Japan International Cooperation

Transcription

1 Japan s ODA connection to emerging economies or JICA as it is better known, is one of the world s largest bilateral aid agencies and carries out most of Japan s Official Development Assistance (ODA). JICA is not yet well known to international investors, but as JICA has recently been permitted to take foreign currencies loan exposures there is a possibility, perhaps likelihood, that JICA might in 2014 join the rank of Japanese government agencies that sell bonds in the offshore debt markets. In anticipation, JICA is becoming more receptive to communicating its message and its credit to global investors. Japan International Cooperation Agency or JICA as it is best known, is one of the world s largest bilateral aid agencies and carries out most of Japan s Official Development Assistance (ODA). JICA was reborn in its current guise in October 2008 out of the institutions and functions of three different institutions, absorbing at that time JBIC s former ODA Loan functions, the former JICA s technical assistance and a part of the Ministry of Foreign Affairs former grant aid functions. JICA is vast. Since its rebirth JICA has become one of the largest bilateral development organizations in the world with a network of more than 90 overseas offices, projects in more than 150 countries. It has the equivalent of more than $110 billion in assets and has an annual budget of over 1.2 trillion, or roughly $12bn. JICA therefore has a similar scale of loan assets globally as the Asian Development Bank, as almost 80% of From 2014 borrowers will be able to repay JICA in US dollars The Government of Japan announced the introduction of foreign currency-oriented ODA Loans (called as Currency Conversion Option ) starting from January 2013 Japan s ODA Loans had been denominated in JPY only; however, borrowing countries can now choose to repay the Loans in USD instead of JPY. By offering greater flexibility to borrowing countries, introduction of this scheme is expected to enhance the convenience of Japan s ODA Loans. Source: JICA Currency Conversion Option of ODA Loans its assets are within Asia. JICA makes the equivalent of about $10 billion of new loan commitments each year and spends approximately $1.5 billion on technical assistance each year. And JICA is also extremely strong financially, with capital and reserves totalling more than 79% of its total assets. JICA is rated at the sovereign ceiling, in other words AA+ by R&I (Rating and Investment Information, Inc.) and AA- by S&P (Standard and Poor s). As of March 2013, JICA has the equivalent of more than $88 billion of capital, which makes JICA enormously strong financially. In exact numbers in Yen, set against total assets of 11.1 trillion, JICA has more than 79% of capital made up of 7.7 trillion of pure capital injected by the government, and reserves of 1.1 trillion. Moreover, the 2.0 trillion of borrowings of JICA from the government s FILP programme [loans from the state provided to JICA at long maturities and at a price flat to Japan Government Bonds] are not backed by general JICA collateral. Only 260 billion of JICA Agency bonds are backed by general JICA collateral and are therefore ranked at the highest level of senior liability. JICA emerged as a new entity in October 2008, reborn out of mergers to create Japan s sole international development institution for the emerging economies. As the single ODA entity JICA has consolidated its position in many countries and expanded its reach into more emerging economies. JICA is continually expanding the sophistication in how it approaches, advises on and ultimately finances a growing range of projects, especially in the infrastructure space, which requires a vast amount of funding throughout the developing world. In response to increasing new activities as well as trade and investment in developing countries by Japanese private companies, JICA also started supporting project development of public-private partnership (PPP) based infrastructure projects and Base of the Pyramid (BOP) businesses. Furthermore, JICA has reopened its private sector investment finance to satisfy growing demand for private sector s role in emerging economies development. Up until recently JICA 6

2 offers loans in yen. Consequently, JICA has since October 2008 become a regular issuer of JICA Agency bonds to domestic institutional and even retail investors. The agency has thus far issued entirely without the state guarantee, due to its immense financial strength. JICA does not yet offer direct foreign currency loans and does not borrow offshore. But that will change as of January 2014 JICA will for the first time potentially have foreign currency assets, as from that date sovereign obligors can choose to repay JICA their originally Yen denominated loans in US dollars. As a result, JICA s name is increasingly of interest to the international investment community and JICA has been gently enhancing its communication with intermediaries and investors with a view to the possibility one day of issuing US dollar bonds offshore. JICA: a view from the top Akihiko Tanaka, President