Debt Management: The Alphabet Soup

Transcription

1 Debt Management: The Alphabet Soup DSF MTDS DeMPA Leonardo Hernández Economic Policy and Debt Department The World Bank

2 Outline I. Why is Debt Management Important? II. III. IV. The Debt Management Facility for LICs DeMPA and the Big Picture The Debt Sustainability Framework V. Debt Management Performance Assessment (DeMPA) VI. VII. Medium-Term Debt Management Strategy (MTDS) Conclusion

3 I. Why is DM important?

4 Why is Debt Management important? Since 1996, there has been substantial progress in both the HIPC initiative and the MDRI: debt relief has opened space for contracting new debt 40 eligible HIPCs willing to avail themselves of relief under the HIPC Initiative 3 countries reached CP recently: Burundi (Jan. 2009), CAR and Haiti (Jun. 2009) 2 countries have reached DP since late last year: Togo (Nov. 2008) & Cote d Ivoire (Mar. 2009)

5 Why is Debt Management important? A large majority of HIPCs have received or begun to receive debt relief 26 CP countries 9 DP countries 5 Pre-DP countries

6 Why is Debt Management important? Heavily Indebted Poor Countries (as of end June 2009) 26 Post CP Countries Benin Bolivia Burkina Faso Burundi Cameroon Central African Republic Ethiopia Ghana Guyana Gambia, The Haiti Honduras Honduras Madagascar Malawi Mali Mauritania Mozambique Nicaragua Niger Rwanda São Tomé and Príncipe Senegal Sierra Leone Tanzania Uganda Zambia 9 Interim Countries Afghanistan Chad Congo, Dem. Rep. of the Congo, Rep. of Côte d Ivoire Guinea Guinea- Bissau Liberia Togo 5 Pre-DP Countries Comoros Eritrea Somalia Sudan Kyrgyz Republic

7 Why is Debt Management important? Debt burdens have been reduced by 80% compared to DP levels In billions of U.S. dollars, in end-2008 NPV terms Before traditional debt relief After traditional debt relief After HIPC Initiative debt relief After additional bilateral debt relief After MDRI 9 Interim Countries 26 Completion-Point Countries

8 Why is Debt Management important? A new landscape (new lenders) Potential mounting of fiscal deficits (fiscal stimulus packages) Countries face a more volatile and uncertain financial environment institutional framework necessary to manage public debt prudently to avoid a recurrence of debt distress (default) episodes.

9 II. The DMF for LICs

10 The DMF for LICs The Debt Management Facility (DMF) for low-income countries is a multi-donor trust fund, that provides grant-based technical assistance (over an initial four-year operational period), with a view to strengthen debt management capacity and institutions, via the supply of global public goods (knowledge tools) and the delivery of technical assistance, while facilitating knowledge sharing and enhancing coordination among different debt management providers. 10

11 The DMF for LICs The DMF focuses on low-income and IDAonly countries. Its work program is demand-driven. Most activities financed under the DMF are implemented in collaboration with Implementing Partners, comprising CEMLA, Commonwealth Secretariat, DRI, DMFAS Programme of UNCTAD, MEFMI, Pôle Dette and WAIFEM. 11

12 The DMF for LICs Activities under the DMF Systematic application of the Debt Management Performance Assessment (DeMPA); Country-led design of medium-term debt management strategies (MTDS) jointly with the IMF; Design of reform programs (after diagnostics); Training events; Research and development of knowledge products; Peer learning initiatives, such as the Debt Management Practitioners Program and the Debt Managers Network.

13 DMF: Other Outreach Events The Debt Management Practitioner s Program enables officials from debt management offices to join PRMED Bank Staff for 3-month assignments; The Debt Managers Network, designed to provide a platform for peer learning on technical issues, especially for African debt managers; The Annual Stakeholder s Forum to bring together public and private sector stakeholders.

14 III. DeMPA and the Big Picture

15 DeMPA and the big picture Debt sustainability Debt management Long term debt sustainability DeMPA (process) MTDS (debt composition) DSF (debt level)

16 IV. The DSF

17 The Debt Sustainability Framework The DSF was introduced in 2005 and reviewed in 2006 and 2009 (ongoing). It is an analytical tool used to assess a country s debt burden (i.e., its probability of debt distress): the thermometer Its aim is to inform Bank-Fund analyses on debt vulnerabilities and allow better informed decision making by lenders, borrowers and donors. Over the past four years its use has increased significantly.

18 The Debt Sustainability Framework Policies set by the Bank and the Fund on non-concessional borrowing, as well as grant allocation decisions by IDA and others, use the analytical tool as an input: the treatment. Despite the framework s inherent flexibility, the ongoing revision suggests 3 areas where this can be enhanced while still preserving the tool s integrity: SOEs, invest./growth nexus, and remittances.

