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Conference on Capital Market Development in Bhutan
“Leveraging Private Finance through Green and Sustainable Bonds”
(Virtual meeting), Tuesday, 24 November 2020
Summary Report
On 24November 2020, the conference on Capital Market Development in Bhutan was held virtually,
outlining the need for “Leveraging Private Finance through Green and Sustainable Bonds.” Organized by
ESCAP and with support from Bhutan’s Ministry of Finance, the conference deliberated on the progress on
the green, sustainable and COVID response sovereign bonds.
Including participants from Bhutan, there were over 60 people that reflect experts from countries such as
Hong Kong, China; Japan; Thailand; and Turkey. The participants from Bhutan included personnel from
various agencies: the Ministry of Finance, the Ministry of Economic Affairs, the Gross National Happiness
Commission, the Royal Monetary Authority, the Royal Security Exchange of Bhutan, the Bhutan National
Bank Limited, the Bank of Bhutan, the T Bank Ltd., the Bhutan Development Bank, the Druk PNB Bank
Ltd., the Royal Insurance Corporation of Bhutan Ltd., the Druk Holdings and Investments and the United
Nations Resident Coordinator Office.
The conference was inaugurated by Dr. Tientip Subhanij, Chief of Financing for Development, ESCAP,
followed by Mr. Gerald Daly, United Nations Resident Coordinator in Bhutan and H.E. Mr. Dasho Nim
Dorji, Secretary, Ministry of Finance of Bhutan. The conference was conducted in two sessions:
• Session 1: Key Challenges and Opportunities of Sovereign Thematic Bonds in Bhutan, with the
speaker of Prof. Dr. Naoyuki Yoshino (Professor Emeritus-Keio University, and Former Dean and
CEO, Asian Development Bank Institute (ADBI)) and the moderator of Dr. Masato Abe, Economic
Affairs Officer, Financing for Development, ESCAP; and
• Session 2: Optimal Financial Terms for Green Bonds, with the speaker of Prof. Dr. Louis Cheng
(Professor of Finance and Director of Center for Economic Sustainability and Entrepreneurial
Finance, Hong Kong Polytechnic University) and the moderator of Dr. Tientip Subhanij.
The conference facilitated extensively engaging relevant policymakers and private sector representatives
and garnering valuable feedback on relevant issues and challenges. The discussions at the conference
specifically focused on two primary issues:
1. The critical challenge Bhutan faces to raise bonds such as green, sustainable and COVID-response
sovereign bond from both the domestic and international capital markets; and
2. The optimal financing terms and conditions for these bonds.
Background
Bhutan stands at a critical juncture regarding its finance for development, particularly at a time when it
seeks to graduate from its least developed county (LDC) status and sustain progress towards the SDGs.
Recognizing this critical challenge, the Royal Government of Bhutan (RGoB) in recent times has prioritized
resource mobilization efforts to sustain the desired level of socioeconomic investments to consolidate on
the rapid development gains it has made. Despite a slowdown in the economy with a decline in aid resources
that was further compounded by the COVID-19 pandemic, the RGoB has targeted an ambitious budget for
the 12th Five Year Plan 2018-2023 that could have potentially worsened its fiscal deficit
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In this context, there is an absolute imperative for Bhutan to secure “innovative financing mechanisms” –
particularly to tap into the capital markets and securities – to strengthen its fiscal management. Sovereign
bonds, in this regard, is a viable option to finance public sector borrowing requirements at a reasonably
competitive cost. To this end, the RGoB requested the ESCAP for technical assistance to develop a
sovereign bond market in 2017, and since, ESCAP has been actively engaged in assisting Bhutan to
strengthen its capital markets through various activities such as stakeholder consultations, capacity building
workshops, study tours and research studies that led to the establishment of the Working Committee on
Government Bond Issuance (April 2019), the development of a “Government Bond Issuance Strategy”
(September 2019) and the enforcement of the “Rules and Regulations for Issuance of Government Bond”
(June 2020).
