2024 Public Sector Perspectives

Local-currency offering considerations Sovereign Local Currency Linked Bond Overview • International bond offering • Denominated in local currency • Fixed rate coupon • Local, regional and international institutional investors Currency • Local currency linked (settles in USD and debt service paid in USD). The FX mechanism is determined in advance Sizing • Varies by sovereign’s financing needs and investor appetite Marketing • May need Deal roadshow (subject to each sovereign) Tenor • Depending on first issuance or regular issuer Pros • New source of liquidity • Reduces reliance of USD funding • Strong interest from international investors in the product • Provides hedge against excessive exposure to FX risks Cons • Higher execution risks, potential impact on FX market Example case study: Dominican Republic Transactions background • The Dominican Republic’s foreign currency debt currently represents approximately 70 percent of its total debt outstanding. In response to this challenge, the government made it a policy priority to continue expanding its local currency debt, investor base as well as reduce its overall foreign-currency exposure and, ultimately, decrease external vulnerability risks. • In pursuit of its goal, the government issued several DOP-linked international bonds and used the proceeds to execute liability managements. • In January 2023, the DR priced an approximately US$ 1.8 billion dual- currency offering consisting of approximately US$1.1 billion of new 13.625% Global DOP Notes due 2033 and US$ 700 million of new 7.050% USD Global Bonds due 2031, priced at par. Concurrently with the new issue, the government successfully executed a liability management exercise consisting of a 5-day cash tender offer for its existing 8.900% Global DOP-linked Notes due 2023. The exercise extended the maturity on existing debt, extinguished USD debt, and reduced the foreign-currency debt. NewDOP-linked debt to aid 2023 financing needs: $ 1.1 Bn yield: 13.625% Maturity: 2033 New USD debt: $ 700Mn yield: 7.050% Maturity: 2031 Extinguished USD debt: Maturity: 2023 $ 657 Mn yield: 8.900% • Later, in September 2023, the DR again priced a new DOP-denominated US$ 1.25 billion senior unsecured 12-year global bond due 2035 that priced at par with a coupon of 11.250%. Concurrently with the new issue, the government successfully achieved another liability management exercise consisting of an accelerated 4-day cash tender offer for its existing 9.750% Global DOP-linked Notes due 2026. Transaction highlights January 2023: • Largest combined hard and local currency-linked bond offering ever printed by the DR in the global debt markets , anchored by strong international participation in the Global DOP tranche. • First ever DOP-linked liability management exercise done by the DR and the tender offer achieved the highest ever participation rate. It also achieved the highest overall hit ratio achieved by the DR in any liability management transaction . • Maturity extension of DOP-linked debt of 10 years and US$ 1.1 billion in newmoney for 2023 funding needs. September 2023: • Largest local currency-linked international bond offering ever printed by the DR in the global debt markets , anchored by strong international demand, representing 60% of the orderbook. • Largest-ever DOP-linked liability management exercise done by the DR. • With this transaction, the DR established itself as a leading local currency-linked issuer with deep access to international markets. Conclusion The successful debt currency switch in Latin America has been driven by government actions, reforms, and improved debt management strategies, including the leveraging of multiple local currency funding sources such as local debt issuances, local linked currency external debt, Global Depository Notes, and the de- dollarization of multilateral debt, among other initiatives. All these efforts have resulted in greater local market depth and the greater ability of sovereigns to finance themselves internally or with local currency-linked issuances, which has been key in the face of multiple shocks. The region has demonstrated significantly greater resilience to external shocks today in comparison to previous decades, successfully weathering recent crises. Therefore, sovereigns with policy goals to reduce foreign exchange risks can use local debt as a vehicle to increase funding sources, reduce refinancing risks, improve domestic liquidity, enhance domestic markets and leverage local currency; thereby helping to provide greater financial stability, improve economic growth and reduce exposure to external exogenous shocks. For example, Chile, the DR, Peru, Uruguay, and Jamaica all issued local currency or local currency- linked international bonds this year, highlighting the growing demand among sovereigns for these solutions. At the same time, there was investor interest in these securities (which can vary depending on multiple factors). Nevertheless, the share of new bond issuances of this sort in the first six months of 2023 increased to 14% from 8% in 2022. In the first half of 2023, there were issuances in local currency or linked including: Chilean Peso, Dominican Peso, and Peruvian Soles. Sovereign local currency linked transactions, Citi has led the below transactions Note: Includes local currency and local currency-linked transactions A local currency-linked bond is a financing alternative that can provide numerous benefits to sovereigns. This is illustrated by the Dominican Republic’s case below. DR – local liability management and local currency-linked Eurobond In line with the Dominican Republic’s policy goal to reduce foreign currency debt, the sovereign pursued several Dominican Peso-linked sovereign bond issuances this year. As a result of the transactions, the country was able to lower its foreign currency debt as a percent of total from 71.8% to 68.7% as of September 2023. The first transaction by the Republic was carried out by taking advantage of favorable market conditions, including the positive momentum generated by the S&P sovereign rating upgrade to BB which helped the DR repurchase its bonds maturing in 2026; the rest of the resources were allocated to the financing needs in the General Government Budget for 2023. In turn, this transaction helped to increase the average time to maturity by 0.23 years, reducing the governments refinancing risk. Notably the transaction also highlighted the interest in DR peso linked bonds, demonstrating investor trust in the credibility of the government agenda and the currency. Meanwhile, the Government’s firm commitment to executing its medium-term debt strategy, reducing both refinancing and exchange risk, was in line to continue making progress towards the DR’s goal of reaching 62 percent FX debt as percent of total by 2027. Citi Perspectives for the Public Sector 81 80 The Currency Switch: How the Expansion of Local Debt Markets Has Provided Greater Financial Stability to Latin America