Peter Attard Montalto
Will The Crisis Shake Some Deeply Rooted Investing Trees?
(7 min read)
How should an investor price a government bond? Is the risk of repayment all that matters, or is it important to consider what the proceeds will be spent on?
Can an investor actually decide that it is ‘ok’ if a government doesn’t service its contractual obligations for a period because it’s the ‘right thing to do’?
Having worked with emerging markets in Africa, these kinds of questions are not quite as new to me as they are to the world just waking up to them during this coronavirus crisis. Unsurprisingly, they are eliciting perplexed head scratching, complex legal discussions, and philosophical references to ‘fiduciary duty’. Whilst the term ‘ESG’ floats around and all investment houses now have some kind of ESG function or funds, it is not really mainstream enough to have garnered possible answers to the above questions.
These issues have particularly struck home to me working on the concept formation of a sovereign ‘COVID-19 social bond’ in South Africa. The idea is that when you are already at the fiscal cliff edge, with a fiscal crisis brewing and little fiscal space for increased expenditure for stimulus measures, and you are then hit by an existential crisis like a pandemic, you need to crowd in cheaper funding in large size. We target issuance of ZAR100bn (or 2% of GDP) with multiple tranches. A social bond is a debt instrument where the use of proceeds generate social returns in additional to the financial return generated for holders of the debt instrument. They are different from social impact bonds, which pay out on certain social criteria being achieved.
See here for more of the technical details around this proposal for a social bond.
The question this raises is how much cheaper you can issue debt when tagged (with appropriate auditing) to health care and economic support spending only in a time of crisis?
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