19 The Debt Sustainability Framework The DSF consists of the following set of institutional and policy-dependent indicative debt thresholds. Table: Debt Sustainability Framework Thresholds PV of debt in percent of Debt service in percent of Exports GDP Revenue Exports Revenue Weak Policy (CPIA < 3.25) Medium Policy (3.25 < CPIA < 3.75) Strong Policy (CPIA > 3.75)

20 The Debt Sustainability Framework The indicative institutional and policydependent thresholds result from the following (empirically founded) equation: Prob. of Debt Distress = f (indebtedness; CPIA) + Which implies a negative relationship between CPIA ratings and probability of debt distress, for a given level of indebtedness. Alternatively, given a country s CPIA, the relationship above indicates the maximum indebtedness allowed for a given prob. of debt distress.

21 The Debt Sustainability Framework Note that the use of thresholds imply different probabilities of debt distress for countries with different CPIAs. 35% Probabilityof Debt Distress 30% 25% 20% 15% 10% CPIA

22 The Debt Sustainability Framework For a given country, its 3 yr average CPIA determines the applicable thresholds against which to compare its debt burden indicators. 20 year projections for the debt burden indicators are constructed in a baseline and alternative scenarios, as well as in stress tests. Such projections are compared against the corresponding thresholds to determine a country s risk of debt distress rating.

23 The Debt Sustainability Framework Then, countries are assigned debt distress ratings (for which staffs are expected to exercise judgment and not just follow a mechanistic approach). Low risk: all debt burden indicators are well below the thresholds. Moderate risk: debt burden indicators are below the thresholds in the baseline scenario but thresholds could be breached in stress tests and alternative scenarios. High risk: one or more debt burden indicators breach the thresholds on a protracted basis under the baseline scenario. Debt distress: the country is already experiencing difficulties in servicing its debt (i.e., is in arrears) irrespective of its capacity to repay based on a forward looking analysis.

24 V. DeMPA

25 What is DeMPA? Analytical tool with following attributes: Objective Assess public debt management performance capacity Monitor performance Design reform program Donor Harmonization Methodology 15 Performance Indicators (PI) 35 Dimensions Covers six core DM functions Implementation Assessment missions Performance Report No conditionality Report release at the authorities discretion Demand driven

26 The Performance Indicators DPI-1 DPI-2 DPI-3 DPI-4 DPI-5 DPI-6 DPI-7 DPI-8 DPI-9 DPI-10 DPI-11 DPI-12 DPI-13 DPI-14 DPI-15 Governance and Strategy Development Legal Framework Managerial Structure Debt Management Strategy Evaluation of Debt Management Operations Audit Coordination with Macroeconomic Policies Coordination with Fiscal Policy Coordination with Monetary Policy Borrowing and Related Financing Activities Domestic Borrowing External Borrowing Loan Guarantees, On-lending and Derivatives Cash Flow Forecasting and Cash Balance Management Cash Flow Forecasting and Cash Balance Management Operational Risk Management Debt Administration and Data Security Segregation of Duties, Staff Capacity and Business Continuity Debt Records and Reporting Debt Records Debt Reporting

27 Example of different dimensions within one PI DPI 11: CASH FLOW FORECASTING AND MANAGEMENT Dimension Score 1. Effectiveness of forecasting the aggregate level of cash balances in government bank accounts. 2. Effectiveness of managing the aggregate cash balance in government bank account(s), including the integration with the domestic debt borrowing program. 3. Where the Principal DeM Entity or the DeM entities operate their own bank accounts, the frequency of reconciliation of these bank accounts.

28 DeMPA s scoring method Scoring method - (A to D) i) Meet minimum requirement = Score C Important for effective debt management ii) Absence of minimum requirement = Score D Signals an area of priority attention iii) Sound practice = Score A (B intermediate for more granularity) iv) Not rated if process/system does not exist (e.g., derivatives)

29 To date DeMPA has been implemented in 38 developing countries FY07 (5) The Gambia (Pilot) Malawi (Pilot) Albania (Pilot) Guyana (Pilot) Nicaragua (Pilot) FY08 (13) Burkina Faso (RO) CAR (RO) Ghana Mali (RO) Mozambique Togo Sao Tome Principe Swaziland (RO) Zambia Bangladesh Honduras (RO) Moldova Mongolia FY09 (14) Burundi (RO) Uganda (RO) St Kitts & Nevis (ECCB) Solomon Islands (RO) Cape Verde Cameroon (RO) Congo, Brazzaville (RO) Guinea (RO) Nigeria (RO) Rwanda (RO) Congo, DRC (RO) Cote d Ivoire (RO) Grenada Antigua FY10 (6 completed) Tonga (pipeline) Yemen (pipeline) Samoa (pipeline) Ethiopia (pipeline) Pakistan (pipeline) Malawi (follow up -pipeline Liberia (RO) Guinea Bissau (RO) Senegal (RO) Congo, DRC (RO) Cote d Ivoire (RO) Sierra Leone (RO) RO = Regional Organizations. Missions undertaken in collaboration with regional TA providers Pole Dette, MEFMI, WAIFEM, and CEMLA

