2022 Perspectives for the Public Sector

Citi Perspectives for the Public Sector 27 Table 1: SDR support, resulting exposures and hedging instruments TYPE OF SDR SUPPORT Hedging Instrument (IMF) Allocation Grant Loan TIME- SEGMENT From Approval to Receipt (or Conversion in case of Allocation) Long SDR Exposure (Short-Term) Long SDR Exposure (Short-Term) Long SDR Exposure (Short-Term) Non-Delivery Forward, Option From Disbursement (or Conversion in case of Allocation) to Repayment Short SDR Exposure when utilized N.A. Short SDR Exposure (Long-Term) Cross- Currency Swap Hedge of future SDR receivables (I.E. Hedging Long SDR Position) Hedge of future SDR payables (I.E. Hedging Short SDR Position) SDR Hedging Local Currency SDR (Upcoming Grants) SDR (Loan Re-Payments) SDR Hedging Local Currency Dynamics and risk consequences of SDR allocation When SDRs are allocated, a recipient’s liabilities increase by that amount, and at the same time, a matching increase occurs in their assets. Therefore, at the onset there is no exposure. However, once a recipient begins to use SDRs (for example, by exchanging them to USD and spending on a project), their assets decrease, thus creating a mismatch with liabilities, which in turn results in a short SDR position. This exposure is similar to that of a loan when it is disbursed and has to be repaid in the future. Also, as any reserves are meant to be used in the future, likely in USD or in local currency, the simple fact that the reserves are in SDR format triggers a long SDR position.