With last week’s launch of its Nomad bond, Mongolia became the latest emerging economy to use an ADB-backed currency-linked bond issue to raise some much needed post-pandemic development capital. Worth approximately $7bn, the 21bn Mongolian togrog (MNT) raised through the Nomad bond will be used to to fund a local dairy company and may point the way forward for other nations struggling to raise capital in the devastating wake of Covid-19. Denominated in one currency but settled in another (usually but not always US dollars), the bonds allow investors in emerging and ‘frontier’ markets to gain exposure to, and income from, a high yielding currency whilst avoiding the complication of buying that currency itself.
“Currency-linked bonds are simple but powerful instruments that fortify economies and can efficiently finance development projects.” ADB’s Head of Treasury Client SolutionsJonathan Grosvenor, wrote in ADB’s blog “They are impactful development terms because they help to plot a yield curve where government issuance is often sparse. They mobilise foreign investment by tapping into international savings pools, and they support the financing of local currency loans and projects in developing countries.”
The Nomad bond is a case in point. Underwritten by ING Bank and sold to a European asset manager, its proceeds are now been used to fund ADB’s Gender Inclusive Dairy Value Chain Project under the auspices of the Tesco Group’s Milko LLC subsidiary. The project is intended to help Milko develop its raw milk direct sourcing and processing capacity; currently, around 50% of the company’s raw milk comes directly from smallholder milk suppliers and herders which are collected in its milk collection centers. Such direct sourcing benefits herders and communities with extra income, while providing Milko with a sustainable and reliable source of raw material. “Investing in agricultural value chains can yield solid economic and development impacts,” says ADB Country Director for Mongolia Mr. Pavit Ramachandran. “This project is good news for rural households, as one-third of Mongolia’s population lives in rural areas and their livelihoods oftentimes depend on animal husbandry and milk production.” Some of the funds will also be used to procure modern equipment, invest in more efficient management systems, and ensure that Milko’s end-to-end operations follow international certification standards. This in turn is expected to increase international export opportunities in international markets, particularly in China.
The currency-linked bond is becoming an increasingly important weapon in the ADB armoury and this February it raised 8.5 billion Indian rupees (around $118 million) from a new issue of offshore Indian rupee-linked 10-year bonds. The bonds, which were underwritten by JP Morgan and primarily distributed to banks and fund managers in the Americas and Europe, were described by ADB Treasurer Pierre Van Peteghem as “a game changer for local currency operations.”
Two years ago, Indonesia’s state-run construction firm Wijaya Karya used the issue of a Komodo bond to help bridge the annual multi-billion-dollar gap between the cost of the country’s infrastructure development programme and its Treasury’s ability to pay for it.