Debt Management DPI 6 Coordination with Fiscal Policy

Transcription

1 Debt Management DPI 6 Coordination with Fiscal Policy Regional workshop WB-CEMLA (SN-DeMPA) Mexico City, March18 to Jaime Coronado Q. Coordinator Public Debt Programs CEMLA Summary Coordination of national debt management with both Fiscal and Monetary Policies Intersectoral consistency and macro budget constraint Principal identities Source and use of flows Deficit funding Debt dynamics Debt indicators SN debt management topics/problems DPI-6 Coordination with Fiscal and Budgetary Policy 2 1

2 Coordination with Economic Policies Area Objective Instruments Fiscal Policy Provide (public) goods & services, and achieve distributive objectives on a sustainable basis. For this purpose: raise revenues in the least distorting way to support expenditure policy. Monetary & Exchange Rate Policy To achieve price stability Avoid BOP crises Debt management Minimize (long-term) debt servicing cost, subject to attaining a prudent level of (portfolio) risk. Manage the composition of spending and taxation Manage the levels of deficits and debt Anchored by a Medium Term Expenditure Framework/Fiscal targts & sometimes a Rules- Based Fiscal Framework Implemented through interest rates, exchange rate or monetary aggregates Manage the composition of the debt portfolio currency and rate (floating/fixed) composition, maturity, etc Anchored by a debt strategy In turn, for SNGs, we basically want to ensure consistency between Budget and DSA Intersectoral Consistency Product and National Income (1) PIB = C + I +X M (2) PNB = PIB Yfe (3) IND = PNB + Tre = C + I + X M Pfe + Tre (4) S = (IND C) = I +X M Pfe + Tre = I + CC (5) CC = S I = (Sp Ip) + (Sg Ig) 4 2

3 Fiscal Balance and Current Account Balance Twin Deficits When domestic demand exceeds domestic income, there must be a CAB deficit: CC = Y - (C+I) = (S I) = (S p I p ) + (S g I g ) (5) Net Public Lending Private Sector: (S p -I p ); Public Sector(S g -I g ) = (R G) (G R) = (S p I p ) - CC (6).. Fiscal Deficit External Deficit Intersectoral Consistency-Conventions Type of transactions Non financial: Real flow of goods and services Financial: Change in assets & liabilities Conventions Source of flows (+): Increase in liabilities Decrease in assets Use of flows(-) : Increase in assets Decrease in liabilities 6 3

4 Flow of Funds (FoF) Ex-post Identities Always hold: there s a creditor for every debtor Debt Dynamics Fundamental Equation Change in debtto-gdp ratio d t = r t g t. d t 1 -b t 1 + g t Chronic indebtedness problem: : r g differential : r > g interest exceeds the economy s growth rate: d Note: r & g are real rates Deficit: b <0 d Fiscal Space: b =( revenues expenditures) > 0 but, e.g., i investment which causes future g. What s the net effect on sustainability? g is crucial 4

5 Debt Dynamics Stabilising the debt-to-gdp ratio To stabilize the debt-to-gdp ratio, d = 0, we need: b t = r t g t. d t 1 (4) 1 + g t Primary surplus must compensate for the interest-growth differential Note that still the overall balance is the one that determines the debt dynamics Stabilizing d does not require to eventually pay o the national debt Change in the debt-to-gdp ratio Assume: d =40%ofGDP r =8% g =6% b = 1% of GDP What is the change in the debt-to-gdp ration? d = = 1.75% of GDP % of GDP is the increase in the debt-to-gdp ratio 1% is the direct impact of the primary deficit 0.75% is due to the (r - g) differential and the existing debt 5

6 Stabilizing the debt-to-gdp ratio Example I Assume: d = 60% of GDP r =6% g =3% What is the debt-stabilizing balance? b = = 0.02 (2% of GDP) 11 Stabilizing the debt-to-gdp ratio Example II Assume d = 40% of GDP r =8% g =6% What is the debt stabilizing balance? b = = (0.75% of GDP) 0.75% Of GDP compensates for the (r g) differential 12 6

7 Debt sustainability indicators Solvency Liquidity Debt B = Balance VP = Present Value SD = Debt Service I = Interest A = Amortization S VP SD (I ; A) VP/ IF CAP. PAYMENT IF X GDP Others IF = Fiscal revenues X = Exports GDP SD/ IF Ratios analysis: Trayectories DSA SN: Debt Sustainability Analysis SN, Example: trajectory of debt sustainability indicators municipal government of Bolivia 7

8 Cash flow The treasurer s problem: Liquidity (avoid spikes in the time profile of the amortization schedule) Debt service is the sum of interest payments and repayments (amortization) of principal(a + id 1 ). Debt service and the primary balance together determine the size of gross debt issues: : Debt Net Increase (5) D t - D t 1 = RF t; D t = D t 1 RF t = D t 1 + (i t D t 1 RP t ) (6) = (D t 1 A t )+(A t + i t D t 1 RP t )) Net Debt issuance Thus, debt issuance is determined by the overall fiscal balance and repayments of principal. Cash flow The treasurer s problem: Liquidity (avoid spikes in the time profile of the amortization schedule) Manipulating (6): D t-1 D t = A t + ( RP t i t D t-1 A t ) (7) Overall Balance D t = RP t i t D t-1 (8) Thus, the net debt increase is determined by the overall fiscal balance (not the primary). Also, do not confuse the role of the fiscal balance (above the line) and the amortizations (below the line) in the debt dynamics. 8

9 Debt in Foreign Currency: Important National DSA Debt Service The Role of the Exchange Rate Interest payments have a domestic and a foreign component The foreign component depends on The interest rate on the foreign denominated debt movements in the exchange rate a depreciation of the domestic currency is equivalent to an increase in the interest rate; more domestic currency is required to service the debt Example: Foreign currency interest rate r = 10% Exchange rate depreciation ε = 20% Then: Increase in interest payments by = 2% Repayment of principal is 20% more costly Coordination with Fiscal Policy: DPI 6 Dimensions to Assess Aim is to ensure that the left-hand knows what the righthand is doing, so that they don t work in an inconsistent/inefficient manner. Dimensions: D1 Ensure that reasonably reliable forecasts on debt service are provided during the yearly budget preparation. It is acceptable for the budget department to prepare its own forecasts, based on what is provided to them by the debt managers, as can be the case in some SNGs. D2 Ensure that key fiscal variables are available and shared with the Principal DeM entity (or DeM entities), and that debt sustainability analyses (DSAs) at the SNG level are undertaken and shared with the Principal DeM entity (or DeM entities). 9

10 Coordination with Fiscal Policy: DPI 6 D1: forecasts on debt service Coordination with Fiscal Policy 10

11 Thanks!! Debt Management DPI 6 Coordination with Fiscal Policy Regional workshop WB-CEMLA (SN-DeMPA) Mexico City, March18 to Jaime Coronado Q. Coordinador Programas de Deuda Pública CEMLA Circular Flow Macroeconomic Accounts 24 11