The Creditworthy Poor?

WASHINGTON, DC – Over the last five years, several low-income countries, such as Rwanda and Honduras, have issued their first-ever bonds to private foreign investors in London and New York. Until recently, that might have been unthinkable, so the new borrowers’ initial bond issue should be viewed as a sign of great investor confidence. But it should also sound some familiar warning bells.

Some 20 “debut issues” have raised around $12 billion at interest rates that, on average, are just 4.5 percentage points above what the United States government pays at maturities of five or more years. This is small change in the grand scheme of global finance; but, given that many of these borrowers were in distress or default just a decade ago, and needed debt forgiveness, theirs is an especially impressive turnaround.

But low-income countries’ access to private lenders comes with risks that should be highlighted at the outset, before they grow into imminent threats.

For starters, there is rollover risk. The bonds have to be repaid in a foreign currency, usually US dollars, in a single “bullet” payment. These bullets can be big, especially when compared with past debt obligations or future export earnings.