2024 Public Sector Perspectives

Citi can create new opportunities for MDBs/DFIs to lend in local currencies by leveraging three distinct direct local currency financing solutions: • Single currency bilateral lending; • Multi-currency bilateral lending; • Syndicated financing structures for larger MDBs/DFIs. These offerings provide MDBs/DFIs with a flexible means to source local currency that can be tailored to their short- and long-term needs while allowing them to navigate the challenges associated with foreign currency lending more effectively. Simultaneously, these solutions benefit Citi by optimizing the utilization of local balance sheets. Specifically, they release regulatory capital, as a 0% risk weight is applied to exposures to MDBs that meet rating, shareholder structure and other criteria. 5 In contrast, deploying capital against local clients or central banks may carry a higher risk weight and could therefore erode Citi’s return on tangible common equity and its potential lending capacity. Citi’s approach facilitates the flow of capital where it is needed most – enabling growth and the progress of the communities the bank serves – while also bolstering the mission of MDBs/DFIs to promote sustainable development globally. While Citi cannot eliminate all of the challenges associated with local currency lending, the bank’s new approach delivers significant benefits for MDBs/DFIs, their borrowers and – by extension – the sustainable development of emerging market countries. As the world navigates the complex economic, financial, geopolitical and sustainability challenges of the coming years, Citi stands ready to collaborate and drive the transition to local currency lending, ushering in a new era of sustainable development and progress for all. Citi’s approach facilitates the flow of capital where it is needed most – enabling growth and the progress of the communities the bank serves – while also bolstering the mission of MDBs/DFIs to promote sustainable development globally. Overcoming the challenges of local currency lending Facilitating a shift toward local currency lending requires partnership and innovation. Collaboration between MDBs/DFIs, governments, private sector partners, and financial markets in developing economies is critical. MDBs’ and DFIs’ utilization of direct local currency financing from commercial banks with a global footprint such as Citi has the potential to solve for currency mismatches and align with the unique requirements of individual projects, offering a degree of flexibility that pooled capital often lacks. Direct local currency financing expands the portfolio of available options to efficiently obtain local currency beyond local bond markets (which may be insufficiently deep or liquid) and cross currency swaps (which can be expensive and inflexible). In addition, this approach can reduce brokerage costs. Moreover, direct local currency financing solutions can be tailored to MDBs’ needs in terms of size, tenor, repayment method, currency available and other terms. For instance, commercial bank lending can take the form of either a revolving credit facility (RCF) or a term loan, depending on the specific project requirements. In cases where project visibility is limited, opting for a more adaptable solution such as an RCF can be advantageous, as it establishes a framework for local currency lending. Another crucial lesson is that local regulations play a pivotal role when extending direct local currency financing. Some countries, such as Turkey, may have regulatory requirements for commercial banks that make it difficult to provide local currency solutions for MDBs. To overcome such challenges, commercial banks and MDBs should work with governments and regulators to enhance regulation in the relevant countries in order to facilitate these solutions. Ultimately, these efforts – and solving the local currency lending conundrum – can deliver outcomes that benefit all, fostering development for the host country, addressing the local currency needs of MDBs, allowing international banks to efficiently leverage their local balance sheets and accelerating financing for projects for last-mile borrowers, where investments and impacts are needed the most. MDBs’ and DFIs’ utilization of direct local currency financing from commercial banks with a global footprint such as Citi has the potential to solve for currency mismatches and align with the unique requirements of individual projects, offering a degree of flexibility that pooled capital often lacks. 5 Source: https://www.bis.org/bcbs/publ/d424.htm Citi Perspectives for the Public Sector 11 10 HowGlobal Development Finance Institutions Can Solve the Local Currency Lending Conundrum