New Trends and Challenges in Government Debt Management

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1 New Trends and Challenges in Government Debt Management Phillip Anderson The World Bank Treasury 1818 H Street, N.W. Washington, DC, 2433, USA treasury.worldbank.org

2 1 Recent Trends 2 Progress and Challenges 3 Case Study: Kenya 2

3 Recent increases in net capital flows experienced across the board, but the nature of the flows have been different Net Capital Flows to Developing Countries, By Type of Flow Net Capital Flows to Developing Countries, By Source Billions of US dollars Grants, excluding technical cooperation Net flow s on debt, total long-term Portfolio equity flow s Foreign direct investment, net inflow s Billions of US dollars Private net resource flow s Official net resource flow s Net Capital Flows to Low Income Countries, By Type of Flow Net Capital Flows to Low Income Countries, By Source Billions of US dollars Grants, excluding technical cooperation Net flow s on debt, total long-term Portfolio equity flow s Foreign direct investment, net inflow s Billions of US dollars Private net resource flow s Official net resource flow s Source: GDF, World Bank 3

4 Net capital inflows have been accompanied by strong external positions 8 All Developing Countries: Net Capital Flows, Current Account Balance, and Internaitonal Reserves as Percent of Gross National Income Percent Percent -4 Current account balance International reserves (right scale) Net capital flows 8 Low Income Countries: Net Capital Flows, Current Account Balance, and Internaitonal Reserves as Percent of Gross National Income Percent Percent -4 Current account balance International reserves (right scale) Net capital flows Source: GDF, World Bank 4

5 And prudent fiscal policies 8 Primary Balance of the General Government: Percent of GDP Percent Latin America Europe Asia Africa/Middle East Source: WEO, IMF Low Income Countries: Average Public Debt Percent of GDP Percent Source: World Bank and IMF 5

6 As well as risk reduction in government debt management 4,5 Government Debt: By Domestic and International Billions of US Dollars 4, 3,5 3, 2,5 2, 1,5 1, Domestic International Domestic Public Debt Maturing in Less than a Year Percent of Total Domestic Debt (in percent of total sovereign debt) Europe Latin America Billions of US Dollars 4, 3,5 3, 2,5 2, 1,5 1, 5 Source: BIS Domestic Currency Government Debt: By Region Middle East and Africa Europe Asia Latin America Asia 2 Source: Global Financial Stability Report, IMF, April 26 Asia: China, Philippines, India, Indonesia, Korea, Malaysia, Thailand Europe: Czech Republic, Hungary, Poland, Turkey, Russia Latin America: Argentina, Brazil, Chile, Colombia, Mexico, Venezuela Middle East: Israel Source: Jeanne and Guscina (26) Asia: China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan (China), and Thailand. Latin America: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. Europe: The Czech Republic, Hungary, Poland, Turkey, and Russia. Middle East and Africa: Lebanon and South Africa. Source: BIS 6

7 Interest rate risk profile shows distinct regional patterns Latin America: Composition of domestic currency debt Central Europe: Composition of domestic currency debt 1% 1% 8% 6% 4% 2% FX indexed Inflation indexed Fixed rate Floating 8% 6% 4% 2% FX indexed Inflation indexed Fixed rate Floating % % Asia: Composition of domestic currency debt Other Countries: Composition of domestic currency debt 1% 8% 6% 4% 2% FX indexed Inflation indexed Fixed rate Floating 1% 8% 6% 4% 2% FX indexed Inflation indexed Fixed rate Floating % % Source: BIS 7

8 An increasing number of emerging market countries are being upgraded and spreads are still at historic lows despite recent financial turmoil Sovereign Rating Action (Includes S&P and Moody's) Number of rating actions for 49 Emerging Countries Downgrades Upgrades EMBI-Global Spreads Basis Points /1/2 7/1/2 1/1/21 7/1/21 1/1/22 7/1/22 1/1/23 7/1/23 1/1/24 7/1/24 1/1/25 7/1/25 1/1/26 7/1/26 1/1/27 7/1/27 Source: Bloomberg 8

