Perspectives 2019 2020 Public Sector

Citi Perspectives 27 Funding gap is particularly large in Africa (SDG investment needs and SDG investment flows p.a, $ trln) Source: UNEP Finance Initiative: Rethinking Impact to Finance the SDGs Advanced Economies Investment Public capital Private capital Gap 0.1 1.5 0.4 1.1 Emerging & Developing Economies Investment Public capital Private capital Gap 2.3 4.5 1.2 1.0 Africa Investment Public capital Private capital Gap 1.3 0.1 0.1 1.5 Public capital flows towards SDG investment in Africa remain limited given the constraints in domestic revenue mobilization. Based on the OECD’s assessment of 21 major economies in Africa, the average tax to GDP ratio in 2016 is 18.2%, far below the OECD average of 34.4% 5 . Africa’s average tax capacity is estimated at 20% of GDP, the lowest in the world, and almost 10 percentage points below that of OECD countries 6 . This is driven by the developing nature of African economies, the dominance of agriculture in economic activities and a large informal sector. In addition, Africa has the second longest average time to comply with tax payments globally, just after South America 7 . A low tax capacity and inefficiency in tax collection have resulted in perennially low tax revenues in the region, leaving governments insufficient internal resources to finance growth and development. With limited internal resources, many governments have sought borrowing to bridge the financing gap. Developmental spending has been a major driver of increasing debt levels in Africa over the past decade. However these levels still remain moderate compared to HIPC era in the mid-90’s. While we don’t think a debt crisis is imminent, the headroom is narrowing for governments to continue relying on borrowing to finance growth and development. In addition, rising public debt has increased the debt servicing burden, which in turns consumes a growing share of tax revenues. Governments will need to strike a balance between meeting development needs and maintaining debt sustainability. Private capital flows for investments in Africa has historically been constrained by the risk and return requirement. Investors focus on the “headlines” risks that are most associated with the African region, including political instability, corruption, weak institutional capacity, liquidity risk, currency risk and commodity risk, etc. Returns on commercial projects often do not stack up to these “perceived” risks. Meanwhile, there has been a major strategic shift in institutional investors’ attitudes towards ESG investment in recent years. ESG is no longer a peripheral matter, but a fundamental financial and strategic driver of firms’ performance. As such, ESG has become a growing mainstream asset class for investors who want to both “do well and do good”, and a global opportunity for issuers looking to diversify investor base and tap into an abundant supply of capital. To put this into context, almost 2300 institutional investors with over $80 trillion of assets under management globally have already signed up to the UN-backed Principles for Responsible Investment 8 , demonstrating their commitment to invest in ESG, report these investments, and to be active owners by incorporating ESG in their portfolio management practice. In addition, the Green, Social and Sustainability bond market has already reached $498bn of outstandings, with year-to-date issuance of $159bnm, implying a 60% increase versus the 5 http://www.oecd.org/tax/tax-policy/brochure-revenue-statistics-africa.pdf 6 OECD estimates, https://www.brookings.edu/wp-content/uploads/2018/10/Mobilization-of-tax-revenues_20181017.pdf 7 PwC: Paying Taxes 2018 report https://www.pwc.com/gx/en/paying-taxes/pdf/pwc_paying_taxes_2018_full_report.pdf 8 https://www.unpri.org/pri/about-the-pri