Money &Markets

BY AAMERA JIWAJI

BONDS

enyas remittances from the diaspora are estimated to have increased by 40% in 2012 to $1.3 billion from $934 million in 2011, according to the World Banks latest Migration and Development Brief released at the end of last month. At $1.3 billion, the amount of funds Kenya receives does not rank the East African powerhouse among top global recipients of diaspora remittances. Not with India, the top recipient having received $ 70 billion in 2012. Nor do Kenyas remittances in 2011 register as a high percentage of the countrys GDP at 2.8%, with Tajikistan having receiving 47% of its GDP from the diaspora. But $1.3 billion (Sh 111.8 billion) is enough to make Kenyas commercial banks, its telecom operators and even its media houses - if the spate of recently launched money transfer options is any indication - salivate. And the governments banker is no dierent. In 2011, the Central Bank of Kenya introduced an infrastructure bond with a diaspora component to tap the increasing funds being received from the diaspora - which suggested that the large potential pool could be used to support the countrys development agenda. The patriotic appeal of diaspora bonds has long been celebrated, and African academics like Prof William Gumedi of University of the Witwatersrand have urged African governments to explore the possibilities of diaspora bonds to fund development, and help the continent escape the begging bowl mentality. The CBKs 2011 prospectus read: In a bid to expand outreach, Kenyan Citizens living abroad (Kenyans in the Diaspora) will be encouraged to directly participate in the bond alongside other investors. In order to maximize participation by the Diaspora investors, Tap Sales of the Bond may be allowed for them after the auction date in September 2011. Governor of the Central Bank of Kenya (CBK) Prof Njuguna Ndungu said, The bond oered an investment platform to Kenyans abroad but also provided an avenue through which Kenyans living abroad could participate and identify with development projects in their country. It was also responding to interest made by Kenyans in the Diaspora for the product. He emphasised however that the bond was not a diaspora bond but rather an infrastructure bond with a diaspora component.
| Nairobi Business Monthly December

The sparkling pool of diaspora funds

As CBK plans a sovereign bond for 2013, African organisations push governments to tap into the diaspora to fund national development
While the infrastructure bond was initially received with much acclaim, and emphasis focused on the incentives it oered such as no withholding or capital gains tax, media reports suggest that CBKs rst attempt to access diaspora funds failed dismally. As far as the Central Bank is concerned, however, the Sh20 billion Infrastructure Bond Issue No FB1/2011/12 did not fail even though it was forced to extend its sale period by ve months to February 2012 from September 2011. Olivier Eweck, Division Manager of the Treasury Department at the Africa Development Bank, is also reluctant to term the infrastructure bond unsuccessful even though its rst tranche did not meet its target: mainly because the bond was able to leverage private sector institutional investment partners and the diaspora through social media and an investment focused online platform called Homestrings. Africa Development Bank promotes economic development and social progress in the region, and was involved in the construction of the recently completed 50 km Nairobi-Thika superhighway to the tune of $360 million. Both the CBK and the AfDB acknowledge that a number of challenges were experienced by the 2011 infrastructure bond which made diaspora uptake dicult. For instance, insucient information was disseminated and too few investor education initiatives took place. The CBK also cites technology related diculties including the lack of a sufficiently versatile system to allow online participation in auctions by foreign investors, exchange rate related complications and the fact that inves-

1500 1200 900 600 300

66

Kenyas Migrant remittance Inows (US$ million)

1,303

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: World Bank sta calculation based on data from IMF Balance of Payments Statistics Yearbook 2011 and data releases from central banks, national statistical agencies, and World Bank country desks.