Following these initiatives, the RGoB successfully issued its first-ever sovereign bond of Nu.3 billion (US$
41 million) in September 2020 at an annual coupon rate of 6.5 percent. A huge success, the bond was
oversubscribed by over 300 per cent by both institutional and individual investors from the Bhutanese
private sector. The sovereign bond offering demonstrated that it is a viable and necessary financing
instrument to tap domestic resources while providing an investment opportunity for the private sector.
Key takeaways
1. Deliberations focused on the need to concentrate on two aspects when issuing sovereign bonds. First,
what is the maturity of the government bond? The longest government bonds have a 40-year maturity,
followed by 30-year, 20-year, 5-year, 2-year and treasury bills. The Ministry of Finance has planned to
issue government bonds with different maturities, ranging from short to long term in the future. The
second question pertains to the number of government bonds issued in one year.
2. No real green bond index has been developed in the global markets. Although some existing green bond
indexes cover such specific sectors and issues as renewable energy, energy efficiency, pollution control
and green buildings, they do not correspond precisely to the amounts of CO2/NOx emissions and exposed
plastics, which raise some classification errors in the green bond indexes. As a result, there is no
commonly shared methodology in measuring greenness currently among the green bond indexes. Since
the indexes may not accurately reflect exposure to polluted gases and materials, investors’ decisions
often become more distorted than the desired portfolio allocation based on an accurate measure of
pollution exposures. This problem could be solved by global taxations of CO2, NOx and plastics. This
way would allow investors to return to a conventional risk assessment on bonds and avoid taking
sometimes controversial environment, social and governance (ESG) criteria into account.
3. By presenting the cases of Japan and Mexico, an emphasis was made on the importance of domestic
investors especially in the initial development stage of the government bond market. Gradual opening to
foreign investors must be carefully assessed as they may bring unbearable exchange risks to the market.
4. To improve liquidity in the domestic financial market, an interbank or money market needs to be well
developed in Bhutan in the future. At present, lack of the money market is one of the biggest obstacles
to foster the government bond market.
5. In practice, the Green Bond Principles of the International Capital Market Association have provided
guidance and set principles for green bonds' issuance. There are four principles for green bonds: first,
use of proceeds to be described in legal documents; second, project evaluation and selection to outline
the elements of eligibility assessment; third, management of proceeds to explain how issuers manage the
proceeds of the bond in a sub-account or a sub-portfolio and to disclose investment for unallocated
proceeds; and finally, reporting to cover both the use of proceeds and impacts of the green bonds.
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6. The green bond market has developed rapidly. A new record was set in 2019 for global green bond
issuance that reached $257.7 billion. This volume was mainly led by the European market, which
accounted for 45% of global issuance, followed by 25% in the Asia-Pacific region and 23% in North
American markets. The United States, China and France led the country rankings, together accounting
for 44% of the global green bond issuance in 2019.
7. The Asian Infrastructure Investment Bank (AIIB) and the Asian Development Bank (ADB) have issued
green (and social) bonds. These bonds have been recently designed to meet the financial needs of
developing countries relating to their climate mitigation and adaptation-related actions and address the
socioeconomic impacts of COVID-19. Green bonds are not only intended to finance environmental
projects but also to support inclusive and sustainable projects within the social aspect of ESG.
8. It is important to explore alternative funding sources for the RGoB to finance its developmental activities
through the sovereign (green) bond. Over the years, the RGoB‘s financing needs have been funded
through concessional borrowings, the issuance of treasury bills and short-term loans from the banks.
9. The investment size of green projects (e.g., for the next three years) can be estimated with a
straightforward project budgeting with some criteria. The coupon rate can be as low as 5-6%, depending
on the green bond issues of other peers at the international bond markets. The assistance of rating
agencies and a well-known bond structuring advisor could further lower the interest rate of the bond
under the umbrella of the COVID-19 intervention fund.
10. The bond could be a combination of a green bond and a social bond, for example, with a social bond
of 10% or a little more, so that the funds could be used on a broader range of issues, even to address
social problems. The green bond portion has a more restrictive guideline. However, for the social part, it
is up to Bhutan and the structuring advisor to make a declaration through a self-regulatory mechanism.
Policy recommendations
The conference highlighted the following policy recommendations:
1. The Ministry of Finance needs to consider investor preferences, the volume of demand from institutional
investors (e.g., insurance companies) and the length of time they intend to hold government bonds.
