Maria A. Oliva Senior Economist

Transcription

1 MEDIUM TERM DEBT STRATEGY Maria A. Oliva Senior Economist International Monetary Fund

2 Public debt management Public debt management is the process of establishing and implementing a strategy for managing debt to achieve the government s financing, risk, cost objectives and other goals, such as developing the domestic debt market Guidelines es for Public Debt Management: ageme IMF/World Bank, 2001 This training material is the property of the International Monetary Fund and is intended for use in IMF Institute for Capacity Development courses. Any reuse requires the permission of the IMF. The views expressed in this material are those of the course staff and do not necessarily represent those of the IMF or IMF policy.

3 Debt Management Strategy Period 1 Period 2 Period 3 Period 4 Period 5 Budget Overall Fiscal Overall Fiscal Overall Fiscal Overall Fiscal Overall Fiscal Balance Balance Balance Balance Balance Financing What type of Instruments? Fixed/Variable? Maturity? Currency? Official or Market?

4 Sovereign debt management is distinct from fiscal policy and the DSA exercise Fiscal policy determines the level of public debt; Public debt management involves its composition, ii i.e. exposure to market risks

5 The Capacity to Fund the Debt Matters Stock of Debt to GDP Algeria Bahrain Djibouti Iraq Jordan Kuwait Lebanon Mauritania Qatar Sudan Syria Tunisia West Bank & Gaza Yemen Stock of Debt to GDP G USA Japan EU Canada France Germany Italy UK Source: World Economic Outlook,

6 Medium-term Debt Sustainability Framework (MTDS): Framework to design the characteristics of the sovereign debt portfolio taking into account a medium-term/long-term objective. Framework to examine costs and risks associated to possible borrowing strategies to cover a financing need.

7 Why an Explicit Debt Management Strategy Framework?? Because we need to understand cost-risk tradeoffs of our sovereign debt portfolio how the composition of our debt portfolio can help minimize amplify the magnitude of external and domestic shocks how the macro affects borrowing how monetary policy affects domestic debt issuance new risks and complexities affecting the debt portfolio

8 The Framework: A 8-step approach Step1: Identify Objectives & Scope Step 2: Identify Costs & Risks of the Existing Debt Step 3: Identify Potential Funding Sources Step 4: Identify Baseline Projections & Risks _ fiscal, monetary & market IF Needed Step 5: Review Key Structural Factors Step 6: Identify Cost-Risk trade-offs for alternative debt management strategies Step 7: Review Implications for macroeconomic policies and market IF Needed Step 8: Recommend MTDS for approval

9 MTDS Toolkit Guidance Note Analytical tool provides generic template for quantitative analysis of costs and risks of borrowing strategies The analytical tool is just one component of the framework.

10 DEBT MANAGEMENT S ANAGEMENT STRATEGY: THE TOOLKIT OUTCOMES 3

11 Cost and Risk Indicators as of end-t 0 Cost and Risk Indicators External debt Domestic debt Total debt Nominal debt as % of GDP Implied interest rate ATM (years) Refinancing risk Debt maturing in 1yr (% of total) ATR (years) Debt refixing in 1yr (% of total) Interest rate risk Fixed rate debt (% of total) FX debt (% of total debt) 54.5 FX risk ST FX debt (% of reserves) 7.4

12 R d Redemption ti P Profile fil att T0

13 Quantifying i the Characteristics ti of the Alternative Portfolios Risk Indicators T 0 As at end-t Current S1 S2 S3 S4 Nominal ldebt as % of fgdp PV as % of GDP Implied interest rate Refinancing risk ATM External Portfolio (years) ATM Domestic Portfolio (years) ATM Total Portfolio (years) Interest rate risk ATR (years) Debt re-fixing in 1yr (% of total) Fixed rate debt (% of total) FX risk FX debt as % of total ST FX debt as % of reserves

14 Quantifying Refinancing Risks Strategy 1 (S1): External borrowing accounts for 70 percent of new borrowing. Domestic borrowing is mostly short-term. te Strategy 2 (S2): Same external/domestic composition but less highly concessional and fixed rate loans. Strategy 4 1,000, , , , ,000 External Domestic Strategy 3 (S3): Domestic borrowing increases, especially the issuance of short-term instruments. Strategy 4 (S4): Domestic borrowing increases, specially the issuance of 2- and 5-year fixedrate instruments.

15 Quantifying Risk-Cost Trade-Offs Debt/GDP (end-year T) Interest/GDP (end-year T) PV of Public Debt to GDP Debt Service to GDP Cost (%) S1 S2 S3 Risk S4 Cost (%) 1.4 S S1 S2 Risk S3

16 What Would You Conclude? Cost-Risk trade offs vis-à-vis objectives The Structural Agenda

17 MEDIUM TERM DEBT STRATEGY STEP 1

18 The Framework: A 8-step approach Step1: Identify Objectives & Scope

19 KEY ISSUES MAIN MESSAGES OBJECTIVES Clear about: The main goal and intermediate goals Steps to reach the goal. SCOPE Choosing the appropriate definition of government matters. THE CURRENT DEBT PORTFOLIO The characteristics of the current debt portfolio is legacy that conditions future decisions.

20 Medium MTDS: Framework to design the characteristics of the sovereign debt portfolio taking into account a medium-term/long-term objective.

21 Period 1 Period 2 Period 3 Period 4 Period 5 Budget Overall Balance Overall Balance Overall Balance Overall Balance Overall Balance Financing What type of Instruments? Fixed/Variable? Maturity? Currency? Official or Market?

