Sovereign Equity instead of Sovereign Debt: A Paradigm Shift for Public Finance


A core premise of investment migration is to enhance a country’s economy in exchange for residence or citizenship rights for individual investors. This is a good description of a classic ‘win-win’ formula. However, it is clear that the benefits of residence- and citizenship-by-investment programs for host nations go far beyond extra funding for the national treasury. One of the industry’s most unique and positive attributes is that it can endow nations with a considerable source of sustainable revenue without them having to further increase debt.  This capacity to expand a state’s ‘sovereign equity’ by enlarging the number of citizens who actively contribute has the invaluable potential to reduce inequality within as well as between states. It is a phenomenon uniquely facilitated by investment migration.


Sovereign equity in practice

Sovereign equity is a means for governments to improve public finances and support economic growth and employment creation without increasing their debt – meaningfully addressing the growing imbalances and inequalities inherent to traditional sovereign debt financing by engaging with the global community of high-net-worth investors.


There are many sovereign states around the world that lack the ability to raise sufficient revenue and may even at times be locked out of traditional financing through capital markets or international lenders. Many countries find themselves locked into a pattern of negative debt and have little opportunity to escape their situation through traditional means. Short of discovering natural resources such as hydrocarbons or minerals, the capacity to reduce debt, increase revenue and attract investments in the country is seriously limited.


Debt financing is helpful and often critical in times of crises. But as Dominica has shown in the aftermath of two consecutive hurricanes in 2017 and 2018 which destroyed large parts of the country’s infrastructure and wiped out entire villages, even there the citizenship-by-investment program proved to be a critical if not even the only real lifeline to enable the government to provide immediate support to the population and rebuild infrastructure. Also outside of a crisis, where countries find themselves in a situation involving a lack of fiscal autonomy, they lose the ability to operate as truly sovereign states, forfeiting the gains from their economies to pay off creditors.


They also lose the ability to sufficiently invest in core infrastructure, education, and health services that enhance the lives of their citizens. This can lead to a scenario in which society’s best and brightest leave to look for opportunities elsewhere, depriving the country of skills and reducing opportunities and quality of life for the general population.


Investment migration is arguably the single most effective means of addressing this dilemma. As a direct injection of liquidity into a country’s economy, it quickly relieves stress on the national treasury without tying the country into debt-based obligations. Moreover, it is not only a source of sustainable income, but a proven driver of important foreign direct investment (FDI). In essence, this twin dynamic can mitigate the problems of many countries related to sovereign debt and lack of investment, which ultimately provides greater national autonomy and prosperity.


The key to sovereignty is fiscal autonomy

Prudently managed residence and citizenship programs with proper due diligence on applicants and clear, transparent structures are able to drive investments that meets the needs of governments, without adding to the burden of debt. Such funding can be used to either pay off debt — as countries such as St. Kitts and Nevis have shown dramatically — or can be used directly to create societal value through strategically targeted government spending. This provides governments with significantly increased fiscal autonomy, which is a key factor in how sovereign a country really can be.


Investment migration programs also act as a remarkably successful FDI platform that can attract capital and skills to an economy beyond the specific investment requirements of a residence or citizenship program. The numerous benefits of FDI are beyond dispute, but it is in the massive social impact created by this type of investment that real human value is to be found. FDI drives employment opportunities for citizens at all levels. From architects to construction workers, from manufacturing and technology companies, from the tourism sector to other service industries, more business and investment is the result, leading to an overall more dynamic and positive socioeconomic environment. The natural consequence of this is to alleviate pressure on government spending, further increasing fiscal autonomy and ultimately establishing greater prosperity.


Proven socioeconomic benefits

In the aftermath of the 2008 financial crisis, Malta’s economy, for example, like all of Europe, was weak. Just years after the launch of the citizenship program in 2014, Malta had one of the highest GDP growth rates and one of the lowest unemployment levels of any EU member state. It is now the best performing economy in the EU by almost any measure. Since 2017, the country has also been able to report an annual budget surplus for the first time in decades.


By the end of 2018, Malta had raised almost EUR 600 million in direct revenue, seen property sales exceed EUR 110 million, earned EUR 70 million in rentals, and received over EUR 120 million worth of investments in government bonds. Results like these are not just unthinkable with traditional ways and means of public finance, they are impossible.


In the Caribbean, it has been a similar success story since the reform and relaunch of the St Kitts and Nevis citizenship-by-investment program in 2007 and the subsequent investment boom in this country as well as in several other countries in the region who introduced new or enhanced existing such programs.


Following independence from Britain, the Federation of St. Kitts and Nevis saw over time all subsidies pulled out of its sugar industry, resulting in a massive financial shortfall, which threatened to undermine its economy. It is thanks to citizenship-by-investment that the country was able to raise hundreds of millions of dollars in FDI, geared towards providing sustainable and holistic solutions for domestic growth and development. Constituting 30% of national annual revenue, investment migration is today, according to Prime Minister Harris, “a pillar in the foundation of the country’s unique future and prosperity.”


In Antigua and Barbuda, the country’s citizenship program – created in 2013 – now constitutes approximately 15% of the government’s annual revenue and has become a significant source for the repayment of debt — both domestic and international. When the International Monetary Fund conducted a review of the Antigua and Barbuda economy, it found that the inflows of capital provided by investment migration had significantly “helped to boost public and private sector construction”, raising economic growth and pulling the country out of a deep recession.


In Moldova and Montenegro, where the two most recent European citizenship programs have been launched in 2018, the positive impact can be expected to be similar. In addition to boosting fiscal health and economic growth, the enhanced inflow of much needed FDI will enable both countries to become more globally competitive and economically sustainable, which will result in greater autonomy and ability to steer their own futures. From the point of view of sovereign equity, this will also mean less dependence on foreign lending and a greater ability to drive national resources to where they are needed most. For ordinary Montenegrin and Moldovan people, the benefits of a new debt-free revenue stream will be felt directly in economic growth, employment opportunities, better social services, and improved infrastructure and education.


Sovereign equity is the future, not further sovereign debt

The concept of sovereign equity is both self-evident and revolutionary. It has the potential to usher in a broad paradigm shift in how sovereign states think about sovereign funding, FDI, and public finance. Fully realized, sovereign equity can also be a means of addressing persistent global inequality. FDI has already shown it can be the lifeblood of developing, recovering, and transition economies, but can also be critical for regional development in large and advanced economies. It is sovereign equity made possible through investment migration, rather than further sovereign debt that will support economic growth and prosperity in a sustainable way.


The benefits inherent in sovereign equity turn the fate of a country away from debt and dependency towards independence and stability. All things considered, investment migration continues to represent one of the most important opportunities for growth and economic development, for those countries able to offer it — creating considerable societal value and persuading productive members of the community to stay and contribute to their country rather than to emigrate. Investment migration therefore ought to be embraced as a long-term solution for the future, and contributing to solving the sovereign debt problem.



Author: Dr. Christian H. Kälin, Chairman, Henley & Partners

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