This week, Tonga’s National Development Summit featured a compelling presentation by Deepika Darshani, a Treasury Specialist from the Asian Development Bank (ADB), on a financial instrument that could hold significant promise for Tonga’s future: Local Currency Bond Markets (LCBMs).
While perhaps not widely known outside financial circles, LCBMs are a cornerstone of economic resilience and growth across Asia and the Pacific. And as Tonga looks for ways to unlock sustainable sources of financing that don’t overburden the country with foreign currency debt, this initiative could not be more timely.
What Are Local Currency Bonds?
Local Currency Bonds are exactly what they sound like—bonds issued in a country’s own currency rather than in foreign currencies like the US dollar or Euro. This simple distinction has profound implications. Issuing and borrowing in local currency protects countries like Tonga from currency mismatches, where exchange rate volatility can sharply increase debt servicing costs. This is a lesson learned painfully during the 1997-98 Asian Financial Crisis, which exposed many nations’ overreliance on foreign currency debt.
ADB’s Role in Developing LCBMs
Since the early 2000s, ADB has been instrumental in developing LCBMs across Asia. Starting with India’s Maharaja bond and expanding to countries like China, Malaysia, Indonesia, the Philippines, and Georgia, ADB has led the way in introducing local currency bonds and encouraging regulatory frameworks to support them. Their innovative use of “themed bonds”—such as green, gender, and health bonds—has further expanded the social impact of these investments.
Notably, ADB does not just participate in existing financial markets. It creates them. Whether it’s issuing the first AAA-rated bonds in emerging economies or piloting gender bonds in new territories, ADB has acted as a market pioneer and catalyst.
Why It Matters for Tonga
Tonga, like many small island developing states (SIDS), faces a triple vulnerability: climate change, geographic isolation, and economic dependency on foreign aid or remittances. Add to that the volatility of borrowing in foreign currencies, and the financial picture becomes even more precarious.
LCBMs offer Tonga an opportunity to:
- Reduce Currency Risk: By issuing and repaying debt in Pa‘anga, Tonga can avoid costly currency fluctuations.
- Expand Domestic Investment: LCBMs open up investment opportunities for local institutions, pension funds, and even retail investors.
- Attract International Impact Investors: Themed bonds—especially green or climate bonds—could attract foreign investors eager to fund renewable energy, climate resilience, and sustainable development.
- Develop the Financial Sector: Building a robust bond market would improve Tonga’s overall financial infrastructure and offer alternatives to traditional lending.
What Tonga Needs to Do
For Tonga to benefit from this powerful financial tool, several steps are needed:
- Regulatory Frameworks: Strengthening the legal and regulatory framework to support bond issuance and trading.
- Capacity Building: Training local financial institutions and government agencies to understand, manage, and promote LCBMs.
- Partnership with ADB: As demonstrated across Asia, ADB is willing to partner with governments to establish these markets, providing technical assistance, policy advice, and even initial bond issuances.
- Issuing Themed Bonds: Tonga has real opportunities to issue green bonds or gender bonds tied to climate adaptation, infrastructure development, and women’s empowerment.
A Glimpse Into the Future
Imagine a Tonga where renewable energy projects are financed through green bonds held by local investors. Imagine a robust domestic capital market that allows entrepreneurs to raise capital without relying on expensive overseas loans. Imagine an economy less exposed to foreign currency shocks, with a deeper financial cushion to respond to climate disasters.
This is not just economic theory—it’s the lived experience of countries like Mongolia, Kazakhstan, and Georgia, where ADB-supported LCBMs are transforming local development.
Conclusion
As Tonga charts its course toward a more resilient, inclusive, and sustainable future, it should seriously consider ADB’s invitation to join the growing network of countries leveraging Local Currency Bond Markets. The opportunity is there. The support is available. The future is waiting to be financed—locally.
By Melino Maka
