Perspectives 2020-2021 Public Sector

Citi Perspectives for the Public Sector 12 13 Public Sector Investment Funds, including central banks, public pension funds and sovereign wealth funds, account for over half the world’s professionally-managed assets. Investing Post-COVID-19: Challenges and Responses Investing Post-COVID-19: Challenges and Responses P ublic Sector Investment Funds, including central banks, public pension funds and sovereign wealth funds, account for over half the world’s professionally- managed assets. In this article, we outline ways that they can respond to today’s challenges, many intensified by the COVID-19 crisis, and highlight practical approaches to help navigate this evolving and complex risk environment. Central bank balance sheets were near record highs before the onset of COVID-19; most were not meaningfully reduced as the global economy recovered following the Global Financial Crisis (GFC), and some continued to expand over the past decade (see fig. 1). Now, in an effort to combat the economic disruption caused by the COVID-19 crisis, central banks around the world are engaging in monetary easing at an unprecedented rate and scale, swelling balance sheets to levels almost unimaginable 12 months ago. Michael Paulus Head of APAC Public Sector Group, Citi Anh Khuat Public Sector Group, Citi Robert Crossley EMEA & APAC Head of Citi Business Advisory Services, Citi Winnie Zhang Public Sector Group, Citi Sophia Oh Public Sector Group, Citi Fig. 1: Central Bank Balances Failed to Shrink After the GFC As part of efforts to encourage banks to lend and stimulate growth, a number of central banks have implemented negative interest rate policies, which has had far-reaching consequences for sovereign debt. At $17.9 trillion at the end of September 2020 1 , the volume of negative yielding sovereign debt globally is nearly three times the level of late 2018 2 (fig. 2) and is 31% of total outstanding sovereign debt 1 . Indeed, there is even more negatively yielding debt in real terms. 12 Sources: • United States: Federal Reserve System Annual Reports from 2005 - 2019, and Audits as of 31 August 2020 • United Kingdom: Bank of England Annual Reports from 2005 -2019, and Weekly Reports as of 2 September 2020 • Japan: Bank of Japan Annual Reports from 2005-2019, and Account Audits as of 31 August 2020 • European Central Bank: ECB Annual Reports from 2005 -2019, and Weekly Statements as of 4 September 2020 • Canada: Bank of Canada Annual Reports from 2005-2019, and Account Audits as of 31 July 2020 1,295 1,445 2,067 3,053 2,654 2,658 3,807 3,809 3,020 2,935 3,086 4,052 5,049 5,554 5,233 10,846 1,371 1,246 958 1,099 1,326 1,390 1,785 1,748 1,692 2,288 2,674 3,739 4,371 4,786 5,111 9,512 135 232 345 368 512 631 666 624 573 680 816 775 1,646 847 873 915 2,246 2,235 2,428 2,919 2,917 4,024 4,498 4,485 4,453 4,450 4,058 4,174 10,526 3,593 3,655 4,069 6,607 6,509 6,880 8,944 9,063 9,455 10,473 10,948 12,897 14,636 15,303 15,383 33,218 - - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (annualized) G7 Central Banks Balance Sheet Trend (in billion USD) Canada European CentralBank Japan United Kingdom United States Total Federal Reserve System Bank of England Bank of Japan ECB Bank of Canada CAGR of 2009-2019: 8.98% CAGR of 2014-2019: 7.99% Growth Rate of 2019 - 2020 (annualized): 115.94%