2026 Perspectives for the Public Sector

Such solutions include re-denominating a portion of SOE debt servicing from nominal instruments to commodity- linked instruments, thereby tying debt repayments directly to the performance of the underlying commodity. This creates a natural hedge against price fluctuations and aligns debt costs with SOE revenue streams. Furthermore, establishing specialized commodity-linked liquidity facilities can provide a critical safety net. These facilities would allow the SOE, or even the central government on its behalf, to secure financing at pre-determined pricing levels if the underlying commodity price reaches a specific strike price, ensuring liquidity during periods of adverse price movements and reducing fiscal stress. 2. Alternative Funding: Exploring Alternative Funding Sources beyond Subsidies Many SOEs operate under a mandate to provide essential services at prices below their production or operating costs, frequently resulting in operating losses that are then typically covered by subsidies from the central government. While these subsidies often provide crucial lifelines to low-income households, they also strain SOE finances and elevate their financing costs. Consequently, actively pursuing alternative funding solutions is imperative to optimize debt costs and reduce reliance on direct government transfers. The two potential solutions discussed belowmay overcome these challenges: i) Security-Based Lending: This mechanism involves raising financing secured by sovereign bonds, allowing the SOE to leverage the creditworthiness of the sovereign by using these bonds as collateral. This approach offers several benefits, including enabling the SOE to obtain financing at more competitive rates due to the backing of sovereign assets. Additionally, for the central government, such a structure might be accounted for as off-balance sheet debt, offering cash flow optimization for both the SOE and the Ministry of Finance without directly increasing government debt. ii) Tariff-Backed Lending: As governments frequently utilize SOEs to ensure that basic services remain affordable for all citizens, particularly for the low income households, this often means that increasing tariffs to cover costs can be politically sensitive—potentially risking social hardship and contributing to overall inflation. Tariff-backed financing can be considered as a preliminary bridge towards tariff liberalization, involving a financing structure backed by the proceeds from a gradual increase in tariffs. This solution effectively spreads out the impact of sharp tariff hikes over an extended period, alleviating short-term liquidity pressures on an SOE’s balance sheet while allowing for a more socially equitable and economically manageable transition towards cost-reflective pricing. Executed Simplicity • No derivative/marketing • No new bond issue Long-TermCounterparty Credit Risk Issues “Addressed” • Swap executed between Citi and (AAA-rated) Supra, under their ISDA and CSA • Minimal counterparty credit/capital charges Caveats/Other • Supra loan has to have “currency conversion” clause • Supra to have loans to the SOE, willingness and “readiness” (e.g., ISDA, approvals) to perform loan desired (esp. multi-currency) conversion USD Principal + Interest Cross-Currency Swap Hedge LCY Principal + Interest USD Loan indexed to LCY (i.e., USD loan + emb. LCY-USD swap) LCY Principal + Interest (USD settled) Example of USD Load Redenomination to Local Currency “LCY” via Multilateral Development Bank (“MDB”) SOE Supranational USD Interest USD Funding Citi Perspectives for the Public Sector 33