tors abroad had not opened a CDS account with the CBK. The lack of sharia compliance of the infrastructure bond also dissuaded foreign investors from participating, Governor Ndungu explained. AfDB adds some more fundamental challenges faced by the bond, the rst of which is Kenyas macroeconomic environment. Ination was at record highs, above 16%, said Mr Eweck. Investors probably foresaw a high foreign exchange rate risk with the shilling depreciating rapidly, down almost 30% against the dollar at the time. There was also likely perceived country risk based on the nostalgia of 2007 elections violence and recurring al-Shabaab attacks in the country. He added that the pricing of the bond was also not competitive. The Infrastructure Diaspora Bond is in reality a Government general obligation bond, (i.e without direct recourse to the cash ow of any project). Its 16.6% yield did not compare favorably with shorter duration Government bonds that were yielding 17-20% with less time risk, he said. In 2013, the CBK plans to introduce a sovereign bond, which will again allow diaspora participation but will not specically target them. Governor Ndungu said Kenyans in the diaspora are able to participate in government security issues using local bank accounts. However, a sovereign bond is designed to attract a small number of big investors, which

In 2013, the CBK plans to introduce a sovereign bond, which will again allow diaspora participation but will not specically target them
Top recipients of remittances for 2012:
India China Philippines and Mexico Nigeria $70 billion $66 billion $24 billion each $21 billion

suggests that the diaspora market will be locked out of formal investment opportunities in Kenya in the coming year, despite CBKs plans to develop an online bidding and auction system to improve investor experience and extend outreach. The increasing amount of diaspora remittances to Africa - $31 billion to sub-Saharan Africa in 2012 - has also attracted the attention of the African Union, which plans to establish an African Institute of Remittances. Its mandate is to realise the development impact of remittances through appropriate policies and improvements

in the dissemination of data. While Prof Ndungu is enthusiastic about its creation, especially if Kenya is selected as host country, he is apprehensive about its proposals to introduce a diaspora bond. An AU diaspora bond, he said, would most probably target the African Diaspora in general as opposed to national diaspora bonds and would prove to be a hard sell to Kenyan Diaspora. Besides it may not meet the Governments objective to contract debt for purposes of budgetary support. Undoubtedly, the involvement of such an institution will strengthen the countrys banking and nancial services, and help develop instruments targeting the diaspora which include bonds, securitisation of remittances and remittance-based investment funds. The work of the AIR will be supported by the World Bank who has established a Diaspora Bond Task Force to provide technical assistance to countries interested in implementing diaspora bonds for nancing development projects. If the current growth trend is maintained, Kenya will attract $ 1.8 billion in diaspora remittances in 2013. Even with the establishment of the AIR and the World Banks Task Force, it is likely that without the Central Bank directly targeting diaspora funds for local infrastructure projects, much of this money will continue to trickle out of the pool of potential funds available to Kenya for national development.

EXECUTIVE TALK
What lessons can Kenya learn from the successful introduction of diaspora bonds by other African countries? Kenya should seek to avoid what we call faceless projects. Issuances with proceeds linked to specic projects tend to be more successful with Diaspora audiences than general obligation bonds to fund a non-disclosed portfolio of public investments. Although the Ethiopian Diaspora bond experience had its own trappings, the sentimental value to the population of the underlying dam project rallied some investment. Diaspora investors request visible and accountable links to the project for each invested shilling. African countries need to engage in demographics diving, that is, Kenya needs to really know its Diaspora. It is not enough to know the number of Kenyans abroad or how much capital ows through money transfer operators. The current amount of research and due diligence done on the Diaspora by countries looking to issue bonds is insucient. They must know their targeted audiences investment patterns, income levels by each individual country or market, and their level of nancial literacy, among other things. Diaspora investors are also rationale investors, despite emotional ties with their home countries. A diaspora investment needs to provide the necessary safety and competitiveness embedded in the investors criteria. The pricing needs to be competitive. The patriotic discount observed on Israeli diaspora issues over the years would not hold for African countries. A stable macroeconomic framework would be required to make a local currency investment. All the successful diaspora bond issues were denominated in hard currencies which mitigate the foreign-exchange risk of diaspora funds. Successful issuances also have built in some exibility in the features oered, providing prepayment options and variable tenors and interest pay-os. Olivier Eweck, Division Manager, Treasury Department, Africa Development Bank

December

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