Perspectives 2019 2020 Public Sector

Conducting Sovereign Liability Management: An Indispensable Step to Building Up Economic Strength Anna Corcuera Joyce Lam In recent years we have seen a number of new sovereigns join seasoned players in raising funds on the international capital markets, where they have taken advantage of low cost of funds to invest in their growing economies. As a result, foreign currency debt in emerging and frontier markets has risen to new levels. Mature economies can provide valuable best practices to newcomers with a hands-on approach to optimize sovereign liabilities. This guidance can help new issuing sovereigns manage debt repayments across economic cycles and reduce risks related to changing economic climate, natural disasters or financial market risks. We observe that many Liability Management (LM) exercises tackle a small portion of a country’s outstanding debt, and over the long term may contribute to a positive impact on sovereign ratings. Therefore, LM exercises are important and should be part of all sovereigns’ debt management best practices as they provide significant risk reduction to emerging market countries with increased exposure to domestic and international markets. Citi is a market leader in Sovereign LM, a product offering Citi often incorporates as a parallel solution when assisting sovereigns raise new funds in the international capital markets. Increasingly popular LM Strategies include proactively extending the average life of the debt profile and opportunistically addressing upcoming short term maturities before unexpected market dislocations occur. The application of regular LM exercises has created a track record of enhanced debt management practice in-country, and a sovereign’s improved perceptions with international bond holders. 1. Sovereign LM exercise: a risk management tool to strengthen macroeconomic policies Growing emerging economies have so far been able to access local and international markets more frequently to complete their funding needs. This has raised their levels of government debt relative to GDP and relative to their exports receipts. The ability to service the related cost of debt effectively becomes increasingly important to maintain macroeconomic stability. Citi Perspectives 61