of JICA, uses the JICA annual report to encapsulate JICA s goals, which are both altruistic and also developmental for both the recipients of the assistance and for Japan itself. He writes: In the aftermath of World War II the international community provided the assistance to kick-start Japan s shattered economy, financing the rebuilding of roads, dams, power systems and the development of innovative projects such as the revolutionary Shinkansen bullet trains. In 2011 nations across the world once more responded to one of Japan s JICA s missions in the world of ODA JICA has some core pillars, namely to help low income economies particularly in Sub-Sahara Africa achieve the Millennium Development Goals, to help countries in post conflict (such as Iraq, Afghanistan and South Sudan), to boost infrastructure investment (especially in Asia), to help green initiatives such as climate change and forestry, and to boost relationships between NGOs and Japanese companies operating in or seeking to operate in the emerging economies. These missions are JICA s lifeblood, but the agency nowadays also focuses on sub-sectors, such as PPP initiatives in Asia, health and education and so forth. Mission 1 - Addressing the global agenda We, as a bridge between the people of Japan and developing countries, will advance international cooperation through the sharing of knowledge and experience and will work to build a more peaceful and prosperous world. That is from the JICA website, a clear statement of intent to the Japanese public, and to the world at large that is further embellished by the statement of JICA s four key missions. The advance of globalization brings positive effects, sparking economic development and providing people with new opportunities. It also has its negative side, though, including such effects as uneven wealth distribution and the cross-border issues of climate change, infectious diseases, terrorism, and expanding economic crises. These effects pose a threat to the stability and prosperity of Japan which depends on resources from around the world and the rest of the international community. The threat is particularly dire for developing countries. JICA will make full use of Japan s experience and technologies as it works in concert with international society to address the various globalization-related issues developing countries face in a comprehensive manner. Mission 2 - Reducing poverty through equitable growth Impoverished people in developing countries are particularly susceptible to the effects of economic crisis, conflict, and disaster and are constantly exposed to the risk of even deeper poverty. Moreover, growing wealth gaps are a destabilizing factor in societies. Helping people to escape poverty and lead healthy, civilized lives is a vital task not only for the growth of developing countries but also for the stability of the international community. To reduce poverty, employment opportunities must be expanded through equitable growth that gives proper consideration to impoverished members of society, and public services like education and healthcare must be enhanced. JICA will provide support for human resources development, capacity building, policy and institutional improvements, and provision of social and economic infrastructure, thereby pursuing sustained poverty reduction through equitable growth. Mission 3 - Improving governance A state s capacity for governance refers to its status as a society that can take the resources available to it and direct, apportion, and manage them efficiently and in ways that reflect the will of the people. Improving governance is of vital importance to the stable economic growth of developing countries. However, these states often have underdeveloped legal and judicial systems and administrative organs, which present obstacles to efforts to reduce poverty through economic growth. JICA will offer support aimed at improving the fundamental systems needed by a state, as well as systems for effectively providing public services based on the needs of people, and at fostering the institutions and human resources needed to manage those systems appropriately. Mission 4 - Achieving human security The advance of globalization causes an increase in various cross-border dangers and exposes many people in developing countries to civil strife, disasters, poverty, and other humanitarian threats. The concept of human security places individual human beings at its core, seeking to defend them from fear and want: fear of things like conflict, terrorism, disaster, environmental destruction, and infectious disease, and want in the face of poverty and in social services and infrastructure. By building up people s abilities to address these issues themselves, this approach aims to build societies in which they can live with dignity. In order to defend the weakest members of society from these various threats, JICA will support efforts to bolster social and institutional capacity and to increase people s ability to deal with threats themselves. 7