22 OBJECTIVES

23 OBJECTIVE: GO FROM A TO E B C Go with the tides and wind D A Start: initial portfolio Note: plans are made subject to constraints (navigation skills, weather conditions and forecast, ship size, etc.) E Final destination: desired portfolio

24 THE STRATEGY Plan that provides direction and benchmarks for debt management THE FORMAL OBJECTIVE Government s medium term goals Standard goals: 1.- attaining i a given risk/cost level 2. - domestic debt market development 24

25 SUBJECT TO: THE REALITY & CONSTRAINTS MT Macro-economic outlook Stock of debt Market development Market access Legal and institutional framework 25

26 SCOPE

27 Liabilities: Financial claims to financial sector, Non-fin private sector and to the rest of the world But.. MARKETABLE DEBT O OTHERS LOANS What is the relevant coverage? Is it feasible? Central Government, General Government, Public Government, Public Enterprises? Should contingencies be included? If so, which ones? How should these be valued? Explicit/Implicit guarantees

28 Contingent liabilities Implicit contingencies Financial Sector (SIFIs) Foreign exchange in fixed ERs Explicit contingencies Credit guarantees SInFIs bail outs/soes Natural Disasters State insurance schemes Legal g proceedings and disputes Sub-national debt : And others And others On lending Implicit Contingent liability?

29 MEDIUM TERM DEBT STRATEGY: STEP 2

30 The Framework: A 8-step approach Step1: Identify Objectives & Scope Step 2: Identify Costs & Risks of the Existing Debt

31 . Period t-3 Period t-2 Period t-1 Period t Budget Overall Fiscal Overall Fiscal Overall Fiscal Overall Fiscal Overall Fiscal Balance Balance Balance Balance Balance Debt Outstanding Domestic and External Debt The sovereign debt portfolio at time t is 1 New Debt Issued t Legacy Debt t 1 maturity t i*debt t 1 g y y Primary Balance t Contingent Liabilities t Valuationt

32 Financing of Debt: What Instruments? Fixed/Variable? Maturity? Currency? Official/ Market? Cost characteristics Risk characteristics: Market risk Refinancing risk

33 Analyzing the current portfolio implies using some matrix 800, ,000 Baseline Domestic debt 400, ,000 External debt

34 Risk Indicators External debt Domestic debt Total debt Amount (in millions of USD) Nominal debt as % GDP NPV as % of GDP Cost of debt Weighted Av. IR (%) ATM (years) Refinancing risk Debt maturing in 1yr (% of total) ATR (years) Debt refixing in 1yr (% of total) Interest rate risk Fixed rate debt (% of total) FX debt (% of total debt) FX risk ST FX debt (% of reserves)

35 Debt Portfolio and Cost Measures

36 Defining Cost: Debt management objectives usually focus on the economic cost Measures that focus exclusively on prevailing accounting/budgetary practices may also be inadequate Cost can be measured in different ways Accrual, due-for-payment, cash Nominal versus real value Discounted cash-flows (Present Value) versus cash-flow measures Different cost measures provide different information on cost - do not rely on one cost measure

37 Cost indicators? Key indicators Interest cost key for budget preparation Interest / GDP captures economic burden (liquidity) Debt / GDP and NPV of Debt / GDP also capture extent of debt burden also costs (solvency) Annual interest payments + the potential impact of changes in exchange rates and other changes to the principal (e.g. inflation indexed debt)

38 Debt Portfolio and Risk Measures

39 Types of risk Exchange Risk Market Risk Interest Rate Risk Term premium Inflation Real interest rate Refinancing Risk + (e.g. operational risk,..)

40 Market Risk Market kt risk ik is a function of Volatility of underlying factors (risk factors = interest and exchange rate volatility) Trends Our main focus here is on downside risk

41 Interest rate risk Vulnerability of funding costs to higher interest rates when variable rates are reset and/or fixed rate debt needs to be refinanced Typical measures of exposure Fixed-Floating ratio Floating rate debt as a percentage of total debt Debt exposed to interest rate re-fixing within a specific time period Maturing fixed rate debt to be rolled over Variable rate debt (include interest rate swaps) Average Time to Re-fixing (ATR) ATR = time weighted average until all principal payments in the debt portfolio become subject to a new interest rate

42 Exchange rate risk The exposure of the portfolio to changes in the exchange rate Typical measure of exposure Share of foreign currency debt in total debt Can be split by specific currency (dollar risk, Euro risk etc.) Currency composition Degree of fforeign currency liabilities mismatch relative to foreign currency reserves

43 Refinancing i risk ik It captures the exposure to not being able to refinance debt Typical measures of exposure Redemption profile of the outstanding debt stock Share of debt falling due within a particular period Ratio of debt falling due to tax revenue Average Time to Maturity ATM = time weighted average to maturity of the all the ATM time weighted average to maturity of the all the principal repayments in the debt portfolio

44 What Can Mitigate Refinancing Risk? Smooth debt profile Official i reserves s as a buffer for BoP needs and to enhance confidence R/STD = reserves over short-term external debt Broad creditor-base concentration Macro-financial stability

45 Exercise Lets compute the average time of maturity and refixing of the following portfolio Principal Repayments T0 T0+1 T0+2 T0+3 Currency Indicator Type Code Years to maturity USD 1 Fix USD_ EUR 2 Fix EUR_ EUR 3 VAR EUR_ Total All figures are in USD

