THE CHANGING FACE OF FINANCE: IMPLICATIONS FOR DEBT MANAGERS Matthew Martin Development Finance International/ Debt Relief International Commonwealth Debt Management Forum London, 5 June 2019

BACKGROUND AND STRUCTURE DFI/DRI: nonprofit organisations advising and building capacity in developing coutnry governments to moblise and manage highest quality development finance – working for 30 years with more than 60 governments More recently with UNDP, UNICEF, OIF, Comsec: analysing how best to finance SDGs – 2-3 times as much public spending needed as for MDGs Also sole distributors/support providers for 19 non-Commonwealth countries using CS-DRMS/Meridian Structure of presentation: What are the key changes – as well as their causes and impacts ? Implications for debt managers on how best to mobilise finance, and if necessary renegotiate (to reduce debt burden on next generation) ?

THE KEY CAUSE: NEW FINANCING MODEL Massive strides made in global development during 2000-2015 with combination of concessional finance and debt relief – for many MICs as well as LICs (erroneous) impression after Global Financial Crisis that no longer affordable; actually more of an ideological preference for/private interest-driven focus on private finance given changes in key governments clear message at Addis Ababa FFD conference 2015: will be less aid, so go (back – given 1970s) to private financial instruments to fund development also stressed tax revenue but progress painfully slow unregulated and irresponsible sales pitches by private providers and advisers with maximum profit motive some (mainly South-South such as China, India, previously Brazil/Venezuela) have not adopted this model: even more public finance, but not always cheap

IMPACT: A « NEW » DEBT CRISIS ? Key impact: large new non-concessional financing leading to rapidly rising debt burdens/growing crisis DFI studies for DFID – not at all about HIPCs having received debt relief and borrowing irresponsibly again – many HIPCs are not back in debt crisis – about countries accessing non-concessional finance and financial markets – following recipe suggested in Addis Now solutions being proposed to « crisis » including more responsible borrowing and lending, greater transparency – emphasis on debtor side – especially need to include new instruments in transparency Not yet acknowledgment that widespread/systematic debt relief needed – like 1982/1992 but will come Dont forget many countries which never got debt relief or adequate aid in the first place and therefore have had longstanding high debt burdens – SIDS etc

SOLUTIONS BY FINANCE TYPE Look in more detail at the different financing types to see what debt managers can do to mobilise best finance and avoid or manage debt crisis Key « new » types of finance (though nothing is really new) to look at in turn are: Domestic borrowing – domestic capital market development Global sovereign bonds – and variants such as green, blue, sukkuks, diaspora etc Blended finance – special focus on public-private partnerships South-south cooperation But dont forget that international organisations (AfDB, AsDB, IADB, WB) and OECD countries (France, Germany, Japan) have also been providing less concessional money and scaling up offers of non-concessional, especially for « graduating » MICs, and cutting back numbers of aid recipients esp LAC/Asia

DOMESTIC BORROWING Excitement for developing domestic capital markets in more countries = mobilising domestic savings/modernising financial systems, without any worries about risks/costs However, generally much more expensive in terms of interest rates, and shorter term repayment, than even international capital markets – in most countries, are the main cause of high debt burdens No evidence that any more stable than global markets – if anything less so, herding away rapidly Main advantage is lack of exchange rate risks What to do: Insist on maximum maturity and lowest interest – many countries still issue fixed interest rather than markets It is possible to restructure domestic debt – many countries have successfully done so – but requires very careful design to avoid destabilising banks/markets

GLOBAL BONDS Have become new status symbol for countries (in 1990s only investment grade credit ratings issued) Advantages: large amounts, arrive rapidly without conditionality, not always tied to specific projects But expensive (interest/fees/costs), market volatile, exchange rate risk, bullet maturity = budget hole What to do: Issuance: 1) independent advice – not by market-makers who have conflict of interest as bond purchasers; 2) insist on « staggered » maturity or use sinking funds to repay bullet; 3) negotiate down fees/costs to minimum; 4) hedge against exchange risk; 5) WB or other guarantees to cut costs; 6) spend on specific projects Issue bond types which can cut costs by broadening investor base – sukkuks/diaspora =√, blue/green = ? Restructuring: bonds have been restructured for centuries, too much fear of holdouts

PUBLIC-PRIVATE PARTNERSHIPS Lessons from OECD and developing countries Advantages – bring in private sector expertise NOT a financial solution – typically up front cost in terms of revenue sacrificed to repay finance is 2-3 times domestic bonds or eurobonds, plus additional contingent liabilities for cost under-/revenue over-estimates, which materialise in 30-40% of projects What to do: Issuance: 1) have clear policy - limit to highly profitable projects with large reliable revenue stream (mostly rules out social sectors and utilities); 2) Depends on strong legal and institutional framework, capacity to analyse costs and risks, strong independent legal advice; 3) push down lost revenue costs/benchmark vs best practice Restructuring: mostly has been done by private sector but nothing stops governments renegotiating especially where clearly overpriced or heroic revenue assumptions

SOUTH-SOUTH COOPERATION Also not really new – China especially has been providing billions for many years, what is new is scale and inclusion of non-concessional finance Advantages – few if any conditionalities except political relations; fund priority projects (esp infrastructure) other donors wont/cant fund Disdvantages – expensive/nontransparent ??; tied to exports or labour from the provider country What to do: Borrowing: 1) use concessional or less expensive funds – large amounts available; 2) resist collateralisation or tying – they have dropped this in many countries Restructuring: – many are not a problem – China has been restruring or cancelling debt for 30 years, currently designing ways to treat non-concessional

AND FINALLY – CROSS-CUTTING ISSUES Broader pressures on debt managers as result of global trends – how to react ? Above all focus on debt management issues – costs and risks (look at longer term to relieve burden on future generations) Responsible borrowing: vital to ensure that investments are better-designed – can add 50-100% to development value of funds – but also that lenders act responsibly Transparency: upgrade debt recording systems eg to latest versions of CS-DRMS/Meridian – but focus on domestic transparency and accountability to ensure development impact, rather than just sending data to international agencies, include new instruments such as PPPs Never listen to the vendors of the funds – always get strong independent legal and financial advice, and develop your own negotiating capacity, to ensure can finance the SDGs sustainably