World Bank to Invest in Bonds Of Poor Nations in Local Currencies

World Bank to Invest in Bonds Of Poor Nations in Local Currencies
Wall Street Journal, 5-Oct-07
By BOB DAVIS

The World Bank said it will start a $5 billion fund to invest in local-currency denominated bonds in poor nations.

The fund's goal is to increase investment by Western pension funds and Asian nations with bulging reserves in countries that are considered relatively risky bets. The World Bank also hopes to boost the ability of poor nations to borrow in their own currencies rather than in dollars or euros. That would help reduce the risks developing nations face when there are large swings in the value of major currencies.

Under the plan, the fund would invest in local-currency denominated bonds, with a minimum value of $200 million, issued by poor countries. The bank plans to start with 15 to 20 countries, including some that already get a substantial foreign investment. They include Brazil, Chile, Egypt, the Philippines and Turkey. If the project works, the bank would invest in bonds from riskier governments, such as Pakistan and Lebanon.

The fund also intends to establish a new bond-rating system that would look not just at a country's ability to repay debt but at economic measures, such as regulations on financial transactions and taxes. The idea is to produce an "investability" index that would rank bonds issued by poor nations -- and give those nations an idea of the kinds of reforms they would need to make to attract investment.

"The aim of the local-currency bond fund is to establish a clear link between policy reform and investment," said World Bank president Robert Zoellick.

The Bank expects half the money in the fund to come from sovereign wealth funds, especially from Asian nations.