FIRST OECD FORUM ON PUBLIC DEBT MANAGEMENT 7 TO 8 DECEMBER 2006, AMSTERDAM

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1 FIRST OECD FORUM ON PUBLIC DEBT MANAGEMENT 7 TO 8 DECEMBER 2006, AMSTERDAM PRESENTATION BY JOHAN KRYNAUW ASSET AND LIABILITY MANAGEMENT DIVISION NATIONAL TREASURY: SOUTH AFRICA (Johan.Krynauw@treasury.gov.za) 0

2 INDEX Background Formulation And Emulation Of Debt Management Strategies Asset And Liability Management Structure Within the National Treasury Phases In Public Debt Management (Evolution) Practical Steps In Implementing Public Debt Strategies Debt Statistics on South Africa 1

3 1. BACKGROUND Focus since 1994 on Macro reforms RDP (The construction and development programme) GEAR (Growth Employment and Redistribution Strategy) ASGISA (Accelerated and Shared Growth Initiatives) 2

4 FROM RDP TO ASGISA The Reconstruction and Development Programme (1993), was the first post-apartheid socio-economic policy and development planning framework for rebuilding South Africa. It focused on meeting basic needs, developing human resources, building the economy, and democratizing the state and society This was followed by the 1994 White Paper on Reconstruction and Development. It was, however, seen as inadequate to deliver the required economic growth and so a macro-economic intervention was needed to accelerate growth This paved the way for South Africa s macro-economic policy, as is set out in the Growth, Employment and Redistribution (GEAR) strategy (1996). The GEAR strategy established certain economic targets, including a budget deficit target, and outlined additional financial reforms, such as improvements in revenue collection. An important focus of GEAR was on restoring the international credibility of the economy ASGISA Since then, South Africa has committed to achieving the targets set out in the UN's Millennium Development Goals, which include amongst others, halving unemployment and poverty by 2014 through growth 3

5 2. FORMULATION AND EMULATION OF DEBT MANAGEMENT STRATEGIES Obtain buy in from Highest Level - Cabinet Macroeconomic and Financial sector stability Improve credibility of Government as an Issuer (Internal/External) Sound Fiscal and Monetary policies Prudent legal framework Establish objectives to borrow Build capacity within Finance Department (ALM division) Co-ordinate Public Debt Management Strategies with Monetary Policies 4

6 3. ALM STRUCTURE / NATIONAL TREASURY SOUTH AFRICAN CASE Minister Deputy Minister Director General Budget Co-ordination Public Finance Asset and Liability Management Asset and Liability Management Corporate Services Economic Policy and International Financial Relations Intergovernmental Relations Office of the Accountant-General Specialist Functions 5

7 ASSET & LIABILITY MANAGEMENT STRUCTURE Deputy Director General Office Manager Chief Directorate: Liability Management Chief Directorate: Financial Operations Chief Directorate: Strategy & Risk Management Chief Directorate: Asset Management Directorate: Domestic Debt Management Directorate: Cash Management Directorate: Market Risk Directorate: Corporate Governance Directorate: Foreign Debt Management Directorate: Accounting & Information Directorate: Country Risk Directorate: Inv Analysis Directorate: Back Office Directorate: Systems Integration Directorate: Credit Risk Directorate: Treasury Operations Directorate: DFI's Directorate: Transport & Defence Directorate: Energy & Telecoms

8 4. EVOLUTION OF PUBLIC DEBT WHAT IS GOVERNMENT DEBT MANAGEMENT? 7

9 DEFINITION The process of establishing and executing a strategy for managing the government s debt in order to raise the required amount of funding, pursue its cost and risk objectives, and to meet any other public debt management goals the government may have set. 8

10 Evolution phases in Public Debt Management Phase 4 Treasury Operations (Super Treasury) Phase 3 Asset Liability Management Phase 2 Phase 1 Debt Issuance & Recording Liability/ Cash Management Start up Evolution Phases 9

