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Residence and Citizenship by Investment

Sovereign Equity instead of Sovereign Debt: A Paradigm Shift in Public Finance and Foreign Direct Investment

Dr. Christian H. Kaelin

Dr. Christian H. Kaelin, TEP, FIMC, is the Chairman of Henley & Partners

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, the benefits of residence and citizenship by investment programs for host nations go far beyond extra funding for the national treasury or increased foreign direct investment. One of the industry’s unique and most positive attributes is its ability to endow nations with a considerable source of sustainable revenue without them having to increase debt and thereby burden future generations. This ability to expand a state’s ‘sovereign equity’ by increasing the number of citizens who actively contribute to its future wellbeing also has the invaluable capacity to reduce a key aspect of inequality within states, as well as between them — a phenomenon that is 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 in traditional sovereign debt financing by engaging with the global community of high‑net‑worth investors.

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There are many sovereign states around the world that lack the traditional capacity to raise sufficient revenue and that may even at times be locked out of financing through capital markets or international lenders.1 Countries can thus find themselves trapped in negative debt: short of discovering natural resources such as hydrocarbons or minerals, their ability to reduce debt, increase revenue, and attract investment is extremely limited.

Debt financing is helpful and often critical in times of crises. But as Dominica showed in the aftermath of hurricanes in 2017 and 2018 that destroyed large parts of the country’s infrastructure and devastated entire villages, citizenship by investment program inflows were a lifeline that enabled the government to rebuild infrastructure and support those affected. Post-pandemic, the island nation is showing signs of recovery, with the IMF having projected growth of 6% for 2022.

In his July 2022 budget address, the Hon. Roosevelt Skerrit, Prime Minister of Dominica, said this would bring total growth for 2021 and 2022 to 10.5%, taking economic activity back to pre‑Covid levels. Prime Minister Skerrit also noted that non‑tax revenue inflows, largely from the citizenship by investment program, remained strong, amounting to USD 475.2 million

Outside a crisis, when countries find themselves lacking fiscal autonomy, they lose the ability to operate as truly sovereign states, forfeiting the gains from their economies to pay off creditors.2 They are also unable to invest sufficiently in core infrastructure, education, and health services that enhance the lives of their citizens.3 This can lead to a society’s best and brightest leaving to pursue opportunities elsewhere, depriving their birth countries of their skills, and in turn diminishing the prospects and quality of life of 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 relieves stress on the national treasury without tying the country into debt‑based obligations. Moreover, it is not only a source of income, but also a proven driver of foreign direct investment. This twin dynamic is extremely effective in mitigating the problems brought about by sovereign debt and limited inbound investment, ultimately providing greater national autonomy and prosperity for all citizens.

Investment migration, fiscal autonomy, and freedom

Prudently managed residence and citizenship by investment programs that conduct stringent due diligence on applicants and that have transparent structures can drive investment that countries need without adding to the burden of debt. The funding generated in this way can be used either to pay off existing debt or to create societal value through strategically targeted government spending. This provides governments with significantly increased fiscal autonomy, a key factor in the degree to which a country can be sovereign.

Investment migration programs also act as remarkably successful foreign direct investment platforms to attract capital and skills to economies far beyond the specific investment requirements of each residence or citizenship program. The numerous material benefits of foreign direct investment are clear, but it is in the beneficial social impact created by this type of investment that real human value is found.

Increased investment drives employment opportunities for citizens at all levels, from architects and construction workers, to manufacturing and technology companies, in addition to the tourism sector and other service industries. The result is more business activity and new employment, leading to a more dynamic and positive socio‑economic environment overall. The natural consequence of this is to alleviate pressure on government spending, further increasing fiscal autonomy and ultimately establishing greater prosperity.

Proven socio‑economic benefits

In the aftermath of the 2008 financial crisis, Malta’s economy, for example, like those of all of Europe, was weak. Just years after the launch of its first citizenship program in 2014, the country had one of the highest growth rates and one of the lowest unemployment levels of any EU member state. Before the coronavirus struck, Malta’s was the best performing economy in the EU by almost any measure. Furthermore, between 2017 and 2019 (before the downturn caused by the pandemic), Malta reported annual budget surpluses for the first time in decades. Between 2015 and 2020, Malta's Individual Investor Programme attracted approximately EUR 1 billion in contributions related to property purchases and rent, investments, and contributions, EUR 196.6 million in investments in government stocks, and EUR 5.3 million in donations. Such results are virtually impossible to achieve using traditional public finance methods.

In the Caribbean, a similar success story has been unfolding over the past 15 years. Since the reform and relaunch of the St. Kitts and Nevis Citizenship by Investment Program in 2007, the subsequent investment boom in the dual island nation and in several other Caribbean countries that launched or enhanced programs is remarkable, and unprecedented in the region’s history.

