2022 Perspectives for the Public Sector

Citi Perspectives for the Public Sector 25 Valentina Antill Head of Cross-Border and Public Sector Solutions, Citi John Finnigan Global Head of Development Organizations, Citi Risk Management Strategies for Special Drawing Rights (SDRs) T he announcement on August 2, 2021 that the International Monetary Fund (IMF) would issue $650 billion (about SDR 456 billion) in Special Drawing Rights (SDRs) to help countries fight the COVID-19 pandemic was historic. The allocation is the largest since SDRs were created in 1969 to supplement member countries’ official reserves, dwarfing the $250 billion allocated during the global financial crisis of 2007-2008. Countries have already begun to receive their share of the issue. SDRs are being distributed in proportion to countries’ quota shares in the IMF which means about $275 billion is going to emerging and developing countries; low-income countries will receive about $21 billion — equivalent to as much as 6% of GDP or 10% of international reserves in some cases. The new allocation could therefore prove extremely significant for many low income and other developing countries. By boosting liquidity, it will provide support to countries at a time when expenditure has increased and tax revenues have slumped. Moreover, it will reduce countries’ reliance on more expensive domestic or external debt. Ultimately, it should bolster the stability of the global economy. In addition to the IMF allocations, there has also been a large expansion of SDR-denominated loans and grants (another popular use of SDRs by a variety of development finance institutions). In continuation we use the term “SDR support” to capture the variety of SDR- denominated transactions. To use the SDR support efficiently, the receiving countries will need to consider appropriate SDR risk management strategies, as SDR constitutes a source of exchange rate exposure arising from the simple fact that it does not represent the official (local) currency of any country. Furthermore, the topic of SDR risk management is today of particular importance due to the unprecedented scale of SDR-denominated support unleashed, as well due to the increased importance of risk management strategies resulting from this last systemic shock to the emerging currencies. In this article we dissect types of SDR exposures arising from different forms of SDR and lay out pertinent hedging strategies and caveats. Maryna Asipchuk Cross Border and Public Sector Solutions, Citi Siva Elambooranan Risk Management Solutions, Citi