Govt weighs Panda Bond issuance to tap global capital market

Highlights:

• Bangladesh weighs issuing Panda Bonds to enter the global capital market.
• Govt to form a committee to assess the feasibility and risks of Panda Bonds and Eurobonds.
• Bangladesh Bank governor proposes an initial $50 million Panda Bond issuance.
• Sovereign bond plans may be included in upcoming debt management strategies.
• Dr Ahsan H Mansur urges caution, citing Sri Lanka and Argentina's debt crises

Bangladesh is exploring the possibility of issuing China's proposed Panda Bond as an international sovereign bond to establish its presence and begin marketing itself in the global capital market.

The government is forming an inter-ministerial committee to assess the feasibility of issuing the bond and prepare recommendations.

Alongside the conventional US dollar-denominated Eurobond, the committee will review the risks associated with issuing Panda Bonds in Chinese currency, as well as examine the bond's structure, timing and size before making recommendations to the finance ministry.

The previous Awami League government had also considered issuing sovereign bonds. However, it ultimately backed away after taking into account the financial crises experienced by sovereign bond issuers such as Argentina and Sri Lanka. Former Bangladesh Bank governor Dr Ahsan H Mansur has advised that, whether the government opts for a Panda Bond or a Eurobond, any sovereign bond issuance should be undertaken with extreme caution.

Officials at the finance ministry said the issue of issuing a Panda Bond as an international sovereign bond was discussed at a recent meeting on exploring alternative sources of financing, chaired by Finance Minister Amir Khosru Mahmud Chowdhury at the Prime Minister's Office. Following the meeting, the Finance Division prepared a summary seeking the finance minister's approval to form an inter-ministerial committee to examine the proposal.

The committee is expected to include officials from the Finance Division, the Economic Relations Division (ERD), the Bangladesh Bank, the Prime Minister's Office, the Financial Institutions Division, and the Bangladesh Securities and Exchange Commission.

According to the minutes of the meeting held on 20 June, Bangladesh Bank Governor Mostaqur Rahman supported the idea of issuing Panda Bonds in Chinese currency, saying, "Alongside the conventional US dollar-based Eurobond, the possibility of issuing Panda Bonds denominated in Chinese renminbi (RMB) can be explored.

"The first issuance should be relatively small – equivalent to around $50 million – to test market response and keep risks at a manageable level."

Before Prime Minister Tarique Rahman's visit to China, a delegation from the Export-Import Bank of China (Exim Bank) visited Dhaka to discuss the introduction of Panda Bonds in Bangladesh. During the Prime Minister's visit, the Chinese government also included the Panda Bond proposal on the agenda, according to sources.

At the meeting, ERD Secretary Md Shahriar Kader Siddiky said several countries, including Pakistan and Sri Lanka, had issued sovereign bonds. He noted that Bangladesh should consider establishing its footprint in the international capital market.

However, the ERD secretary cautioned that issuing sovereign bonds could raise concerns from the International Monetary Fund (IMF). He added that China would be willing to assist Bangladesh if it decided to proceed with a Panda Bond.

The finance minister said in the meeting that Bangladesh's entry into the international capital market should be viewed positively. He noted that an initiative is underway to establish a Bangladesh Investment Fund for equity investment by the private sector. Once the Hong Kong-based fund is established, it will create opportunities for equity investment in both private enterprises and state-owned companies.

The finance minister also said that alongside the proposed equity fund, the government could continue exploring the possibility of issuing sovereign bonds. He instructed officials to begin internal discussions and institutional preparations.

The meeting also discussed incorporating the possibility of issuing Eurobonds or other international sovereign bonds into the upcoming Medium-Term Debt Strategy, Annual Borrowing Plan and Debt Sustainability Analysis (DSA). Participants agreed that signalling such plans to the market and investors in advance would be appropriate.

Finance Secretary Dr Khairuzzaman Mozumder said the Finance Division had previously been reluctant to pursue sovereign bond issuance because of the associated risks. However, he said the current situation warranted a fresh assessment.

In his view, Bangladesh should improve its sovereign credit rating before making any final decision so that bonds can be issued at favourable interest rates in the international market.

"As this would be Bangladesh's first international sovereign bond issuance, it is necessary to carefully examine the associated risks as well as the bond's structure, timing, currency and denomination before proceeding," the finance secretary added.

Former Bangladesh Bank governor Dr Ahsan H Mansur told TBS that the government had also considered issuing sovereign bonds in 2014-15, when Bangladesh's economic situation and international image were stronger than they are today. However, after observing the debt crises faced by Sri Lanka and Argentina following their sovereign bond issuances, the government abandoned the plan.

He said the biggest risk associated with such borrowing is ensuring the proper management of large amounts of money raised abroad under a sovereign guarantee. It is essential to determine where the funds will be spent and to ensure effective oversight of their use.

"Many countries avoid borrowing from the international capital market because such loans carry commercially determined interest rates. For US dollar-denominated borrowing, the interest rate is generally the US Treasury bill rate plus around 3%. The rate Bangladesh would receive will depend on its international sovereign credit rating," Ahsan H Mansur added.