By Carolyn Cohn
LONDON (Reuters) - In a five-star hotel overlooking the Thames a month ago, investment manager Eric Guichard stood up to address a crowded cocktail party on how African expatriates could invest their savings in projects back home. The response from the chattering financial professionals was unusual.
"When I see what my family is doing with the money I send them..." Guichard, who comes from Senegal, told the party, "they are leasing a house to the U.S. embassy at $5,000 a month, they are buying Persian rugs, they are importing taxis from Belgium, they are buying and leasing power generation units..."
Rather than subsidize all this consumption, he argued, Africans sending home cash could make a more sustainable contribution.
Among the projects Guichard described to his Africa-focused audience were bonds designed to capture a share of the billions Africans send to their families at home. Offering a better return than investors can expect in the developed world, these "diaspora bonds" could enable countries to cash in on patriotism and fund much-needed development. It's an idea the World Bank and the African Development Bank are encouraging.
The funds are certainly needed. Africa, the world's poorest continent, is showing some of its fastest growth, driven by a commodity boom and growing consumer demand. For that 5-percent plus annual growth to continue, and for the continent's wealth of raw materials to be converted into refined projects, it needs to invest in roads, rail, utilities and other infrastructure -- $93 billion a year by World Bank estimates. It's only spending half that at the moment.
Remittances from Africans abroad, meanwhile, are booming, growing fourfold in the past 20 years and shrugging off the global financial crisis, to total $40 billion a year. "Tapping into this money with so-called diaspora bonds could help provide Africa with the equipment and services it needs for long-term growth and poverty reduction," World Bank policymakers Ngozi Okonjo-Iweala and Dilip Ratha wrote in an op-ed in the New York Times earlier this year.
But the history of such bonds is patchy at best. Japan and China issued them in the early 1930s, Israel has raised around $25 billion in diaspora bonds in the last 30 years, and India has used them to raise billions, generally in times of crisis, including $11 billion after the United States imposed sanctions against the government for testing a nuclear bomb in 1998.
"The ones that India have issued, I would almost call them desperation bonds," said Leon Isaacs, chief executive of remittances and payments consultancy Developing Markets Associates in London. "It's a bit like going to mum and dad to borrow money because you cannot go to the bank."
Debt-laden Greece may also make such a move: it filed with U.S. regulators in March to issue up to $3 billion in bonds to any expatriates keen to lend a helping hand to their twice bailed-out sovereign. Analysts doubt there will be many takers.
Could African countries fare any better with the continent's 30 million or so expatriates?
Savings by African expatriates from Sub-Saharan African alone total $30 billion annually, according to the World Bank, which reckons African countries could issue $5-10 billion a year in diaspora bonds.
"Migrants make more stable investors in their home countries than people without local knowledge. They're less likely to pull out at the first sign of trouble," wrote Okonjo-Iweala and Ratha.
Following victory for President Goodluck Jonathan in this year's elections, Nigeria has said it hopes to set up a diaspora fund. Okonjo-Iweala, sworn in as finance minister two weeks ago, did not respond to requests for comment.
The advantage of diaspora bonds for governments is that they can leverage loyalty and ties of emotion and family to the home country. If they are lucky, they would avoid taking their begging bowl to organizations like the International Monetary Fund, which are likely to impose more stringent lending conditions.
"Diaspora investing exists in the space that's between investing and charity," says Liesl Riddle, who runs the Diaspora Capital Investment Project at George Washington University. She said her researchers have surveyed many different diaspora communities globally and discovered that they are typically motivated to invest in their countries of origin "for emotional or social status reasons, not just to make a profit."
It's an idea that could chime with diaspora professionals the world over, faced with puny deposit rates in western banks and, at best, an uncertain performance in major stock markets. To illustrate: five-year Treasury yields are running below one percent -- a five-year diaspora bond might pay nearer 5 percent.
"A diaspora bond is a new way of investing for a good return," said Mthuli Ncube, chief economist at the African Development Bank by telephone from Tunis. "Global interest rates are the benchmark and you add a little premium. This is how you can assist your country, and the rate will be better than you can get in the developed world. Rather than put your money in a savings account, put it in a diaspora bond."
Another advantage, proponents hope, would be that the bonds could serve as the 'patient capital' that developing countries need. The investment horizons of migrant workers may be longer than that of the disinterested investor, Okonjo-Iweala wrote in Foreign Policy magazine in May.