9 And an increasing number of low income countries are being rated Low Income Countries: Number of Countries with Credit Rating 15 Moody's Standard & Poor's # of Countries Rated Credit Ratings of Low Income Countries: Standard & Poor's (As of October 27) # of Countries Rated B- B B+ BB- BB BB+ BBB- Source: Bloomberg 9

10 1 Recent Trends 2 Progress and Challenges 3 Case Study: Kenya 1

11 Developing medium-term debt management strategies Formalizing a comprehensive strategy Conducting cost-risk analysis Providing input to fiscal sustainability analysis Coordinating with cash management and monetary policy implementation 11

12 Improving governance arrangements and capacity Consolidating and eliminating inconsistencies in the legal framework Consolidating debt management activities into one unit More effective management of operational risk Strengthening management of debt recording systems Addressing skills and retention problems 12

13 Domestic debt market development and financial stability Supply side measures Establishment of benchmark bonds Elimination of non-marketable debt Fair and transparent issuance program Demand side measures Diversification of investor base, including foreign, institutional, and retail investors Incentives to trade are often poor Financial stability Concentration of banks as main buyer of government debt Lack of liquidity in secondary markets reduces quality of assets in the banking system 13

14 Designing and implementing a reform program Country ownership and commitment to reform is a precondition Comprehensive diagnostics necessary prior to undertaking reform including links with macroeconomic framework Embodying PDM reform in broader projects can improve chances of success in implementation Coordination with other organizations and governments have improved the quality of PDM technical support 14

15 1 Recent Trends 2 Progress and Challenges 3 Case Study: Kenya 15

16 Institutional Reforms in Kenya History of failed capacity building efforts Joint UNDP/World Bank/ComSec/SIDA Set up Debt Management Division in the Ministry of Finance Strong senior management support Sole support of SIDA Twelve well trained staff Creation of debt management strategy Good basic debt recording No outside support Debt management became less priority within the Ministry of Finance Departure of senior management and trained staff Deterioration of quality of debt records Source: Nars (1995), SIDA Key Lessons: Commitment from host country Awareness by senior management of the importance of DM Staff recruitment and retention program to avoid key person risks Establish institutional memory through establishing clear routines, handbooks, career planning and continuous staff training 16

17 Institutional Reforms in Kenya Turning point: Anglo Leasing affair (24) and commitment to prevent future corruption Situation in 23 Situation in 27 Staff of 5 officials Debt Management Department of MoF (DMD) played limited role Main functions were to maintain and register external loans in the debt recording system and to calculate the grant element in external loan proposals Debt recording system intermittently down and data were not entered in a timely manner; recorded debt were not accurate Last Annual Report prepared in 1994, by consultants No formalized debt management strategy Staff of 24 officials Organized according to FO, MO and BO functions Domestic and external debt database has been migrated and updated on CS-DRMS 2+ Debt data reconciled against loan contract and validated Back office of DMD and its internal procedures have been strengthened A comprehensive Annual Debt Management Report has been published DMD has its own website 17

18 Cost-risk trade-offs arising from a portfolio of foreign (concessional) debt vs. domestic (market) debt Kenya: Total Public Debt, External and Domestic as % of GDP Kenya: Interest Cost of External and Domestic Debt Percent EXTERNAL DOMESTIC Billions of Ksh Domestic Interest External Interest Kenya: External Public Debt, By Type of Creditor Kenya: Amortization Schedule of Domestic Government Debt: November 27 Billions of Ksh Bilateral Multilateral Commercial banks Export credit Billions of Ksh Weighted average interest rate Average time to maturity Source: Annual Report July 25 - June 26 Domestic debt 1.5% 2.2 years Debt Management Department, Ministry of Finance, Kenya External debt.8% 36 years 18

19 Final words Importance of comprehensive approach Interactions between DM issues Coordination with other macroeconomic policies Parallel work with domestic debt market development No one-size-fits-all approach and reform programs need to be tailor-made Country specific circumstances LIC specific issues Useful to have standardized indicators to measure progress over time 19