2. To develop a stable bond market, two key issues need to be addressed. First, Bhutan should focus on
domestic rather than foreign investors, especially at the initial stage of sovereign bond issuance. If Bhutan
overextends its market for foreign investors, it will increase uncertainty in the bond market. Second, it is
essential to issue government bonds based on the Bhutanese currency given monetary risks again at the
initial stage.
3. Liquidity is essential and must be created by the central bank so that money can circulate well. It should
reflect on the monetary policy of the central bank in Bhutan. There are two instruments for enhancing
liquidity: one is controlling the short-term interest rate, and the other is quantitative easing. Bhutan's
central monetary policy is focused on quantity rather than interest rate fluctuations. The central bank
needs the interbank money market to maintain the interest rate because it can create liquidity and solve
liquidity constraints.
4. The milestones of green bond issuance should be established, including initial visits by secondary
verification consultants, rating agencies and subscribers. Any costs associated with the employment of
these agencies may contribute to lowering the coupon rate. The RGoB should request quotes for the
expenses and then compare them with the interest savings due to a lower coupon. The cost of advice and
rating may be significantly below market price, depending on the willingness of the structuring
consultants and the credit rating agencies.
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5. An appropriate allocation system can increase the demand for bonds and is essential to improve
transparency. In this vein, the RGoB should also consider taking two following actions: first, securing
the bonds within the government budget; and second, developing a dedicated web portal on the stock
exchange to share all financial and market data in the case that investors are interested in viewing the
latest bond related information. In addition, secondary market trading data, if any, should also be shared
with investors. The ability to trade bonds in the secondary market fairly and with sufficient liquidity is
essential to ensure that domestic and international investors have the confidence to subscribe to the bonds
in the first place.
6. Bhutan may consider social inclusion projects to broaden the scope of the bond issuance by including
both the E and S aspects of the ESG. Any projects and activities used to alleviate poverty or develop
infrastructure could be promoted. Social bonds may be appropriate for Bhutan since they do not require
third-party certification. There are no guidelines to certify such bonds, such as the minimum size of the
issuing and the use of proceeds involving social inclusion.
7. The secondary party opinion for green bond verification is vital to attract international investors, which
the RGoB could consider. Credit rating agencies may be another party to verify the green bonds. Bhutan
could cooperate with a structuring advisor and ESCAP together to evaluate and approve the green and
sustainable bond projects. Further, a report of the RGoB on environmental and social impacts should be
published with the support from ESCAP.
Q&A session
1. Setting a coupon rate based on the deposit rate will be more costly for bonds because the deposit
market in Bhutan is costly. How to regulate the rate? Are generally the thematic bonds low cost?
The market must determine the interest rate by balancing supply and demand. The government interest
rate should be the lowest because it is the issuer of the security. If a company is also an issuer of
securities, the interest rate on its bond will be close to the government interest rate while depending on
maturity, liquidity and risk.
2. In times of declining interest rates, are long-term bonds recommended over short-term bonds?
Historical data shows that long-term bonds outperform short-term bonds in a low-interest-rate
environment. The central bank lowers the interest rate; the yield curve is inverted (downward sloping).
When the central bank raises the interest rate, the yield curve is an upward sloping curve.
3. Although banks offer high-interest rates on deposits, people have still subscribed to the recently issued
government bonds at a nominal interest rate of 6.5%. Why is this so?
No behavioural surveys have been so far conducted in Bhutan to understand why investors invest in
government bonds. It could be explained, however, that government bonds offer certain advantages,
such as low risk and long-term nature, to investors in allocating some portion of their investment
portfolios.
4. What advantages can you see when entering the international market?
From domestic investors’ point of view, the risk of default with domestic bonds is zero, backed by
future cash flows from taxation. From international investors’ point of view, the risk of default with
international bonds may come from currency exchange. If the currency appreciates, the RGoB needs
more money for repayment. On the one hand, by entering the international market, the bonds are most
likely to attract higher demands, leading to a decline in their nominal interest rate.
5. What other approaches could be used to attract foreign investors when issuing a green bond in the
domestic market?
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