bne IntelliNews – OPINION: Frontline state bonds for refugees can fund influx to Ukraine
The wartime exodus of hundreds of thousands of Ukrainian refugees so far to immediate neighbors Poland, Romania and Hungary is unprecedented in the past decade as a displacement within the Europe, but follows a clear familiar pattern as the continent last tried to absorb 1 minute fleeing the carnage of Syria. According to the United Nations, 80% of the world’s 80m commuter population is from one emerging or low-income economy to another. In the Syrian tragedy that has been going on for 10 years, Turkey, which hosts 3mn, is the main destination, followed by Jordan and Lebanon. 2 million Venezuelans are in Colombia and spread throughout the Andean region, and Pakistan with the same number has welcomed another wave from Afghanistan in the last six months.
In the 2015 saga, Central Europe and the Balkans were staging posts on the way further west, although there were asylum seekers who wanted to stay. Instead, they were denied entry and turned away because EU migration policy was ill-defined, with no enforcement mechanism for shared resettlement, and these economies in the aftermath of the global financial crisis and of the Eurozone debt crisis alone lacked the fiscal power to manage humanitarian, infrastructure and employment needs. . Brussels has considered using the supranational balance sheet to issue refugee bonds whose proceeds would be distributed among members, but the program has gained little traction. Before the pandemic, Germany in particular rejected a collective EU bond, but since then billions of euros have been borrowed this way for the recovery fund. An obvious alternative, adapting local and external bonds already present in the portfolios of major emerging market investors, was considered but never attempted. The case of Ukraine repeats these characteristics, and pilot deals are long overdue and can quickly raise billions of dollars in long-term private finance, as opposed to chronically underfunded UN appeals and indirect and nits from official lenders in the field.
Poland, Hungary, Romania and smaller locations are established investment grade or borderline investment grade credits. Poland’s Ukrainian community numbered in the millions before the bombing of Russia, with dedicated work-family migration programs, and the close relationship was also reflected in terms of the financial market. The Warsaw Stock Exchange has a sub-index of Ukrainian listed companies, from agriculture to e-commerce, as cross-border links with brokers date back to the early days of post-communist securities market development. In the early 2000s, the country pioneered private pension funds and tried to introduce the model to its neighbor, who adapted a diluted version.
During the COVID-19 outbreak, the central bank, with sophisticated government bond markets and hard currency at its disposal, was able to adapt advanced economy-style quantitative easing into fiscal policy and monetary policy with a program of 5% of GDP. It can easily redirect normal sovereign bond issuance locally and externally for the refugee emergency. An indicative structure was outlined in a publication last year by the Canada-based World Refugee Council, “Emerging Market Finance Application: A Roadmap.” A rebate would be tied to detailed reports on product usage verified by outside parties such as incumbent relief agencies, and where feasible cash flows could be identified from users able to pay for housing and utilities . A wide range of conventional retail and institutional investors have Polish bonds in their portfolios, and the instrument would still have a competitive yield as well as novelty value. ESG or impact investors would naturally be drawn to the issue as falling into the socially sustainable category.
A dedicated public investment fund could also be designed building on the existing Ukrainian platform to channel money to companies willing to hire refugees, or design specific products and services or technology applications to facilitate immediate adjustment and integration. Development lenders are already experimenting with a so-called refugee lens to measure cash outcomes much as they do gender with small-scale micro-enterprises and financial support. The scale and duplicability that can translate into big business results is lacking, like in a regular mutual fund or even a thematic ETF, again with socially responsible investors jumping on the bandwagon.
Hungarian Prime Minister Viktor Orban is facing a united opposition for the first time in an election too close to be called in April and has reversed his longstanding anti-migrant hardline by accepting Ukrainians. Without deflecting from the xenophobic logic behind the previous stonewalling, his initial reservations in 2015 were highly budget-specific, as the banking system was also marred by the foreign currency mortgage debacle. This problem has been overcome, and so far this year the local bond market has been a favorite of non-residents amid aggressive rate hikes to combat near double-digit inflation. Refugee versions could also be introduced at this stage, and instead of the eternal fight with the EU over the election period, common ground could be found in a guarantee or credit enhancement from Brussels.
Romania, Slovakia, the Czech Republic and even Moldova, which are considering a return to sovereign bond markets after a pro-Western, business-friendly government comes to power, offer ample scope to deploy a range of capital market instruments linked to the displacement from the existing base. In the unprecedented outpouring of hospitality, the long obsolete mold of managing this dilemma combining humanitarian and economic development may also be broken. Commercial debt and equity markets can help bridge financing and policy gaps, and rally the interests of banks and fund managers to the public interest with the same vigor seen in the outrage over the shock of the cross-border attack by Russia, an original member of the BRIC.