11 Evolution of Global Debt Management See South Africa s Experience attached Annexure A

12 Phase 1 Debt Issuance and recording Focus is on issuing debt given significant fiscal imbalance and no clear debt management strategy Focus on developing domestic debt markets Fragmentation and problems in coordinating debt management with monetary policy Problems in analysing and controlling the impact of debt servicing on the budget Problems controlling contingent liabilities 11

13 Phase 2 Liability/Cash Management Focus on integration of liabilities and cash flows within a risk management framework Reducing or eliminating foreign currency debt Integration of debt management and aggregate government cashflows Risk management around debt portfolio 12

14 Phase 3 Asset Liability Management Focus is on debt issuance and managing debt within a risk management framework Full integration of assets and liabilities Full identification of contingent obligations Risk management based on market values Primary objective is reducing debt costs subject to acceptable risk levels 13

15 5. PRACTICAL STEPS IN IMPLEMENTING DEBT MANAGEMENT STRATEGIES Compile funding strategy before each fiscal year part of the budget process:- (Questions to ask) What is the budget deficit?; How will it be funded?; What is the cost of service debt?; What instruments will be issued; What new instruments to be introduced; Composition of debt?; Reflect on previous year?; Develop an auction calendar? Etc. 14

16 PRACTICAL STEPS IN IMPLEMENTING DEBT MANAGEMENT STRATEGIES Communicate funding strategy to market openness, transparency, information sharing Actively involvement in Market Development Issue short, then slowly build yield curve and benchmarks over time Convert illiquid into benchmarks bonds 15

17 PRACTICAL STEPS IN IMPLEMENTING DEBT MANAGEMENT STRATEGIES Savings cost prime objective How to design and use of instruments How primary issuances designed and managed Reporting and Information on monthly basis 16

18 CONSULTATIVE PROCESS SARB & NATIONAL TREASURY Bilateral (Minister and Governor) Standing Committees (Bank and National Treausry Officials) Macroeconomic Standing Committee Banking and Financial Markets Standing Committee Financial and Regulatory Issues Standing Committee Banking Subcommittee Financial Markets Subcommittee Working committees Debt management committee 17

19 6. DEBT STATISTICS ON SOUTH AFRICA

20 Declining budget deficits as % of GDP % of GDP Financial years 19

21 Declining Government debt as % of GDP R billion Percentage Domestic debt Foreign debt Total net loan debt as % of GDP 0 20

22 Declining debt service cost as % of GDP Per cent of G D P

23 Liquidity in domestic bond market increased 14 R trillion Years 22

24 Portfolio diversification 7.1% 0.3% 1.0% 14.5% Domestic capital market bonds: R447,3 bn Retail bonds: R1,6 bn Treasury bills: R41,5 bn CPD deposits: R6,0 bn 77.1% Foreign loans: R84,3 bn Total debt: Gross R581,2 bn (33,3% of budget GDP) Net R496,6 bn (28,4% of budget GDP) 23

25 RSA FOREIGN SPREADS DECLINING USD Spread Date 24

26 Fully developed fixed income yield curve Bond issues YTM R 194 R 153 R 206 R 201 R 157 R 203 R 204 R 207 R208 R 186 R209 Bond Code YTM (% ) R 'm illio n

27 Fully developed CPI-linked yield curve Stock of ILB's Yield curve Yield R billion R198 (3,80% 2008) R189 (6,25% 2013) R197 (5,50% 2023) R202 (3,45% 2033) Bonds 26

28 Fully developed Treasury Bill yield curve 30,000 25,000 27, Oustanding Amount 20,000 15,000 10, , , Average yield 5, Months

29 2005Q2 2005Q1 2004Q4 28 RSA securitisation market 2004Q3 2004Q2 2004Q1 2003Q4 2003Q3 2003Q2 2003Q1 2002Q4 2002Q3 2002Q2 2002Q1 2001Q4 2001Q3 2001Q2 2001Q1 2000Q4 2000Q3 2000Q2 2000Q1 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 Credit card debtors Mortgage advances R'Million - Instalment and leasing finance

