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Extraordinary times calls for extraordinary measures. The COVID-19 pandemic has required countries to deploy large spending for emergency health response and relief measures for households and firms. For a Least Developed Country (LDC), these measures mean a big squeeze in their fiscal space. The pandemic, however, also offers a once in a lifetime opportunity to utilize innovative financing instruments, such as sovereign bond issuance, to meet fiscal financing requirements, develop capital market, and support the economy in fighting the pandemic.

The Royal Government of Bhutan recently made history by successfully issuing its first sovereign bond despite a very small population size. It has completed the offering of a 3-year domestic bond of US$ 41 million (or Nu. 3 billion) at an annual coupon rate of 6.5 per cent to support increasing fiscal needs. The transaction was very well-received with more than 300 per cent oversubscription. The issuance was mainly dominated by financial institutions, while non-bank institutions such as pension and insurance companies as well as civil society organizations and individual investors also participated.

Over the years, Bhutan has been facing financing shortfalls, which have been funded through concessional borrowings and short-term bank loans. Treasury bills have been used to finance the resource gap well beyond typical cash management operations. In Bhutan, the interest rates in the financial market remain inelastic and short-term government securities have minimal impact on interest rate due to underdeveloped interbank market. This has posed a tremendous challenge for the Royal Monetary Authority to maintain control over monetary policy, with no alternative financial instruments such as long-term government securities. The sovereign bond issuance, therefore, is a welcome move by the government not only to develop capital market, but also to provide a supportive environment for monetary policy operations.

The issuance of sovereign bond is also deemed necessary as the government has already spent as much as US$ 40 million (or Nu. 2.9 billion) in coping with the COVID-19 pandemic while revenue has declined by 14 per cent from previous year. Fiscal deficit to GDP is estimated to increase to 7.36 per cent of GDP in 2020/21 from 6.18 per cent previously, and higher than the average for South Asia.

However, in the midst of every crisis lies a great opportunity. The first-ever Bhutan sovereign bond has already encouraged unprecedented private sector participation, including a large number of individual investors. Bhutan’s experience has provided at least three important lessons in financing for development in the era of COVID-19 and beyond. First, it is possible to issue a sovereign bond despite far-from-ready market infrastructure, limited population size and underdeveloped capital market. With population of less than 800,000, bonds could be a viable and necessary financing instrument in tapping into domestic resources.

Second, establishing a benchmark yield curve of government-backed bonds is an important step to leverage private sector to finance increasing spending needs without relying on official development assistance and concessional loans. Therefore, Bhutan should continue to develop the yield curve by issuing more bonds with different types and maturity as well as develop secondary market to promote market trading. The development of sovereign bond market is necessary to create a diversified financial market to attract foreign investment. Given the risk appetite in the financial markets in Asia and the Pacific, many insurance companies and pension funds from the region can be attracted to invest in the sovereign bond market in the country.

Given Bhutan’s leadership in protecting its environment and commitment to sustainable development goals, a thematic bond, such as green or sustainability bond, could be considered to provide the necessary financing option while maintaining Bhutan’s commitment as a carbon neutral, sustainable and happy society. There is enormous potential for the country to tap into green/sustainability bond markets to finance its infrastructure projects/investment such as small and medium hydropower projects, waste management, biodiversity conservation, public transportation, climate change adaptation and mitigation.

Finally, the bond issuance is a solid evidence of a contribution from international community, especially the UN System, in working together with a member state and providing technical assistance in strengthening its capital market. At the request of the Royal Government of Bhutan in 2017, ESCAP has continuously provided technical assistance and capacity building support to assist the government in implementing necessary reforms and infrastructure for bond market development, including setting up a bond working committee, rules and regulations for bond issuance, and relevant pre-issuance work. It has also helped raise Bhutan’s profile as a model for bond market development in a small country.

Going forward, the time is ripe for Bhutan to gradually take advantage of cheaper borrowing costs in the international market, while ensuring well-thought-out set of regulations and policies governing bond issuance. In this context, ESCAP remains ready to further support Bhutan in quickly adapting and designing policy options in financing sustainable development that will lay good foundations for a green, resilient, and better recovery.

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Tientip Subhanij
Chief, Financing for Development
Masato Abe
Economic Affairs Officer
Zenathan Hasannudin
Associate Economic Affairs Officer
Macroeconomic Policy and Financing for Development +66 2 288-1234 [email protected]
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