46 An Indicator of Refinancing Risk Average Time to Maturity Calculate average time to maturity Time to maturity Principal repayments (fixed rate only) $ 340= = =55+30 =60+10 =40+5 Principal repayments (variable rate only) $ 137 = Total principal repayments $ 477= Weights of cash flow 034= 0.34= 02= 0.2= 031= 0.31= ( ) / 477 ( ) /477 ( ) / = ( ) /477 Weight * Time to maturity 0.34= 0.41= 0.94= 0.54= 0.34*1 0.2*2 0.31* *4 Weighted average time to maturity (years) 2.24= T P t t ; TD t t 0 P t = principal payments due TD = total outstanding debt T = time to maturity

47 An Indicator of Interest Risk Average Time to Refixing Calculate average time to refixing Time to refixing Principal repayments (fixed rate only) $ = = =55+30 =60+10 =40+5 Principal repayments (variable rate only) $ = = Total principal repayments $ = =55+30 =60+10 =40+5 Weights of cash flow 0.58= ( ) / 0.18= 0.146= 0.09= (40+5) / ( ) (55+30) / ( ) (60+10) / ( ) ( ) Weight * Time to refixing 0.58=[( ) / ( )]* = [(55+30) / ( )]* = [(60+10) / ( )]*3 0.38=[(40+5) / ( )]*4 Weighted average time to refixing (years) = 1.75 [( ) / ( )]*1+[(55+30) / ( )]*2+[(60+10) / ( )]*3+[(40+5) / ( )]*4

48 MEDIUM TERM DEBT STRATEGY: : STEP 3

49 The Framework: A 8-step approach Step1: Identify Objectives & Scope Step 2: Identify Costs & Risks of the Existing Debt Step 3: Potential sources of financing

50 KEY ISSUES MAIN MESSAGES OPTIONS All types of loans carry some type of risk. IDA loans are very concessional (long maturity/low rates) T-SECURITIES Not only a source of financing but also a tool to create benchmarks COST OF LOANS The cost is not only the interest but also other conditions i attached to them.

51 Potential Sources of Financing Non-marketable Concessional loans Semi-concessional loans Commercial loans Other non-marketable sources Marketable International bond Domestic securities i 51

52 Non-marketable Debt Official sector loans Commercial bank loans Retail debt Other nonmarketable Structure Issues Cost Fixed or floating, amortizing, long-term Variable, bullet Domestic, international Short-term Fixed or variable Depends Size constraint; volatility and speed of disbursement; may be conditions attached Very low cash cost; indirect costs Liquidity conditions; health of Market tbased banking sector (domestic) Need efficient sales network. Reliable source. Non-transparent; hampers market development Can be competitive Cost born indirectly Principal Risk Exposure FX risk mitigated by LT FX where relevant; rollover; refixing Uncertainty as to quantum of supply Hidden costs; abuse

53 Marketable Debt T-bills T-bonds Inflation indexed International bond Structure Issues Cost Discount, bullet Fixed / variable, bullet Indexation structure Fixed / variable, ibl bullet Simple; robust demand from banking sector Market development will impact demand Requires reliable index. Can secure maturity extension. But complex instrument. Large size, timing risk, excess cash at issuance Low, except in liquidity crisis LT can be expensive (inflation risk premium). Deflation is costly. Depends on credibility of monetary policy Principal Risk Exposure Rollover and refinancing risk Depends on tenors achieved, may be some rollover and refinancing. Refixing if variable rate. Depends on link between inflation and tax revenue and likelihood of supply side shock. Reduces roll-over risk. Credit rating. Depends on RER FX, rollover risk trend

54 Concessional Borrowing Lenders: Multilateral and bilateral official creditors Cost characteristics: Low cost grant element 35% for multilateral Risk characteristics Interest rate exposure limited typically long-term, fixed rate Exchange rate exposure Factors that may influence the mitigated by amortizing structure amounts available Rollover exposure also Income level mitigated by amortizing Quality of institutions structure, and nature of creditor Access to market financing Size of multilateral balance sheet Amount often linked to an Economic developments allocation rule

55 Example: Current IDA terms /id /fi i h l 55

56 IMF Funding Facilities IMF s Stand By Arrangement (non-concessional) The IMF s Poverty Reduction and Growth Trust (concessional)

57 IMF loans: To help member countries tackle balance of payments problems, stabilize their economies, and restore sustainable economic growth. The global financial crisis Crisis resolution role Crisis prevention role Detail on program conditions is publicly available:

58 Semi-Concessional Borrowing Lenders: Multilateral and bilateral official creditors Cost characteristics: at a discount to market financing. There could be indirect cost [exchange rate; purchase conditions] Factors that may influence the amounts available Funds availability Strategic factors Economic developments Risk characteristics: In specific cases, these could be negotiated. Interest rate exposure - floating rate Exchange rate exposure mitigated by amortizing structure Rollover exposure similar to concessional Amount can be linked to allocation rules

59 Commercial Bank Loans Lenders: Domestic and international banks Cost characteristics: At market rates (typically y more expensive than bonds, but cost of carry may be lower.) Factors that may influence the amounts available Strategic factors Economic conditions Liquidity conditions These may be marketable through syndication (fees increase). Risk characteristics: In specific cases, these could be negotiated. Interest rate exposure often floating rate Exchange rate exposure depends Rollover exposure shorter maturity Amount Depends on allocated credit line

60 Other Non-Marketable: Central Lenders: Bank Central Bank (fiscal dominance) Risk characteristics: Cost characteristics:?? Factors that may influence the amounts available External position Inflation levels Political factors Amount?