"They're also less likely to worry about the risk of currency devaluation or being paid in local currency rather than dollars, since they can find ways to spend local currency if the bonds were repaid in those terms."
WHO'S DOING IT
Several African countries are looking to issue diaspora bonds.
Guichard, who has just launched Homestrings, a website to put potential diaspora investors in touch with opportunities, says he is talking to two African central banks and one in the Caribbean about offering diaspora bonds via the platform -- one African central bank wants to develop a regular, quarterly issuance program. He wouldn't name the countries, but likely contenders besides Nigeria include Kenya and Ghana, and, in the Caribbean, Jamaica.
Kenya said last month it planned to raise $600 million from bonds targeted at the diaspora by the end of this year, including a $400 million infrastructure bond. It has previously issued infrastructure bonds denominated in Kenyan shillings, but without the small denominations -- as low as $100 or equivalent -- or specific overseas marketing that typify a diaspora bond.
In the Foreign Policy article, Okonjo-Iweala included Nigeria in a long list of countries that would benefit, alongside Ghana, Kenya, Liberia, Senegal, Uganda and Zambia in sub-Saharan Africa, and Haiti and Jamaica in the Caribbean.
Uganda held its first diaspora conference in London this month, aimed at the 210,000-plus members of the Ugandan diaspora living in Europe. It offered them the chance to talk to government ministers and finished up with a fashion show and concert.
Diaspora professionals are interested. Dipo Salimonu, a Nigerian who runs oil and gas firm Ateriba in London, is one. "I think it would be attractive," he said. "It's an investment in one's country, not only an investment in a financial instrument that generates a return. It makes a very compelling case."
In a continent whose politics can be unstable and where corruption is also prevalent, though, the scheme would not come without risks. One country Okonjo-Iweala did not include is Zimbabwe, which has also said it planned a $50 million diaspora bond. Zimbabwe held a conference in London targeted at diaspora investors two years ago, but may struggle with antipathy toward President Robert Mugabe.
Distrust may hinder others. "The diaspora are in some cases political exiles who would not trust the government to invest the money sensibly," said Graham Stock, chief strategist at frontier market fund managers Insparo.
And Africa's sole example to date has not been auspicious. Ethiopia in 2009 launched diaspora bonds to finance the building of a hydro-electric dam, a venture Isaacs at DMA called "a dismal failure."
That time, analysts blamed several factors: the government struggled to make contact with the right kind of investors, found it hard to convince them it would repay its debt, and was using the funds for a project to which some investors objected on environmental grounds. Ethiopia this month launched replacement bonds for the project, in smaller denominations.
Reaching the right kind of investor is a potentially expensive and difficult task: governments need to find rich migrants, but marketing such bonds in countries like the United States and European Union involves working around tight rules governing the sale of financial products to the public.
Guichard, a former World Bank portfolio manager, says his platform gets around this hurdle by targeting only the more affluent investors who can be tagged as "professional" in regulators' terms. Potential investors are already registering on the site at the rate of 5-10 a day, he added.
"We have developed a database of about 20,000 Africans investing $25,000 a year in African investments," Guichard, who also runs investment management firm Gravitas Capital, told Reuters in his serviced apartments in Mayfair, one of London's most upmarket areas.
"We are dealing with the strata of investors who are above the regulation threshold."
Nonetheless, skeptics aren't hard to find. "If you have investible funds, you could find much better projects than buying a government bond -- like buying a home for your retirement," said Insparo's Stock.
Others point out that fatter yields are available in Africa, particularly to "smart money" investors. The continent has attracted some of the world's most sophisticated investors, from private equity funds to hedge funds, so why shouldn't its migrants demand a piece of that action?
"The idea of a diaspora bond, they are chancing it too much," said Nigerian-born Timothy Modu, a London-based consultant. "They are thinking we do not know what to do with our money. So many people want to make a return, I don't just mean big earners. Even if someone is working as a cleaner, they want something which is managed well and will make a return."
He's not sure diaspora bonds are big enough for his aspirations.
"If I have $200,000, I might put $20,000 into a diaspora bond -- it is a guaranteed return... but I want to be like Richard Branson."
(Edited by Sara Ledwith and Simon Robinson)