Perspectives 2019 2020 Public Sector

Citi Perspectives 63 Tailored LM operations can address the above mentioned risks. Below is a selection of the most common operations: Debt Exchange Offers are used to either extend the debt maturity profile of a government, or to consolidate a smaller series of outstanding bonds into a larger benchmark series. Refinancing is applied, as an example, to high-coupon legacy 30-year government bond issuances, which can be refinanced with lower-coupon 30-year, or long dated funding, current market conditions permitting. De-dollarization strategy is applied to reduce foreign exchange risk: it consists in repurchasing US Dollar (US$) denominated notes funded with proceeds from domestic debt issuances. This strategy has become increasingly common for investment grade sovereigns with a developed US$ and local funding curve, such as Peru or Uruguay. As domestic funding markets have become more robust in size and product mix, the de-dollarization strategy has grown largely due to innovative local capital markets products (such as Citi’s GDN program) created to allow for international investors’ ability to hold domestic securities through international clearing systems, such as Euroclear or the Depository Trust Company (DTC).  3. LM operations add institutional strength to the debt management framework Regular LM operations contribute to a solid debt management framework. It builds upon the institutional strength of the sovereign debt management office, improving its credibility to apply sound policies that foster debt sustainability and fortify the public debt profile of a country. Institutional strength in debt management operations signals to local and international market players the effective application of a strong rule of law, as well as a political willingness to ensure prudent policies are applied over the length of the economic cycle. Both require increased transparency and communication with market players, which in turn generates a higher degree of confidence towards the sovereign. Sovereigns that employ active liability management practices often benefit from increased trading liquidity, as market investors position themselves in anticipation for the next LM transaction. In the medium term, these operations also improve market players’ perception of the government, leading to an improved sovereign credit rating which decreases the cost of its future funding operations. 4. Case study: Ecuador’s first liability management exercise In the first half of 2019, Citi accompanied the Republic of Ecuador on its first sovereign liability management operation. Since the election of the Moreno Government in 2017, the Republic of Ecuador has undertaken steps to strengthen its economy and ensure inclusive growth. Next to social and fiscal reforms, the Ministry of Finance is working on solutions to reduce fiscal pressures stemming from the increased cost of servicing its government debt. The debt management office was also keen to tackle potential refinancing risk stemming from upcoming external government debt maturities due in 2020. The Government of Ecuador undertook its first ever LM addressing both of these issues. The aim of the exercise was to extend the maturity profile of the existing government debt portfolio while taking advantage of the current market rally. The opportunistic timing of the operation presented it as a well-thought strategic exercise to Ecuador’s bondholders and an integral part of Ecuador’s debt management framework. The LM exercise started as a tender offer composed of a two-step approach. In the first step, the government of Ecuador priced $1,125 million in the international markets with the re-opening of its bond maturing in 2029. The second step opened up a six day tender offer period, where the newly re-opened bond was offered as a liquid benchmark for bondholders of Ecuador’s sovereign bonds to tender the notes maturing in 2020.