Local currency bonds play a key role among developing Asian economies in raising finance outside of the traditional bank-lending channels. They support sustainable development by tapping into savings pools to crowd in domestic and international investments, often with long-term horizons.
ADB Assistant Treasurer Jonathan Grosvenor shares ADB’s strategy and plans for issuing local currency bonds in its developing member countries (DMCs), and how these bonds can help promote local capital market development. Mr. Grosvenor manages ADB Treasury’s local currency financing, client outreach, and capacity building in capital markets, as well its rapidly growing engagement in Asian local currency markets. He has more than 30 years of professional experience in treasury and capital markets.
What are local currency bonds?
Local currency bonds are debt securities issued in non-mainstream markets. For us in ADB, they refer to un-swapped bonds issued in the currencies of our DMCs to raise funding in those currencies for operational purposes. Local currency bonds may be issued onshore in the domestic market, or offshore in “linker-bond” format.
Why are they important for developing economies?
Capital markets are important for generating the long-term funding that allows banks and companies to invest and grow. However, the capital markets of developing countries are often underdeveloped. ADB’s issuance of bonds in the local currency can stimulate investor interest, provide a benchmark for others to emulate, introduce best-practice in deal management, and support financial market infrastructure such as central depositaries and stock exchanges.
How does ADB decide where to issue in local currencies? What does ADB use the proceeds for?
ADB has 41 borrowing member countries. Nine of these (all Small Island Developing States in the Pacific region) do not have their own currencies, instead relying on the Australian, New Zealand, and US dollars as their official means of exchange. This leaves 32 local currencies for ADB to potentially intermediate. ADB issues local currency bonds in response to demand from our operations departments, and when investors are available – we carefully calibrate amount, tenor, and pricing for acceptability. The proceeds of ADB local currency bonds are available for the funding of either sovereign or nonsovereign operations and may be applied to fund projects on a back-to-back basis, or warehoused in eligible instruments (such as deposits or government bonds) until a project is ready to be disbursed.
How many local currency bonds has ADB issued so far?
ADB has issued more than 50 bonds in Asian local currencies since the late 1990s, including more than $1 billion equivalent in Indian rupees alone. Many of the early issues have already matured but we continue to regularly tap the markets. In 2021, ADB issued 10 local currency bonds in five different currencies, including ADB’s third panda bond in Chinese renminbi, marking a return to the domestic Chinese market after an absence of more than a decade. Sized at CNY2 billion (about $350 million), this was ADB’s largest ever local currency bond. We are also a regular issuer in Kazakhstan tenge, with the proceeds dedicated to financing both public and private sector projects. In fact ADB now has more un-swapped local currency bonds outstanding in Kazakhstan tenge than any other local currency.
How do you see local currency bonds developing in the coming years?
I like to describe our strategy for developing local currency bonds as three dimensional: First, we aim to broaden the universe of local currency bonds until we can readily finance ADB operations in all 32 local currencies of our DMCs. Second, we aim to extend the maturity profile of local currency borrowings to at least 10 years in order to support ADB’s long-term operations. And third, we seek to increase the volume of local currencies raised on both an individual and aggregate basis.
Of course, competitive pricing is also key, and ADB always strives to deliver the best outcome for every project irrespective of currency. We are constantly discussing with our DMCs to see if we can issue bonds in their currencies.
Can ADB generate local currency from sources other than the bond market?
In some DMCs, ADB has local currency equity available. This is usually in the larger DMCs where the capital contribution is more significant and where ADB has generated retained earnings over a number of years. This local currency equity is the most flexible source of funding available to ADB. However, it is obviously a finite resource. We try to reserve local currency equity for short-term bridge funding or the more esoteric structures. In addition, ADB can generate local currency funding from derivatives in the shape of cross currency swaps, either deliverable or non-deliverable. There are many pre-conditions to satisfy before seeking funding from the swaps market, but when it’s available, it works very well indeed. In Thailand, ADB has been able to generate competitive swap financing for up to 22 years – paying testament to the successful development of the local capital market.
Which local currencies might be next for ADB?
In 2020, ADB issued its first local currency bonds in Mongolian togrog and Pakistan rupees, and in 2021 we completed the first local currency operation in Uzbekistan sum, although this one was a swap trade. We already have the requisite approvals from Azerbaijan, Fiji, Kyrgyz Republic, and Sri Lanka, so any of these could be next. However, it is likely to be driven by demand from operations.
Do you ever issue theme bonds in local currencies?
Indeed, ADB has issued green bonds in Indian rupees and Kazakhstan tenge, and last year we issued the first gender bond in the Kazakhstan domestic market. We issued a second gender bond in Kazakhstan tenge this year. The latter prompted much attention from investors, regulators and the financial media since Kazakhstan is working hard on developing its taxonomies for sustainable development in line with the United Nations 17 Sustainable Development Goals. ADB’s local currency gender bond issues are considered an important step in capacity development. The proceeds of ADB’s Kazakhstan tenge gender bond issues financed a sovereign housing project.