3 JICA has two separate accounts and three main arms of operations Two Separate Accounts Three Main Arms Source: JICA, November 2013 Technical Coopera on darkest moments, providing help and support in the wake of the devastating earthquake-tsunami which claimed around 20,000 lives. In the intervening decades Japan had rebuilt its economy, re-joined the global community of nations and through its Official Development Assistance (ODA), became a major development partner to many of the world s most vulnerable nations international cooperation is not a one-way street, but rather a broad two-way highroad on which Japan s own economic and social advancement is inextricably linked with the economic and social health of countries in Africa, Latin America, the Middle East, Asia and other regions. As the country s comprehensive development institution, the Japan International Cooperation Agency is dedicated to strengthening this movement under the rubric of Inclusive EUROWEEK: What key changes are likely to occur regarding JICA s mission and structure in the foreseeable future? Nagata: Our key missions, including addressing the global agenda and reducing poverty through equitable General Account Government of Japan 100% Grant Aid and Dynamic Development continuing our traditional cooperation projects, but also forging new alliances and partnerships, exploring new approaches to new challenges and creating new ideas and knowledge centres between Japanese and overseas experts, academics, technicians and private business. This two-way highroad is complex and challenging. New, middle income countries are emerging. China, South Korea, Thailand, Brazil and India among others are becoming donors. The so-called Arab Spring highlighted the increasing clamour for democracy, social and economic justice. Entrenched poverty, natural disasters and conflict threaten tens of millions of people and the environment, energy, food security and aging populations are more recent global issues. JICA provides technical cooperation, concessional loans and investment, and JICA diversifying domestic funding, looking offshore JICA Finance and Investment Account Finance and Investment EuroWeek in November met with Akihito Nagata, Director, Capital Markets, Treasury Department, at. Nagata s enthusiasm for JICA s mandate and missions shone through the discussion. And when the discussion focused on funding, EuroWeek learned more of JICA s efforts to fund at the optimum cost in the domestic market and learned of the rising potential for foreign issuance, providing the Japanese authorities decide that is an appropriate step to take. growth, will remain important for some time. However, we have to cope with a variety of development patterns and their increasing complexity and we cannot apply one-size-fits-all solution to different partner countries. For example, those partner countries for which we provided our long-time Bond Issuing Account grant aid and its operations are based on the concept of providing both the type and level of cooperation appropriate to individual countries or regions, ranging from peacebuilding to sustainable economic and social growth. Through such efforts, combining tried and tested approaches and innovative, dynamic new ideas, we hope not only to revitalize the world s developing nations but Japan itself. Tanaka therefore underlines that revitalisation is not limited to the recipients of JICA s assistance, but to Japan as well. JICA s mission alone has raised great interest in the domestic bond market amongst institutional and retail investors alike. And JICA s missions and its great financial strengths will certainly raise interest amongst global investors, should JICA later be able to issue international bonds, an outcome that looks increasingly likely. cooperation have achieved dynamic growth and are now classified as middle income countries, but they face typical problems like widening disparity and sometimes the resulting social unrest. We will therefore have to create and offer a best mix of cooperation schemes for each and every partner country to solve these issues ranging from infrastructure development to improvement of governance. Another feature which we have seen recently is that ODA is expected to be conducted more and more in the context of public-private-partnership or in a private sector-oriented manner. For 8

4 Akihito Nagata, Director, Capital Markets, Treasury Department example, in the global outreach strategy of the so-called Abenomics under the current cabinet, a variety of ODA schemes are quite often referred to as to be strategically utilised to vitalise private sectors in Japanese economy as well as in emerging markets. We have to therefore deliver seamless service to the world economy to cover and connect public and private sectors both. EUROWEEK: How then does this connect to and affect the JICA budgets for loan disbursements and therefore fundraising? Nagata: We feel that more and more expectations are being placed on Japan s Official Development Assistance (ODA) in the context of our country s international cooperation, so we assume that the current large budgets of recent years will remain roughly the same in the years ahead. And after the Great East Japan Earthquake, the