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Citi Perspectives for the Public Sector
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2015 – 2016
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In order to move beyond old fashioned A-B
Loan structures, and mitigate today’s game-
stopping infrastructure risks, like construction
and foreign exchange, sponsor governments
and developmental institutions will have to
make some breakthrough moves to sort out the
complex infrastructure risk-return Rubik’s cube;
there is no free lunch. Institutional investors
will also have to be smarter in linking their EM
allocations to their infrastructure capabilities.
Development institutions will have to be more
forthcoming, and even aggressive, in credit-
enhancing structures to push the debt into the
investment-grade sweet spot and make equity
returns viable for Alternatives investors. The
challenge is perhaps even bigger than it seems;
sovereign equity funders of development
institutions are set on maintaining AAA and AA
ratings, despite the leverage upside, and rating
agencies are applying a Basel III approach to
the development bank community. In short, this
means that the risk and credit organizations of
many developmental institutions think about
and take risk no differently than, for example,
Citi. The infrastructure opportunity in the
capital markets will not be realized and the
SDG financing gap will not get closed without
fundamental changes.
Another significant opportunity to harness
the power of capital markets is to further
extend the size, breadth and reach of thematic
bonds. Citi is a believer in the power of
thematic bonds that combine development and
sustainability themes with the power of global
institutional markets. Citi began this journey
with our innovation in the Green Bond space,
underwriting green bonds for International
Financial Institutions like the IFC. Green bonds
have witnessed explosive growth. Yet the
thematic bonds done to date are only the tip of
the iceberg; local capital market variations and
new SDG-related themes continue to emerge,
as we saw recently with the InterAmerican
Development Banks’ EYE bond (priced at USD
500 million 1.50% on Sept. 17, 2014), dedicated
to Education, Youth and Employment.
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Thematic
bonds can also incorporate risk mitigation
strategies, such as in the growing Catastrophic
Bond (CAT Bond) market, designed to push
natural disaster risk into the capital markets.
We believe that the CAT bond experience will
eventually progress into capital market funding
solutions for pandemic risk, an increasing
priority for Dr. Kim’s World Bank.
Whether it is done through infrastructure
projects or thematic bonds, extending the
financial reach of development funding
initiatives to local capital markets and
simultaneously promoting domestic resource
mobilization is critical. The IMF has done
extraordinary work in demonstrating the
historical developmental impact of local
currency capital markets. This impact will
only grow in the financial world of the future.
And with Citi’s local, on-the-ground presence
in many developing countries — including
emerging and frontier markets — we are well-
positioned to actively support the further
development of domestic capital markets.
New Risk-Sharing Structures and the Potential
of Blended Finance
In order for the private sector to move its
participation in the SDG effort from billions
to trillions, and to drive a massive step up in
the flow of capital to the newly crafted SDGs,
Citi and other private sector participants will
have to come up with even more creative and
scaled financing structures. Blended finance
solutions that leverage grant or concessionary
financing from philanthropic or public sources
to make development projects financially viable
or “bankable” will need to go viral. Financial
structures that incorporate risk-sharing with
the public sector, enabling the private sector to
achieve appropriate risk-adjusted returns, must
be front and center.
Blended finance, conceptually, is not new. In
fact, for years Citi has been partnering with
the World Bank Group’s Multilateral Investment
Guarantee Agency and with the U.S. Overseas
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InterAmerican Development Bank