61 International Sovereign Bonds Lenders: Risk characteristics: International and domestic institutional Rollover risk and exchange rate investors exposure aggravated by bullet structure Cost characteristics: Reflects nature of market demand Market determined. d Exposed to sudden stops in High transaction cost international capital markets Tenors and interest rate structure can be customized Factors that may influence the Possibly longer tenors than in the amounts available domestic market Established track record of good Helps diversify investor base economic performance Positive medium-term outlook Credit rating Amount typically there is a Investors risk appetite/ global market conditions minimum (e.g. $200mn), maximum depends on market conditions

62 Financing Environment Debut Spreads Timeline of International Bond Issuance (in millions of US dollars) 3,500 3,000 2,500 2,000 Africa Eastern Europe Latin America Middle East Asia # of issues (rhs) , , (Q3) Source: Dealogic and IMF staff calculations. 1 0 Maturity (in years and percent of total issuers) 5 year 6 year 7 year 10 year

63 Financing Environment Debut Spreads Financial Characteristics of First-time International Sovereign Issuances (2004- December 2013) Issue size (in US$ and percent of total issuers) up to 200 mn mn mn mn. Spread at issue (in bps and percent of total issuers) below 200 bps bps bps bps Maturity (in years and percent of total issuers) 5 year 6 year 7 year 10 year Yields at issue (in bps and percent of total issuers) Less 4% 4%-5% 5.01%-6% 6.01%-7% Source: Dealogic;and and IMF staff calculations.

64 Domestic Market

65 Domestic Securities: T-bills Lenders: Domestic (banks, pension, insurance and mutual funds, etc) and international investors Cost characteristics: Market determined. d Risk characteristics Interest rate risk: high Rollover risk Factors that may influence the amounts available Economic developments Size of banking sector Market development Amount? Others: Useful at early stages of market development Tools to meet reserve ratios, in payment systems, etc. Often tool of monetary policy

66 Domestic Securities: T-bonds Lenders: Domestic (banks, pension, insurance and mutual funds, etc) and international investors Cost characteristics: Market determined. They usually require a risk premium. Types: Fixed and floating rate bonds Zero coupon bonds Indexed bonds Risk characteristics Interest rate risk Factors that may influence the amounts available Rollover risk Exchange rate exposure Economic developments Size of banking sector Market development Amount?

67 SUMMARY

68 Non-marketable Debt Official sector loans Commercial bank loans Retail debt Other nonmarketable Structure Issues Cost Fixed or floating, amortizing, long-term Variable, bullet Domestic, international Short-term Fixed or variable Depends Size constraint; volatility and speed of disbursement; may be conditions attached Very low cash cost; indirect costs; LT RER trend. Liquidity conditions; health of Market tbased banking sector (domestic) Need efficient sales network. Reliable source. Non-transparent; hampers market development Can be competitive Cost born indirectly Principal Risk Exposure FX risk mitigated by LT FX where relevant; rollover; refixing Uncertainty as to quantum of supply Hidden costs; abuse

69 Marketable Debt T-bills T-bonds Inflation indexed Internationa l bond Structure Issues Cost Discount, bullet Fixed / variable, bullet Indexation structure Simple; robust demand from banking sector Market development will impact demand Requires reliable index. Can secure maturity extension. But complex instrument. Low, except in liquidity crisis LT can be expensive (inflation risk premium). Deflation is costly. Depends on credibility of monetary policy Fixed / Large size, timing Credit rating. variable, risk, excess cash at Depends on RER bullet issuance trend Principal Risk Exposure Rollover and refinancing risk Depends on tenors achieved, may be some rollover and refinancing. Refixing if variable rate. Depends on link between inflation and tax revenue and likelihood of supply side shock. Reduces roll-over risk. FX, rollover risk

70 MEDIUM TERM DEBT STRATEGY TRATEGY: STEPS 4&5

71 The Framework: A 8-step approach Step1: Identify Objectives & Scope Step 2: Identify Costs & Risks of the Existing Debt Step 3: Potential sources of financing Step 4&5 : Identifying baseline projections and risks in key policy areas fiscal, monetary, external sectors

72 To develop an explicit Debt Management Strategy There is a need to understand cost-risk tradeoffs of the debt how debt structures can dampen or amplify the magnitude of external and domestic shocks how the macro affects borrowing how monetary control helps domestic debt issuance constraints: institutional, market, new risks and complexities

73 The Economy Real Sector External Government Monetary Sector Sector Sector

74 National Accounts Fiscal Account Consumption Private consumption Government consumption Investment Private investment Government investment Exports of goods and services Imports of goods and services Revenue Tax Revenue Non-tax revenue Grants Expenditures Current expenditure Interest payments Capital expenditure Overall Balance The Macroeconomic Accounts & Interrelations Balance of Payments Current Account Exports of goods and services Imports of goods and services Income Current transfers Capital and Financial Account Direct Investment Portfolio investment, net Other investment, net Government investment Overall Balance Change in reserves Financing Domestic bank borrowing Domestic nonbank borrowing Foreign borrowing Depository Corporations Survey Assets Net foreign assets Net credit to the government Claims on other sectors Other items, net Liabilities Broad Money

75 Real GDP Growth Inflation Overall fiscal Balance (with grants) External Current Account (Percent) (Annual average, percent change) (Percent of GDP) (Percent of GDP) (e) 2014 (p) (e) 2014 (p) (e) 2014 (p) (e) 2014 (p) South Sudan Middle-income Botswana Lesotho Namibia Zambia Kenya Malawi Tanzania Uganda Fragile countries Zimbabwe Source: IMF REO (October, 2013)