importance of the government policy institutions has risen again as people have focused on our future wealth and economic importance in the global arena. It is therefore extremely unlikely that the government will reduce its existing capital contribution and lending to JICA as JICA has a powerful mission and the full backing of the government. JICA is the sole ODA institution for Japan and is crucial to Japan s global efforts to improve economic conditions in the emerging economies. The current fiscal year budget for Finance and Investment Operations (which is JICA s investment lending scheme) is 915 billion, or the equivalent of $9.2 billion. For this size of operation, the budgeted external fundraising is equivalent to $5.1 billion in total, and is to be sourced as follows: $0.5 billion of capital contributions from the Government of Japan, $3.8 billion of borrowing from the Government of Japan under the Fiscal Investment and Loan Programme (FILP), and $0.8 billion of domestic bond issuance. Regarding the FY2014 budget [the year ending March 31, 2015], the figure for Finance and Investment Operations which we have requested from the Government of Japan is 925 billion, or $9.3 billion equivalent. This has yet to be approved of course and we are still currently in the stage of discussion with the Government of Japan regarding the fundraising plan for this operational budget. As one can see from this, JICA s fundraising amount in the debt capital market is rather limited compared to the funds coming from the Government of Japan, which are and are likely to remain the main funding source. The JICA Act only allows us to raise funds through either borrowing from the government or bond issuance; bank loans are only allowed for the purpose of filling in the shortterm funding gaps. Nonetheless, we are raising the equivalent of $800 million this fiscal year through bond issues in the domestic market, so we are an important part of the government agency bond market, although a far smaller issuer than many of our Japanese peers. We certainly believe that the debt capital market funding leads to an improvement of our corporate governance through investor relation activities and disclosure of and accountability for our financial statements. EUROWEEK: Do you issue in the domestic market with or without the state guarantee? Nagata: According to the JICA Act, we are allowed to issue bonds either with or without the government guarantee, though we have never issued bond backed by the government since October 2008, after which JICA first became an issuer of bonds. We issue without the government guarantee as we have aimed to be regarded as a stand-alone agency in the market. As I said, we believe it will lead to improvement of our corporate governance through investor relation activities such as punctual issuance and accountability for our periodical statement of accounts etc. Moreover, we try to adhere to the government s guidance that stipulates that government agencies should wherever possible issue bonds without the government guarantee. EUROWEEK: How do you explain the strengths of JICA s credit to investors? Nagata: JICA needs only about 16% of its current year funding from the domestic bond market, while the rest, 84%, is from the government, some in capital contribution and about 75% in loans directly from the state at extremely low rates, in other words flat to Japan Government Bonds (JGBs). Our total capital is more than 79%. And our borrowings from the government, priced as they are at JGBs flat, carry no JICA collateral, and total more than 20% of our total assets. This means that from a pure balance sheet perspective our credit is remarkably strong, as our capital ratio is so robust. EUROWEEK: What about your risk weightings? Nagata: We are similar to the other government agencies and JFM when we issue in the domestic Yen market without the state guarantee, in other words we are 10% risk weighted, whereas the municipal government issuers themselves are zero risk weighted, as are agencies with the state guarantee. EUROWEEK: How does JICA price relative to your domestic peers? Nagata: Due to Bank of Japan s strengthened monetary easing policy, the JGB yield curve has been so turbulent this year that the high quality names especially with longer tenors have had difficulty attracting sufficient investor demand. We had dual-tranche bond issuance of 20 billion in total with 10 year and 20 year tenors, in June and September respectively, as our regular issuance. We made every effort to have careful dialogues with investors through a number of IR meetings and an extended period of marketing. As a result 9

