World Economy

Countries Try to Tap Their Diasporas for Investment

Countries Try to Tap Their Diasporas for InvestmentCountries Try to Tap Their Diasporas for Investment

A growing roster of developing states are turning to their compatriots abroad to raise cash by marketing “diaspora bonds”, a funding strategy successfully pioneered by India but sometimes tricky to imitate.

Some 250 million people, around 3% of the world population, live outside their native countries, according to World Bank data from 2013. They are an important source of funding for their homelands: last year they sent home around $440 billion—three times more than global development aid, Reuters reported.

Cash raised by governments directly by marketing securities to their overseas citizens represents just a tiny fraction of that, but looks set to grow, judging by a number of recent announcements.

Egypt has announced debt certificates denominated in dollars and euros to ease hard currency shortages.

Kosovo, which estimates a third of people of Kosovan descent live abroad, proposed issuing bonds for expatriates last month. Sri Lanka discussed such bonds last year, and Nigeria has tried to revive plans for a diaspora issue after naming Goldman Sachs and Stanbic as advisors on a proposal in 2014.

But not all such efforts succeed. Many countries overestimate the generosity of their natives abroad. One high-profile example was Greece, which proved unable to raise a hoped-for $3 billion from the million-strong Greek community in the United States at the height of its debt crisis in 2011. Ethiopia’s 2009 bond to fund a hydro-electric dam failed chiefly because it could not convince investors it would repay the debt. Some also objected to the project on environmental grounds.

In 2009 and 2010, Nepal raised a fraction of its target when it offered yields below 10% over five years on rupiah bonds—well below local rates at the time. Moldova also decided not to issue diaspora bonds, concluding that Moldovans abroad who were willing to invest in its currency would probably prefer local bank accounts that pay 25% interest.

The lure of a diaspora as an investment pool is clear. Investors with a personal link to a country are often happier than other outsiders to take risks in the local currency, and at lower yields, says Dilip Ratha, manager of the World Bank’s Migration and Remittances Unit, who advises governments on diaspora funding.

They can also be more willing to stick around in a crisis than the big funds that dominate emerging market debt, he added.

“When you have hundreds of institutional investors...there is a big probability of herd mentality: You see a little bit of a scare and run for the door,” Ratha said. That is less of a problem with a wider pool of expatriate investors scattered across the globe, he added.