Following independence from Britain, the Federation of St. Kitts and Nevis witnessed a decline in its sugar industry. It simply became unsustainable to produce sugar on the twin islands and to compete in world markets. This resulted in a massive annual deficit, which threatened to undermine the entire economy.4 Thanks to its citizenship by investment program, St. Kitts and Nevis was able to restructure its economy away from loss-making sugar production and raise hundreds of millions of dollars in foreign direct investment geared towards providing a sustainable transition and laying the foundations for future growth and development.5 Over the past seven years, the St. Kitts and Nevis Citizenship by Investment Program has brought great value — at times estimated at 35% of the dual-island nation’s revenue. Investment migration is, according to the Hon. Dr. Timothy Harris, Prime Minister of St. Kitts and Nevis, “a pillar in the foundation of the country’s unique future and prosperity”.

During the closing session of the 15th Global Citizenship Conference in December 2021, the Premier of Nevis, the Hon. Mark Brantley said, “If you were to ask what saved St. Kitts and Nevis during the pandemic, I would say citizenship by investment. This experience has demonstrated that citizenship by investment has a place in this world, particularly for small countries like ours, and for countries which do not have access to vast resources.”

In Antigua and Barbuda, revenue from the dual island nation’s citizenship by investment program, created in 2013, brought in USD 123.1 million in 2021, helping to cushion the adverse effects of declining government revenues from other sources. This compared with USD 115.7 million in 2020, USD 98.9 million in 2019, and USD 59.7 million in 2018. Antigua and Barbuda’s Prime Minister, the Hon. Gaston Browne, stated: “The significant damage to our economy by the global effects of Covid‑19 underscored the importance and benefits of the citizenship by investment program. As tax revenues fell rapidly and swiftly, it was — and continues to be — that the citizenship by investment program has helped to sustain our economy.” Program inflows are responsible for substantial investments in the construction sector that have helped to create a sustainable tourism and leisure industry. In addition, investment migration has been a major driver in the country’s transition to renewable energy. Thousands of solar panels have been successfully installed on government buildings and land throughout Antigua to produce electricity, in significant part paid for by the citizenship by investment program. The program was also essential in providing the necessary capital to support efforts to rebuild Barbuda after Hurricane Irma devastated the island in 2017, forcing the evacuation of the entire population.

At the macro level, before Covid‑19 struck, the liquidity injected onto the sovereign balance sheet, combined with the long‑term income streams created by new businesses and their associated tax revenues, had helped the island nation to pay off its entire external debt to the IMF — over USD 320 million — built up after the economy shrank by one quarter during the 2008 global financial crisis. Overall debt was down from a challenging 102% of GDP in 2014 to a more sustainable 69%. The IMF’s 2017 review of the Antigua and Barbuda economy found that the inflows of capital provided by investment migration had significantly helped to boost public and private sector construction, improving economic growth and pulling the country out of a deep recession.

The Caribbean’s newest program — the St. Lucia Citizenship by Investment Program — was launched in December 2015. The program is performing extremely well, and by 31 March 2021 had contributed XCD 187.6 million (approximately USD 69.4 million) in total. In 2020/2021, it raised XCD 38.5 million (approximately USD 14.2 million) in funding to the National Economic Fund and also generated XCD 17.9 million (approximately USD 6.6 million) in bond financing for the government. Following excellent results in the 2018/2019 reporting year, when the previous year's revenues more than doubled, the IMF stated that “prudent fiscal policies in recent years, supported by revenues from the citizenship by investment program, have helped to stabilize public debt as a share of GDP”. At the launch of the new brand visual identity and website of the St. Lucia Citizenship by Investment Program, the prime minister of St. Lucia at the time, the Hon. Allen Chastanet, said, “Everything that the country was focused on pre‑Covid has become even more relevant now: investment in education, building an e-government platform, simplification of the tax regime, investment in infrastructure, modernization of the security force and of the judicial system, and broadening the tourism offering. The citizenship by investment program can be a key source of funding in helping us to facilitate these developments”. The St. Lucia Citizenship By Investment Unit's 2020/2021 Annual Report stated that the fiscal year 2020/2021 could be termed “one of the most successful years for the CIP Unit in terms of revenue and growth in applications, in almost all the investment options available for citizenship. Overall, it has been the best year on record since inception”.

Montenegro, which launched its citizenship by investment program in 2019, has also experienced a positive impact. Based on the 220 applications that had been approved by late August 2022, EUR 29 million had been paid into Montenegro's budget through program fees, and EUR 22 million had been paid into a dedicated account for less developed municipalities, while almost double that amount was in the escrow account for pending applications. In an interview, Mladen Grgić, director of the Montenegrin Investments Agency, pointed out that if financial indicators and the fact that the program's development projects had already generated over EUR 46 million were considered, Montenegro could be satisfied with the success of the program. With over 500 applications from 2021 still in the pipeline at the time of writing, and a similar number anticipated in 2022, the program has the potential to bring an estimated EUR 500 million to the Montenegrin economy over the next two years, which would represent about a fifth of the country's average annual budget.