5 we have very successful bond issuance both in June and September with sufficient investor demand and a favourable review from market participants, and we have achieved the tightest pricing among government agency names. Looking at the domestic Yen market for public sector issuers other than Japanese government guaranteed bonds here, the municipal bonds are tightest, e.g. 10yr new issue domestic Yen bonds by the Metropolis of Tokyo were priced at JGB+5.5bp in Nov 2013; this is because the local governments control tax generation. Slightly wider are the core government agencies such as JFM, JICA and JBIC which are traded around 10 bp above JGBs, in Zaito bond format without the explicit government guarantee. EUROWEEK: What are the main funding instruments that you use in the local market? Nagata: We use Yen-denominated JICA agency bonds as the main funding instruments from capital market. All the JICA s agency bonds have been required to be arranged in the domestic capital market in Yen so far, according to the approval from Japanese government. EUROWEEK: Do you focus on the wholesale or retail investor base, or both? Nagata: Our main JICA agency bonds are sold to institutional investors. We only began issuing bonds since our reorganisation in October 2008, so we are unlike the other major government agencies that have far more experience of the capital markets. However, we have been making every effort to understand the market and to be active and proactive in dealing with investor and intermediaries. Our first mission has been to introduce ourselves and then expand our reach within the institutional investor base. And once we accomplished that to some success we expanded to the retail market in 2011 with what was the first ever retail bond issued by a Japanese government agency. We have since then issued another similar bond and in December this year we will again issue similar bonds for retail investors, in a continuing effort to further expand and diversify the investor base. Impact Investment bonds are retail targeted bonds distributed in Japan and generally issued by multilateral borrowers such as the Asian Development Bank or other supranationals, and to finance green energy, water projects and other projects in the emerging economies. JICA has further diversified the issuer base in recent years. Our retail bond offerings are therefore similar to the Impact Investment bond issues, but also distinct as the funds were raised for our broad ODA purposes. The objective is to enhance the investor base for funding stability and to reach out to the huge retail investor base in Japan, most of whom have knowledge of JICA and its central role in ODA finance. We made a considerable effort to boost our name through investor presentations, and also via advertorial sections in top quality domestic newspapers. We have enjoyed a favourable response from retail investors and the issues have been a considerable success. EUROWEEK: Could JICA issue offshore in the foreseeable future and what key messages do you wish to At March 31, 2013 JICA s ODA loans totalled 29.2 trillion, or more than US$295 billion Central Asia and Caucasus International Organizations etc. Source: JICA, November 2013 South East Asia South Asia East Asia Middle East Latin America Africa Europe Pacific 1.5% 0.3% 0.2% 5.4% 3.2% 3.2% 6.7% 13.8% 22.2% 43.5% convey to the international investor community? Nagata: Our fund raising activities have so far been limited to Yen in the domestic markets, as our investment lending products have been all denominated in Yen. However, we have just recently introduced a scheme that will be effective in January 2014 whereby sovereign obligors can choose to repay JICA in US dollars. We will hedge our exposures with cross currency swaps, unless we are given permission from the Government of Japan to issue foreign currency bonds, which will provide a natural hedge. We are not expecting at this stage huge amounts of dollar exposure, but this is a notable and important step to allow sovereign obligors this flexibility. As the underlying contracts for much of the ODA projects are denominated in US dollars and many sovereign obligors seemingly conduct US dollars-oriented public debt management, this is an important evolution for JICA. We have also received requests from private sector parties to provide local currency-denominated Private Sector Investment Finance (our private sector window). That is why there are discussions regarding the possibility to go to foreign currency debt capital markets for fundraising. Obviously this is a Government of Japan decision. If they do decide to permit JICA such flexibility we will then discuss the market and our options with bookrunners and determine the most appropriate strategy for our debut issuance carefully. We have been communicating so far mainly to international investors in Asian countries in order to familiarise our name to them and discuss the possibility of our tapping the international markets sometime in the future. EUROWEEK: If permission is granted by the authorities, would JICA issue with or without the state guarantee? Nagata: JICA would be a debut issuer in the offshore markets, and it would seem most prudent to issue with the national guarantee. Moreover, JICA provides concessional ODA finance and therefore there is a great need for the cheapest possible funding. The differential between Japanese government agencies in the offshore markets in dollars is roughly 30 basis points, or more, based on current market conditions. That provides a powerful incentive to use the state guarantee, if JICA is granted permission. w 10