2026 Perspectives for the Public Sector

From Vulnerability to Viability: Best Practices and Financial Instruments for State- Owned Enterprises Hanan Amin-Salem Co-Head Global Public Sector Sovereign Solutions & Advisory Gerard Arabian Public Sector, Middle East & Africa Reid Fennerty Public Sector Sovereign Advisory & Solutions Karim Soubra Public Sector Sovereign Advisory & Solutions Harris LaTeef Public Sector, Global I. SOEs: Dual Role Can Amplify Sovereign Risks S tate-owned enterprises (SOEs) serve as instruments of national policy, established by governments to fulfill crucial mandates. They frequently provide essential services in infrastructure, energy, and finance, acting as catalysts for development in areas where the private sector is absent or unwilling. SOEs can also offer stability during economic downturns by sustaining employment and investment. However, their dual function as public service providers and commercial entities introduces significant risks. Operational or financial weaknesses within the SOE sector can have broader economic repercussions, hindering growth, straining public finances, and compromising external stability. SOEs can impede growth by crowding out private investment and distorting resource allocation, even if unintentionally. Loss-making SOEs often seek support from state banks or the national budget, consuming liquidity and capital that could otherwise be directed towards more productive sectors. During periods of stress, SOE losses frequently become government liabilities through subsidies, equity injections, or assumed debt guarantees, transforming “quasi-fiscal” activities into tangible fiscal burdens, in turn resulting in widening budget deficits and increased financing needs. Contingent liabilities from SOE debt can also unexpectedly impact the government’s balance sheet, particularly when these enterprises are highly leveraged or dependent on foreign currency borrowing. Citi Perspectives for the Public Sector 29