30 ANY QUESTIONS? 29

31 THANK YOU 30

32 ANNEXURE A SOUTH AFRICA S EXPERIENCE EXTRA READING

33 Followed same evolution phases as globally Phase 4 Treasury Operations (Super Treasury) Phase 3 Asset Liability Management Phase 2 Phase 1 Debt Issuance & Recording Liability/ Cash Management Start up Evolution Phases 32

34 Phase 1: Debt Issuance and recording

35 Domestic debt management strategies not well developed Debt management strategies focused on access to market and smoothing of maturity profile Domestic primary issues through the South African Reserve Bank (SARB) and Public Investment Commissioners Market making risk for account of Government Domestic debt instruments limited to TB s, fixed income bonds and zero coupon bonds 34

36 Domestic debt management strategies not well developed Domestic maturity profile fragmented Domestic maturity profile of up to 23 years Low bond market turnover - R2,3 trillion 35

37 Issuance in foreign markets limited Focused on establishing country s name in the market Establish benchmarks for RSA financial institutions Foreign loan issues limited to 5 year maturity Foreign holdings limited to investors in UK, Germany, USA and Japan 36

38 Domestic debt markets not well developed Established Bond Exchange of South Africa (BESA) Established a clearing house (UNEXCOR) Trade reporting, matching and settlement conducted electronically on a daily basis 37

39 Phase 2: Liability/Cash Management

40 Debt and cash management integrated Establish an institutional framework ALM Division Front, middle, back office Cash management function taken over from SARB Surplus cash invested (Tax and Loan Accounts) Improved cash flow forecasting Non interest earning liquidity buffer with SARB reduced from R3 billion to R50 million Intergovernmental Cash Coordination 39

41 Debt Flows Borrowing Rev/Exp Flows Integrated Debt & Cash Management Investment Flows Capital Flows Investment 40

42 Domestic debt actively managed Debt management strategies focused on reducing debt cost within acceptable levels of risk Domestic primary issues through Primary Dealers Market making risk for account of Primary Dealers Diversified domestic debt portfolio, floaters, ILB s, retail bonds and STRIPS added Restructure the maturity profile through switches (R63,2 billion) and buy-backs (R4,5 billion) 41

43 Domestic debt actively managed Domestic maturity profile extended to 30 years Benchmark bonds created over the yield curve Established an index-linked bond yield curve Introduced Retail Bonds, focused on the private investors Bond market turnover at R10,6 billion 42

44 RSA established as credible borrower in foreign markets Foreign debt management concentrated on the elimination of the NOFP and refinancing of maturing loans Foreign loan issues up to 20 years maturity, concentrating in 10 year area Foreign investor base extended to a wide range of high quality investors spread across Africa, Europe, Asia, America and Middle East Investment grade credit ratings assigned by all major Credit Rating Agencies 43

45 Transparency improved Auction calendar Chapter 5 of Budget Review Monthly reporting on loan issues, redemptions, extraordinary receipts / payments and cash balances Complied with the IMF s Special Data Dissemination Standards (SDDS) Domestic and foreign deal and non-deal roadshows Daily interaction with markets and media 44

46 Risk Management Unit established Initial focus on market risk pertaining to the Government debt portfolio 45

47 Phase 3: Asset Liability Management

48 Risk Management focus shifted Focus shifted to government-wide risk management Objective of Government-wide Risk Management To actively manage the risks affecting the budget emanating from debt portfolio and contingent liabilities Risks were identified and classified as Credit, Market and Country risk Risks identified were prioritised and rated 47

49 Integration of asset and liability management Initial focus on restructuring through privatisation Shift from privatisation to restructuring Create opportunity to address socio economic challenges Improve service delivery Infrastructure for growth 48

50 Integration of asset and liability management Governance over public entities Public Finance Management Act (PFMA) Treasury Regulations Protocol on Corporate Governance Initiatives to enhance stakeholder value Review of Treasury Operations (State Owned Ent.) Review of DFI mandates PFMA Amendment Bill Review of public entities 49

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