank (ADB) in Cox's Bazar on 15-16 November. One hundred representatives from 30 countries have been invited to the conference, titled 'Public Debt Management in a Changing Global Landscape'.

Finance and Planning Minister Amir Khosru Mahmud Chowdhury will be the chief guest at the conference's inaugural session. Bangladesh Bank Governor Md Mostakur Rahman, Finance Secretary Khairuzzaman Majumdar, ADB Country Director Qingfeng Zhang and World Bank Country Director Jean Pesme will also speak.

The Finance Division formed an eight-member high-level inter-ministerial committee last July. The committee will review the bond amount, currency, term, interest rate, market selection and risks, and submit recommendations.

Although the US dollar leads in this bond issue, there is also the possibility of raising loans in Japanese yen, Chinese yuan and other currencies. For example, during Prime Minister Tarique Rahman's visit to China last June, there was consensus on advancing the initiative to issue Panda bonds in Chinese yuan. But no final decision has been taken yet.

Interest rates on loans in Japanese yen or Chinese yuan are currently lower than in US dollars. But if the dollar's value rises against the yen or yuan at repayment time, Bangladesh's loan cost could increase. Conversely, if the dollar's value falls then, the cost could decrease. So there is a possibility of entering forward currency-swap contracts in advance to reduce exchange-rate risk.

In the case of a dollar-based bond, the repayment currency matches Bangladesh's foreign currency earnings. A large share of export earnings and remittances comes in dollars. So borrowing in dollars could mean comparatively less need for currency conversion. But if dollar interest rates are high, or the taka depreciates against the dollar over the loan term, pressure will grow.

On the other hand, Samurai bonds could open access to Japanese investors, and Panda bonds could allow use of China's large capital market. But the government will first verify what interest those markets' investors are willing to lend at, what conditions they will impose, and how much issuing the bonds will cost.

Earlier, the International Finance Corporation (IFC), a member of the World Bank Group, issued an 800 million taka 'Bangla Bond' in Bangladeshi currency in the international market for the first time on 11 November 2019, equivalent to 95 million US dollars. The bond was issued to finance the expansion of Pran Group's production operations and product distribution system. The three-year bond was listed on the London Stock Exchange. Asset management firms specialising in investment in emerging markets bought the bond.

At the time, Nikhil Rathi, chief executive of the London Stock Exchange and director of international development at the London Stock Exchange Group, said IFC's historic bond had paved the way for launching a global Bangla bond market and increased the international profile of the Bangladeshi taka.

Pran Group chairman and CEO Ahsan Khan Chowdhury said: 'Back then everyone wanted the bond market to open up and expand. We also wanted international experience. As far as I remember, the taka bond was very good. We benefited. If needed, we will go to that market again.'

The advantage of borrowing on commercial terms from the international market is the creation of a new source of financing. It offers the chance to reduce dependence on multilateral lending agencies or the domestic banking system. In other words, a new source of loans is created in the international market.

Economists, however, have questions and concerns about what the money borrowed through bonds will be spent on. In their view, if the money is invested in productive projects to raise income, repayment can become easier. But if it is spent in unproductive sectors, the burden of paying interest and principal will grow.

Bangladesh first moved to issue a 500 million dollar sovereign bond in the international market in 2011. A seven-member committee was also formed on it in 2012. But the initiative did not progress much. In 2013 too, talks were begun in London with potential investors to raise 500 million dollars. That initiative also made no progress. Later, sovereign bond issues of 2 billion dollars in 2014, 1-2 billion dollars in 2016, and again in 2021 and afterwards, came up in discussion. But because of loan risks, market conditions and financing concerns, none of the initiatives moved forward.

Asked about this, Zahid Hussain, former lead economist at the World Bank's Dhaka office, said: 'The government can certainly try to find alternative sources of financing. But we have to look at what we are doing with the money raised by issuing bonds. If the money is spent on projects that are not commercially profitable, there is a risk of falling into danger. Because what will happen if you issue a bond at 8 to 9 percent interest for two or three years and invest in a 10-year project — that arithmetic is not very complicated. It is easy to understand.'

Asked whether he sees the sovereign bond initiative as connected to whether a new IMF loan is obtained or not, Zahid Hussain said: 'I think the government is moving in parallel. Even if that is so, it is not negative. In the present reality, the country needs multiple sources of financing.'

According to Finance Division officials, for Bangladesh, choosing only the lowest-interest bond among the dollar, yen and yuan is therefore not enough. The decision must consider in which currency the future repayment risk is lower, in which market comparatively better terms will be available, and how much economic benefit can be created with the borrowed money.