76 Low Income Countries: Higher Growth Translated into Lower Debt Levels LBR Debt to GD DP at t ERI GIN GNB GMB DRC Average COM HTI BDI KYR CAF KEN MDG NPL NER BEN TCD MLI SLE BFA MMR MWI MOZ TZA KHM UGA RWA ETH Average Growth Rates at t-2 Average Growth Rates at t 2 (In Percent)

77 Stock of Debt (Percent) (e) 2014 (p) South Sudan Middle-income Botswana Lesotho Namibia Zambia Kenya Malawi Tanzania Uganda Fragile countries Zimbabwe

78 How much (Financing Need) Input Growth rate Inflation rate Macro Primary deficit Interest Debt Interest on existing debt Interest on new debt Debt Fiscal deficit (Net financing) Principal repayment Principal on existing debt Principal on new debt Gross financing requirement

79 2013 Financing Needs (In domestic currency) Gross Central Government Cash Requirements 20,000 Redemptions -- Example Total Financing Need 20,000 Financing Sources 20,000 External Financing (60%) 12,000 Multilateral concessional (40%) 4,800 Bilateral concessional (30%) 3,600 Eurobonds (10%) 1,200 Commercial bank loans (20%) 2,400 MTDS Domestic Financing (40%) 8,000 T-Bonds (60%) 4,800 T-bills (40%) 3,200

80 Macro-Framework MTDs DSA National Accounts Consumption Investment Private consumption Government consumption Private investment t Government investment Exports of goods and services Imports of goods and services Balance of Payments Current Account Exports of goods and services Imports of goods and services Income Current transfers Capital and Financial Account Overall Balance Change in reserves Direct Investment Portfolio investment, net Other investment, net Fiscal Account Revenue Grants Expenditures Current expenditure Interest payments Overall Balance Capital expenditure Financing Domestic bank borrowing Domestic nonbank borrowing Foreign borrowing Depository Corporations Survey Assets Net foreign assets Net credit to the government Claims on other sectors Other items, net Liabilities Broad Money

81 Key Challenges in Funding Investor base: geography Local borrowing International ti borrowing Investor base: composition Market borrowing New bilateral official lenders Less concessional borrowing Instruments Conditions with Roll-over risks FX-risk exposures IR-risk exposures Operational risks

82 6 5 Average Yields for New External Credits Obtained by HIPCs (as percent) Average interest on new external debt commitments, official (%) Average interest on new external debt commitments, private (%) 38 Average Maturity of New External Debt Borrowings (in years) Average maturity on new external debt commitments, private (years) Average maturity on new external debt commitments, official (years)

83 The Structural Agenda? Examples of structural t factors: Market Access? Investor Base? Pricing? Institutional constraints? Structural changes in monetary policy (inflation targeting) Domestic debt markets development Price of commodities trend Real effective exchange rate and productivity Trade liberalization reform

84 Why a MTDS? Mitigating Fiscal Vulnerabilities Choice of strategy can reduce risks and therefore, reduce the likelihood of crisis Longer debt maturity helps reduce fiscal vulnerabilities: reduces roll-over risk More domestic funding reduces foreign exchange rate risk exposure And, reducing variable rate debt can reduce budgetary uncertainty and exposure to interest risk

85 Why a MTDS? Financial Markets Development Public debt management a can effectively el support the development of more robust financial markets, improving the functioning of the financial system Facilitating corporate debt markets Providing a benchmark for the private sector Providing scope for securitization of banks assets Facilitate repo market development Improving liquidity of banks balance sheets Facilitate development of derivatives markets Allowing for more effective risk management within the economy

86 To develop an explicit i Debt Management Strategy There is a need to understand cost-risk tradeoffs of the debt how debt structures can dampen or amplify the magnitude of external and domestic shocks how the macro affects borrowing how monetary control helps domestic debt issuance constraints: institutional, market, new risks and complexities

87 Risks Macro-economic risks and implications for the debt strategy For the Governme nt Finances Implications for the MTDS Risks Real Sector Real Growth Inflation Fiscal Sector Fiscal receipts Primary Balance Monetary Sector Commodity Prices Interest rate Risks Further global economic slowdown Capital flow reversal Implications Reduce inflows of aid and FDI? Decline in oil and other commodity prices? Strains in financial markets? Homegrown risks Political instability?

88 They got speculative grades with few variations from Moody s and below investment grade from S&P S&P: Local and Foreign Currency Ratings, An Historical Perspective to Date B B B- 2 CCC 1 0 NR 0 Mar-11 Dec-12 May-10 May-09 Nov-05 Dec-111 Aug-13 Apr-06 Jul-04 Jul-08 May-04 Aug-13 Jun-12 Sep-09 Oct-08 Aug-10 Sep-07 Nov-05 May-06 Dec-04 Jul-06 Dec-10 May-07 Nov-05 BRB BFR CMR GHA HND MLI MOZ RWA SEN UGAZMB Moodys: Government Bonds Ratings, a Historical View B1 Local currency Foreign currency 3 B2 2 B3 Caa1 1 Nov-12 Mar-11 May-10 Jun-03 Mar-98 Sep-13 Nov-12 Feb-13 Jul-99 Sep-98 Dec-12 Sep-13 May-07 Jun-12 Dec-10 Jun-10 Sep-09 Apr-03 May-98 BOL KHM DRC GHA HND KEN MOZ NIC SEN ZMB and if rated by S&P and Moody s

