Perspectives 2019 2020 Public Sector

Citi Perspectives 17 Conclusion Emerging and frontier market countries face the greatest hurdles to achieving the 2030 SDG goals, especially with regards to funding the necessary investment. The scale of the increase in finance required means that existing approaches — principally sourcing capital in USD — will put these countries at an unacceptable risk given their propensity to suffer periodic EM crises. Furthermore, it is unclear whether international investors are willing to fund EM investment on the scale required. Local currency conversion of existing Development Bank USD loans is the first step to consider in de- risking frontier markets balance sheets, alongside the focus on denominating any new debt in local currency. In the case of frontier markets, given their swap market illiquidity and lack of investors, this may not be possible. Nevertheless, there are solutions involving proxy indices, currencies, commodities or customized baskets that could notably reduce the risk of local currency devaluation. Some may argue that a typical frontier government lacks the sophistication to run “proxy” or “basis” risk between its local currency movements and currencies of its trading partners. But frontier governments currently run a much larger “basis” risk between local currency and the USD market. This risk requires much greater sophistication to manage than risks related to similar economies and directly relevant current account drivers. In short, any reduction of local currency/USD risk by shifting it “closer to home” is the right direction to travel. Amongst the highlighted solutions, we believe that the currency basket approach harbors the biggest benefits, addressing the liquidity issue and enabling larger size transactions, while avoiding exposure to vagaries of a single currency or commodity. Finally it is worth noting that frontier markets have a genuine need for a systemic, scalable solution that can ramp up development financing. Development Finance Institutions can play a critical role as an intermediary, using their influence on policy, technical expertise and innovations in development finance to unlock capital at scale and make the SDGs a reality. John Finnigan Global Head of Development Organizations, Citi Valentina Antill Head of Strategic Risk Solutions for the Americas, Citi Gabriel Kimyagarov Financial Strategy and Solutions Group, Citi Vassiliy Tengayev Strategic Risk Solutions, EMEA, Citi Guocheng Zhong Financial Strategy and Solutions Group, Citi