30 Preliminary Results (27 countries) Debt Records Segr. of Duties, Staff Debt Administration/ Debt Reporting Legal Framework 27 Managerial Structure Debt Management Audit Cash Flow Forecasting/ Coordination with Loan Guarantees, OL External Borrowing DeMPA Score C and Higher Coordination with Domestic Borrowing DeMPA Score D

31 Technical Assistance Road Map DeMPA Possible follow- ups Capacity building: Debt Sustainability Assessment Legal and other advice: Domestic market development Capacity Building: Reform Plan Capacity building: Public debt Management Strategy Hub training Within country training Reform Plan TA mission Hub training MTDS mission Training / TA examples Follow-up Reform Plan TA mission Follow-up MTDS training mission

32 VI. MTDS

33 What is the MTDS? Objective Provides guidance on the process for developing a plan that the government intends to implement over the mediumterm to achieve a desired composition of the government debt portfolio Evaluates the costrisk tradeoffs associated with different strategies. Methodology (developed in partnership with the IMF) Guidance Note (GN) provides practical guidance on the process of developing an MTDS. The Analytical Tool (AT) allows to undertake a cost-risk analysis to guide the MTDS decisionmaking process. A Handbook explains the use of the AT. Implementation Implementation mission plus training follow-up missions It is implemented jointly with the IMF Report release at authorities discretion Demand driven.

34 Why an MTDS? B C Go with the tides and wind D A Start Note: plans are made subject to constraints (navigation skills, weather conditions and forecast, ship size, etc.) 34 E Final destination

35 Still, DeMPA results indicate that only 4 out of 27 assessed (reports finalized) countries had a satisfactory medium-term strategy in place Debt Records Segr. of Duties, Staff Debt Administration/ Debt Reporting Legal Framework 27 Managerial Structure Debt Management Strategy Debt Management Audit Cash Flow Forecasting/ Coordination with Fiscal Loan Guarantees, OL External Borrowing DeMPA Score C and Higher Coordination with Domestic Borrowing DeMPA Score D

36 The MTDS has so far been implemented in 6 countries FY10 Pipeline FY08 (4) FY09 (2) Nigeria Bangladesh (P) Cameroon (P) Ghana (P) Nicaragua (P) Kenya Moldova (P) Cape Verde Malawi Tanzania Zambia

37 The Eight Steps of an MTDS I. Identify objectives for public debt management and scope of the strategy II. III. IV. Analyze the cost and risk of the existing debt Identify and analyze potential funding sources Identify baseline projections and risks in key policy areas V. Review key longer-term structural factors VI. VII. VIII. Assess and rank alternative strategies on the basis of the cost-risk trade-off Review candidate strategies with fiscal and monetary policy authorities Submit and secure agreement on the MTDS

38 Step III. Identify and analyze potential funding sources Determine the range of strategies that might be feasible and desirable. Concessional vs. commercial external borrowing Access to international capital markets? At what cost? Potential demand for government paper?

39 Step IV. Identify baseline projections and risks in key policy areas Step V. Review longer-term structural factors Objective is to identify : baseline projections of key fiscal, monetary policy, external, and market variables; the key risk to these projections; a set of comprehensive risk scenarios; any other factors that are relevant for an MTDS formulation. Longer-term structural factors could include: Commodity dependence and associated vulnerability to development in commodity prices; Longer-term prospects of continued access to concessional finance.

40 Step VI. Assess and rank alternative debt management strategies on the basis of the cost-risk trade off Identify set of relevant strategies; Assess, using the AT, the costs and risk of these alternative strategies. Cost (i/gdp) 1.20% 1.00% S4 S3 0.80% 0.60% 0.40% 0.20% S1 S2 0.00% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% Risk (max Δ from baseline after shocks)

41 VII. Conclusion

42 Conclusion Results from DeMPA missions clearly highlight large gaps in PDM frameworks and capacity in developing countries. Moreover, the current crisis underscores the urgency for improving PDM in many countries. Thanks to the DMF, the scaling up of World Bank s technical assistance for strengthening PDM has come at the right time. Going forward, the World Bank will not only further leverage the dissemination of existing tools, but it will also continue to develop new tools and facilitate knowledge sharing with a view to foster coordination among debt management TA providers.