Borko Handjiski, Senior Economist World Bank Remittance Trends, Diaspora Bonds and Remittance-Backed Securities

Outline 2 Remittance trends in the Baltics and other EU countries Diaspora bonds: An instrument to attract savings of diaspora Remittance - backed securities: An instrument to improve access to finance 123

Remittance trends 3

Baltic countries have recorded fastest growth in remittances among EU-10 countries 4

Consequently, Baltics have among the highest remittance- to-GDP ratios among EU-10 and in the EU as a whole 5

6 Lithuania’s remittance inflows affected most by the crisis; Latvia’s the least; but in all three remittances more stable than FDI. Inflows of FDI and migrant remittances (in million EUR) Sources: Eurostat, IMFBalance of PaymentsDatabase, Central Banks ofEE, LV and LT

Remittance flows often mirror migration flows 7  Russia and the EU are the main sources of remittances to the Baltics  Some source countries are common (e.g. Russia, USA, UK)  Not exposed to the weakest EU economies  Note: data in table include formal remittance flows only (source: World Bank)

Costs of remitting funds seem to be high – an issue for further exploration 8 Source: World Bank

Diaspora bonds and remittance-backed securities 9

Why interest in diaspora bonds? 10  Remittances are a way of tapping into diaspora income flows on a regular basis, while issuance of foreign currency-denominated bonds to diaspora is a way of tapping into diaspora’s wealth, i.e. savings.  Empirical analysis shows that migrant (diaspora) savings are several times higher than annual remittance flows

What is the rationale for diaspora- targeted financing instruments Patriotic discount (cheaper source of finance) Diaspora investors more loyal than foreign investors (stable source of finance, even during bad times) Diversification of funding sources Support to sovereign credit rating For issuing countries Patriotism and desire to “do good” in their country of origin Diaspora investors are less worried about devaluation risk Asset diversification For diaspora investors Large and affluent diaspora with high propensity to save Certain level of “governability” in the country of origin What are the preconditions?

Two successful issuances of diaspora bonds: Israel and India 12 Israel India $25 billion issued in total$11 billion issued in total Annual issuance since 1951Opportunistic issuance in 1991, 1998 and 2000 Development-oriented borrowingsBalance-of-payments support Large though declining patriotic discountSmall patriotic discount, if any Fixed, floating-rate bonds and notesFixed-rate bonds Maturities from 1 to 20 years with bullet repayment Five year with bullet maturity Distribution by Development Corporation for Israel Distribution by State Bank of India and international banks Targeted toward but not limited to diasporaLimited to diaspora NonnegotiableNon-negotiable Source: Ratha and Kethar World Bank.

Remittance-backed securities – another instrument to utilize remittance flows 13 Future-flow backed securities have been introduced in many countries, both large (Brazil, Turkey, Kazakhstan) and small (Peru, El Salvador) Future flows used as collateral include: crude oil, credit card receivables, royalty/tax receivables, and remittances $1.8 billion in remittance-backed securities issued between 1992 and 2006 – average issuance size $111 mil. Main benefits for commercial banks are: (i) increased market access (ii) prolonged debt maturity (iii) lower cost of debt (because of higher investment rating) “Innovative Financing for Development”, World Bank 2009

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