89 Pricing and Monetary Policy

90 Baseline and Monetary Policy Key variables: Interest and Exchange Rates Interest rates: Short-term driven by monetary policy Nominal rates driven by inflation expectations Monetary policy stance may influence real interest rates given the impact of macroeconomic stability on risk premium Exchange Rates: Influenced by interest rates (parity equation) Relationship with foreign reserves, including a policy of foreign reserve accumulation

91 THE YIELD CURVE

92 Yield Curve or Term Structure Plots of yields to maturity of a series of bonds against their term to maturity Crude representation of risk: return trade off of bond investment alternatives with reasonably equivalent risk (liquidity, credit, call, premium/discount) Determinants: real interest rate inflation premium risk premium Term structure in one year n 2 3 ( 1 i) (1 i) (1 f1,2 ) (1 f1,3) (1 f1, 1 n n )

93 Term Structure Shapes YTM Normal YTM Symptoms of economic downturn, recession The longer maturity the higher the risk Inverse Term to maturity (in years) Term to maturity (in years) YTM Humped YTM Flat Term to maturity (in years) Term to maturity (in years)

94 Less liquid id bonds YTM Liquid bonds Term to maturity (in years)

95 EXCHANGE RATE POLICY Foreign currency denominated debt Exchange rate regimes: Fixed exchange rate regimes with an open capital account can aggravate liquidity risk in case of sudden stops or reversals (changes in market sentiment) Reducing FX debt and monetary policy, and exchange rate policy coordination. FX support, public debt management coordination and FX reserves

96 MEDIUM TERM DEBT STRATEGY TRATEGY: STEPS 6&7

97 The Framework: A 8-step approach Step1: Identify Objectives & Scope Step 2: Identify Costs & Risks of the Existing Debt Step 3: Identify Potential Funding Sources Step 4: Identify Baseline Projections & Risks _ fiscal, monetary & market IF Needed Step 5: Review Key Structural Factors Step 6: Identify Cost-Risk trade-offs for alternative debt management strategies Step 7: Review Implications for macroeconomic policies and market IF Needed Step 8: Recommend MTDS for approval

98 Setting up alternative strategies

99 % of gross borrowing - Over Projection Period New debt S1 S2 S3 S4 IDA FX 100% 0% 20% 50% AfDF FX 0% 0% 30% 0% Bilateral semi-conc FX 0% 0% 50% 0% Bilateral semi-conc FX 0% 0% 0% 0% Bilateral semi-conc DX 0% 0% 0% 0% Bilateral semi-conc DX 0% 100% 0% 0% Eurobond FX 0% 0% 0% 0% Dom 1 an DX 0% 0% 0% 25% Dom 3 ans DX 0% 0% 0% 0% Dom 5 ans DX 0% 0% 0% 25% Dom 7 ans DX 0% 0% 0% 0% Commercial DX 0% 0% 0% 0% Arrears FX 0% 0% 0% 0% Arrears DX 0% 0% 0% 0% 0 FX 0% 0% 0% 0% External 100% 0% 100% 50% Domestic 0% 100% 0% 50% 100% 100% 100% 100% Are these the right strategies? t s?

100 Or, are these the most reasonable strategies? % of gross borrowing - Over Projection Period New debt S1 S2 S3 S4 IDA FX 19% 13% 8% 15% AfDF FX 11% 8% 5% 9% Bilateral semi-conc FX 11% 8% 5% 9% Bilateral semi-conc FX 11% 8% 5% 9% Bilateral semi-conc FX 11% 8% 5% 9% Bilateral semi-conc FX 11% 8% 5% 9% Eurobond FX 0% 0% 0% 0% Dom 1 year DX 13% 0% 14% 7% Dom 3 year DX 13% 0% 28% 13% Dom 5 year DX 0% 0% 14% 10% Dom 7 year DX 0% 50% 14% 9% Commercial loan DX 0% 0% 0% 0% Arrears FX 0% 0% 0% 0% Arrears DX 0% 0% 0% 0% Instrument EUR Var FX 0% 0% 0% 0% External 75% 50% 30% 60% Domestic 25% 50% 70% 40% 100% 100% 100% 100%

101 Issues: Debt Rollover? Many economies fit under the group of long-term external debt holdings and short-term domestic debt The question is: could the FX risk of external debt be rebalanced using domestic market instruments? Committed but undisbursed loans?

102 Evaluating alternative strategies

103 Evaluating Strategies: cost and risk trade-off Step1: Simulate range of candidate viable and realistic i strategies under specific baseline Step 2: Have already defined the set of alternative strategies and alternative scenarios the stress tests Step 3: Consider and compare the outcomes k f d d i h Step 4: Rank performance and determine the preferred strategy

104 Assessing performance Need to be critical in the assessment Consider ex ante the possible ranking / effects of stress scenarios Which strategy is likely to be least costly? What risk exposures are likely to increase with each strategy? Do expectations differ from outcomes? If so, why? Need to determine in advance indicators and Need to determine in advance indicators and cost/risk levels

105 Recall Cost and Risk Indicators Cost? Interest Interest / Revenues or Interest / GDP Interest t + Adjusted d Principal i Debt / GDP Which h measures are relevant for the economy? Risk? What is the reasonable level of risk?

