Perspectives 2019 2020 Public Sector

Citi Perspectives 25 Sustainable Sovereign Financing: Optimizing Resource and Risk Allocation Peter Sullivan Anh Khuat Over the past two decades Africa has enjoyed almost uninterrupted growth; a quarter of its countries achieved a real compound annual growth rate above 5.5% per year. 1 Part of this growth has been attributed to debt-financed infrastructure investment as African governments have sought to close its infrastructure gap and drive economic opportunities in the region. However, Africa governments continue to face increasing challenges in addressing its development gaps of $1.3 trillion per year. 2 The challenges are compounded by diminishing debt capacity and constraints to generate more internal resources due to low savings rates, sizable informal sectors and weak institutional capacity. As demand for development funding grows and supply of domestic resources remain static or declining, how will governments fulfill its pledges to achieve the ambitious “Sustainable Development Goals” (“SDGs” 3 )? Part of the solution is reflected in the seismic shift in investors’ attitudes and demand for investments in emerging markets that deliver both economic returns and social impacts. The market trends of “Impact investing”, “ESG 4 -focused funds”, and “Green Finance” are creating more accessible and flexible sources of liquidity for governments to tap into to finance the needs of SDGs. But how should governments approach these pools of money? Should private capital flows be left to traditional channels in support of commercially-orientated SDGs (e.g., SDG 9 — Industry, Innovation & Infrastructure ) while governments focus on directing their limited financial resources on socially-minded SDGs and developing policies and enabling environments that maximize the synergies from private sector interventions? Or should governments seek to divert more public resources to attracting private capital flows in support of the broadest possible range of SDGs while implementing the necessary policy and institutional frameworks to realize and maximize the intended social outcomes and benefits? In this article we will explore how governments can best allocate its finite resources to not only mobilize and direct significant quantum of private sector capital but achieve the maximum economic and social impact for their citizens. We will also identify the key building blocks governments need to adopt to scale and deliver the necessary financing to achieve the SDGs as well as achieving an effective and efficient allocation of risk. 1 On a compounded annual basis. Source: calculated from IMF data 2 UNEP Finance Initiative: Rethinking Impact to Finance the SDGs https://www.unepfi.org/wordpress/wp-content/uploads/2018/11/Rethinking- Impact-to-Finance-the-SDGs.pdf 3 UN Sustainable Development Goals https://sustainabledevelopment.un.org/?menu=1300 4 Environment, Social & Governance