The creation of an independent and transparent benchmark index and “investability” rankings of countries’ local-currency bonds markets are expected to facilitate external financing flows to emerging markets. Like portfolio equity flows, however, the Gemloc is likely to favor middle-income countries with market access. Although the Gemloc plans to include Kenya, Nigeria and West African countries in a subsequent phase, most of the countries selected for the first phase (for example, Brazil, China, India and South Africa) are countries with sovereign ratings in the BB or BBB category. It is also not entirely clear whether the Gemloc would result in additional funding or whether it might substitute portfolio equity flows.<sup>30</sup>

# **_Future-flow securitization_**

Sub-Saharan African countries can potentially raise significant bond financing by using securitization of future-flows, such as remittances, tourism receipts and export receivables. Securitization of future hard-currency receivables is a potential means of improving the access of Sub-Saharan African countries to international capital markets. In a typical future-flow transaction, the borrower pledges its future foreign-currency receivables—for example, oil, remittances, credit card receivables, airline ticket receivables—as collateral to a special purpose vehicle (Ketkar and Ratha 2001, 2005). The special purpose vehicle issues the debt. By a legal arrangement between the borrowing entity and major international customers or correspondent banks, the future receivables are deposited directly in an offshore collection account managed by a trustee. The debt is serviced from this account, and excess collections are forwarded to the borrowing entity in the developing country.<sup>31</sup> This future flow securitization mitigates sovereign transfer and convertibility risks and allows the securities to be rated better than the sovereign credit rating. These securities are typically structured to obtain an investment grade rating. For example, in the case of El Salvador, the remittance-backed securities were rated investment grade, two to four notches above the subinvestment grade sovereign rating. Investment-grade rating makes these transactions attractive to a wider range of “buy-and-hold” investors (for example, insurance companies) that face limitations on buying sub-investment grade. As a result, the issuer can access international capital markets at a lower interest rate spread and longer maturity. Moreover, by establishing a

> 30 Under a more recent proposal advocated by the World Bank, sovereign wealth funds which are estimated to hold more than $3 trillion in assets would be encouraged to invest 1 percent of that in Sub-Saharan Africa. This proposed “one percent” initiative would use the GEMLOC bond index and investability rankings (as well as promote the development of other market-based indices) to encourage investments by sovereign wealth funds in African markets. If successful, this would translate into $30 billion of additional resource flows to African countries.

> 31 Such transactions also often resort to excess coverage to mitigate the risk of volatility and seasonality in future flows.

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