106 Measurement of risk Cost Risk Scenario 1 Risk 1,X Baseline Scenario Cost 1,X Cost baseline Time

107 Borrowing Strategies 100% IDA AfDF 80% Bilateral semi-conc Bilateral semi-conc 60% 40% 20% Bilateral semi-conc Eurobond Dom 3 year Dom7 year Arrears Bilateral semi-conc Dom 1 year Dom 5 year Commercial loan Arrears 0% Current S1 S2 S3 S4 Instrument EUR Var

108 Outcomes: Interest / Revenues Cost (% %) S3 S2 S1 S4 Risk No real trade-off: S1 clearly l least cost and least risk ik

109 250,000 Strategy 1 External Domestic 500,000 Strategy 2 External Domestic 100, , , , , , , , , , ,000 Strategy 3 External Domestic 250, ,000 Strategy 4 External Domestic 100, , , , , , , , , , ,

110 Risk Indicators 2013 As at end FY2017 Current S1 S2 S3 S4 Nominal debt as % of GDP PV as % of GDP Implied interest rate (%) Refinancing risk ATM External Portfolio (years) ATM Domestic Portfolio (years) ATM Total Portfolio (years) Interest rate risk ATR (years) Debt refixing in 1yr (% of total) Fixed rate debt (% of total) FX risk FX debt as % of total ST FX debt as % of reserves

111 Other relevant indicators? Can compare. End-Simulation Horizon (2017) Current S1 S2 S3 S4 % DX in debt portfolio 1% 30% 27% 39% ATM (years) % of debt refixing within 12 months 6.2% 24.4% 23.6% 33.0% % of debt refinancing within 12 months 5.5% 31.4% 28.6% 34.7% Short-term external debt / Reserves 3% 3% 3% 3% External debt / Reserves 102% 81% 91% 78% Average interest rate 2.4% 2.5% 2.6% 2.8%

112 Stress Scenarios Baseline FX depreciation USD 0.2% 0.4% 0.5% 0.4% 0.4% EUR 0.0% 0.0% 0.0% 0.0% 0.0% JPK 0.1% 0.3% 0.4% 0.3% 0.3% GBP 29% 2.9% 31% 3.1% 32% 3.2% 32% 3.2% 31% 3.1% CNY UTP 0.0% 0.0% 0.0% 0.0% 0.0% % depreciation in year 2 (stand-alone exchange rate shock) 30.00% USD 0.2% 30.4% 0.5% 0.4% 0.4% EUR 0.0% 0.0% 0.0% 0.0% 0.0% JPK 0.1% 0.3% 0.4% 0.3% 0.3% GBP 2.9% 3.1% 3.2% 3.2% 3.1% CNY 0.0% 0.0% 0.0% 0.0% 0.0% UTP 0.0% 0.0% 0.0% 0.0% 0.0%

113 Evolution of indicators Strategy 1 Debt-to-GDP ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest Shock Combined Shock (15% depreciation and IR Shock) Interest-to-GDP ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest tshock Combined Shock (15% depreciation and IR Shock) PV of debt-to-gdp ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest Shock Combined Shock (15% depreciation and IR Shock) Strategy Debt-to-GDP ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest Shock Combined Shock (15% depreciation and IR Shock) Interest-to-GDP ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest Shock Combined Shock (15% depreciation and IR Shock) PV of debt-to-gdp ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest Shock Combined Shock (15% depreciation and IR Shock)

114 Evolution of indicators Strategy Debt-to-GDP ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest Shock Combined Shock (15% depreciation and IR Shock) Interest-to-GDP ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest Shock Combined Shock (15% depreciation and IR Shock) PV of debt-to-gdp ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest Shock Combined Shock (15% depreciation and IR Shock) Strategy 4 Debt-to-GDP ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest Shock Combined Shock (15% depreciation and IR Shock) Interest-to-GDP ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest Shock Combined Shock (15% depreciation and IR Shock) PV of debt-to-gdp ratio Baseline Exchange Rate Shock (30%) Interest Shock Interest Shock Combined Shock (15% depreciation and IR Shock)

115 Resolving a conflict between indicators? Consider wider set of indicators? Consider more closely how well the strategies meet other objectives Consider how they perform relative to identified priorities for mitigate macro vulnerabilities At the end of the day need to use judgment

116 Implied Issuance Patterns Implied net borrowing (% of GDP) (Average over simulation) S1 S2 S3 S4 Net external borrowing 23% 2.3% 13% 1.3% 10% 1.0% 18% 1.8% Net domestic borrowing -1.9% -0.8% -0.4% -1.3% External net borrowing S1 3.9% 2.8% 2.2% 1.8% 1.1% S2 2.5% 1.5% 1.2% 0.8% 0.4% S3 1.5% 1.1% 0.9% 0.9% 0.6% S4 3.1% 2.1% 1.6% 1.5% 0.8% Domestic net borrowing S1-3.3% -2.3% -1.7% -1.5% -0.8% S2-2.0% -0.9% -0.6% -0.3% 0.1% S3-0.9% -0.5% -0.2% -0.4% 0.0% S4-2.5% -1.5% -1.1% -1.1% -0.4% Is this viable? How realistic are the strategies being analyzed? What do these decisions imply for the rest of the economy? Is this compatible with the monetary policy stance?

117 Drawing conclusions Quantitative tools help inform decision-making process by allowing producing a ranking of candidate strategies on a consistent basis However, The quality of outputs is only as good as the quality of the inputs Decisions need to be made in line with Decisions need to be made in line with the pre-set objectives and take constrains into account

118 MEDIUM TERM DEBT STRATEGY TRATEGY: STEP 8

119 Outline KEY ISSUES IMPLEMENTATION MAIN MESSAGES Defining financing plan in line with budgetary cash needs Issuance plan MONITORING Impact on key targets Meet? STRUCTURAL REFORMS Developing/improving risk management system. Market development objectives Investor base relation

120 Developing a consistent borrowing plan

121 After choosing a DMS. Implementation What is the annual financing plan that is consistent with the selected strategy? Are there other portfolio management activities that are needed to attain the portfolio targets? (e.g. derivatives?) How is the monitoring of implementation going to be applied? And, if there are deviations, how are these going to be addressed?