The tourism industry contributes the most to Montenegrin gross domestic product and the development of tourism capacity is a consistent effort. Prime Minister Dritan Abazović has noted that the government's decision is systematically to make intensified and sustainable investments into infrastructure projects in the north to realize the further potential for the development of mountain, winter, and summer tourism. “A large number of high-end hotels and five ski-centers are under construction in the north of Montenegro, and the advancement of the local and regional infrastructure is a priority. The ski-centers have so far seen investments of EUR 90 million, and the initial estimate of the value of hotels currently under development in Montenegro is over EUR 400 million.”

In addition to boosting fiscal health and economic growth, the enhanced inflow of investment generated by the citizenship program may enable Montenegro to be more competitive and its economy to be more sustainable, resulting in greater autonomy. This sovereign equity may see Montenegro less dependent on foreign lending and better able to drive national resources to where they are most needed. Ordinary citizens will feel the benefits in economic growth, employment opportunities, better social services, and improved infrastructure and education.

Sovereign equity in the Covid‑19 era

The concept of sovereign equity is both self‑evident and revolutionary. It has the potential to fundamentally shift how sovereign states approach sovereign funding, attracting investment from abroad, and public finance. Sovereign equity also addresses persistent global inequality. Foreign direct investment has been shown to be essential for developing, transitional, or recovering economies, but it can also be critical for regional development in large, advanced economies. Sovereign equity, possible through investment migration, will support ongoing economic growth and prosperity.

The benefits of sovereign equity enable countries to turn away from debt and dependency towards fiscal autonomy, stability, and independence. Investment migration is one of the most important opportunities for growth and economic development for countries able to offer it, creating considerable societal value and persuading productive members of the community to stay and contribute rather than emigrate.

All of this was true before the pandemic, which has changed our way of life and fundamentally damaged the global economy, and was rapidly followed by Russia's invasion of Ukraine, which is also having a major effect on global markets. Sovereign equity could be a partial solution to the challenges that will face government decision-makers in the months and years to come.

All sovereign states need capital, ideally from a debt-free source of liquidity. Even with cheap debt, there is insufficient liquidity. The pandemic saw central banks in advanced and emerging market economies taking unprecedented actions to ease financial conditions and support economic recovery, including interest-rate cuts and asset purchases. In late 2021, however, policymakers began to tighten policy, with inflation at multi-decade highs in many countries, and pressures broadening beyond food and energy prices. Countries are constantly competing for vital foreign direct investment and talent to diversify their economies and introduce opportunities to their societies. What sovereign states require is a competitive edge — this is what sovereign equity can provide.

An innovative financing mechanism

Nation states can use alternative residence and citizenship programs as an innovative financing tool to allocate investors’ funds to national or regional social, infrastructure, and development projects that benefit their citizens. Investors gain a long-term yield in the form of enhanced global mobility. Alternative residence or citizenship is a unique investment that permits them to be as globally diversified as their wealth portfolios.

Furthermore, the liquidity pool will continue to grow. Even before Covid-19, a rising number of millionaires with global wealth portfolios could not travel efficiently because of their birth citizenship. This market creates a rising demand for sovereign equity products. To meet this surge in demand, the increase in sovereign equity offerings is highly likely to continue. These may be positioned as specially branded offerings from existing sovereign equity providers. However, the more dramatic moves could come from sovereign states that choose to enter the market, whether by offering residence rights or citizenship rights, to rebalance their socio-economic mixes in the wake of Covid-19 and the ripple effects in numerous sectors of the war in Ukraine.

In short, investment migration is a positive, long-term solution, injecting liquidity into an economy, generating sustainable income streams that can support public financial needs and attracting much needed foreign direct investment, creating significant sovereign and societal value.

Printed references

1 S. Park and T. Samples, ‘Towards sovereign equity’ (2016) 21(2) Stanford Journal of Law, Business, and Finance

2 M. Guzman, J.A. Ocampo, and J.E. Stiglitz (eds.) Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises (2016) New York: Columbia University Press

3 Ibid.

4 J.C. Okwuokei and B. van Selm, ‘Debt Restructuring in the Caribbean: The Recent Experience’ in K. Srinivasan, I. Otker, U. Ramakrishnan, and T. Alleyne (eds.), Unleashing Growth and Strengthening Resilience in the Caribbean (International Monetary Fund 2017) 165

5 J. Gold and A. Myrvoda, ‘Managing Economic Citizenship Program Inflows: Reducing Risk and Maximizing Benefits’ in K. Srinivasan et al. (eds.), Unleashing Growth and Strengthening Resilience in the Caribbean (International Monetary Fund 2017) 131

Dr. Christian H. Kaelin, TEP, FIMC, Chairman of Henley & Partners, is considered one of the world’s foremost experts in investment migration, a field he pioneered. Holding master’s and PhD degrees in law from the University of Zurich, he is a sought-after speaker and advises governments and international organizations. He is the author, co-author, and/or editor of many publications, including standard works such as the Global Residence and Citizenship Handbook, the Kälin – Kochenov Quality of Nationality IndexIus Doni in International Law and EU Law, and the Switzerland Business & Investment Handbook

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