122 The Financing Plan

123 How Does the Financing i Plan for the Next Budgetary Cycle Look Like? Determine the gross borrowing needs for each type of instrument to cover expected budgetary needs roll over needs/amortization needs Are these consistent with the debt strategy? Borrowing plan. What is the timing?

124 2013 Financing Needs (In domestic currency) Gross Central Government Cash Requirements 20,000 Redemptions -- Total Financing Need 20,000 Financing Sources 20,000 External Financing (60%) 12,000 Multilateral concessional (40%) 4,800 Bilateral concessional (30%) 3,600 Eurbonds (10%) 1,200 Commercial bank loans (20%) 2,400 Domestic Financing (40%) 8,000 T-Bonds (60%) 4,800 T-bills (40%) 3,200

125 Timing Issues and program design The debt program needs to be consistent with the cash management program. Calendar of issuances. Quarterly? Inputs: revenue & spending (including debt service) programming Level of deposits, TSA balances Programmed grants/loans disbursements

126 Ministry of Finance Tax and spending data Fiscal position forecasts Daily cash flows Defines debt and cash management policy Back Office Middle Front Office Office Debt manager Borrowing to meet medium/long term needs Developing secondary market Interfaces to investor base and creditors Central Bank Government s banker Manages monetary policy Key Relationships: Need for Prompt Updates

127 Key Relationships Ministry of Finance Tax and spending data Fiscal position forecasts Daily cash flows Defines debt and cash management policy Back Office Middle Front Office Office Debt manager Borrowing to meet medium/long term needs Developing secondary market Interfaces to investor base and creditors Central Bank Government s banker Manages monetary policy

128 Filling the Domestic and External Borrowing Plans: Consistency Domestic Borrowing: Options Marketable debt Instruments Overdraft facilities Non-marketable instruments Pre-funding Issues Market development objectives Fiscal dominance? External Borrowing: Options Official sector flows Access to market sources Financing from reserves Financing secured from FX market Postponing spending plans Issues Difficult to forecast the timing of disbursements Need for sterilization, bridge financing? i Identifying the matching liability

129 Examples

130 Example of an Issuance Plan: Target balance on TSA? Target bond financing: 4,500 Market development considerations Regular issuance: Bonds are auctioned on a Friday. Standard amounts: Minimum size of an auction is 150, maximum is 400, increments of 25 Frequency: Maximum frequency of every two weeks Seasonal factors: No auctions are scheduled in August or December

131 Example of an Issuance Plan: Implications Max of 22 auction dates available, Implies an average auction size of 205 to meet issuance target. Minimum i issuance size constraint t can be met, but not an increment Need to adjust For Instance, aim for 225 across 20 auctions

132 Example: The French Calendar for Domestic Debt Issuances

133 LATEST T-BILLS AUCTION RESULTS 26W T-BILLS 13W T-BILLS AUCTION DATE 5-Nov Νov-13 ISSUE DATE 8-Nov Nov-13 MATURITY DATE 9M 9-May Feb-14 AMOUNT AUCTIONED 1,000,000,000 1,000,000,000 TOTAL BIDS 1,860,000,000 2,025,000,000 COMPETITIVE BIDS 1,560,000,000 1,725,000,000 NON-COMP. BIDS 300,000, ,000,000 COVERAGE RATIO TOTAL ACCEPT. AMNT 1,300,000,000 1,300,000,000 Greece: November 2013 Results UNIFORM YIELD 4.15% 3.90% CUT-OFF PRICE CUT-OFF RATIO 71.60% 90.90% SECOND DAY BIDS AUTHORIZED AMNT 300 MLN EURO 300 MLN EURO EXERCISED AMNT 300 MLN EURO 300 MLN EURO

134 Spain Tesoro Público funding in 2011 Forecast (in Bn Euros) Forecast Forecast Jan-10 Close Jan-11 Close Strategy Funding requirement (=Net Issuance) Redemptions of long-term bonds and loans* Net issuance of long-term bonds and loans* Gross issuance of long-term bonds and loans* Net increase in Letras del Tesoro outstanding Net change in outstanding Central Government Debt** Central Government Debt outstanding at year-end** *Including foreign-currency debt, medium- and long-term bonds and assumed debt **In nominal terms Spain: 2012 Financing i Needs Programming

135 Spain Auction Calendar for Spain es/en/deuda/index asp Debt Issuance Strategy for Spain

136 Brasil Indicators 2011 Limits for 2012 Minimumi Maximun Stock of FDP (R$ billions) 1, , ,050.0 Profile (%) Fixed Rate Inflation Linked Floating Rate Exchange Rate Maturity Structure Average maturity (years) % Maturing in 12 months

137 Turkey Canada

138 MEDIUM TERM DEBT STRATEGY STEP 8

139 The Framework: A 8-step approach Step8: Recommend MTDS for approval

140 Not only developed but also a number of developing countries have published their MTDS document and got Parliaments approval. Reports published include: Kenya (2009, 2010, 2011) Ghana 2010 Tanzania a 2011, 2012 Malawi 2011 Moldova 2011 Bangladesh Kyrgyz Republic Tool that permits Improved policy coordination p p y Enhanced transparency Better communication also with investors Commitment to a medium-term debt funding strategy