DMF Stakeholders Forum 2011, Bern

Transcription

1 DMF Stakeholders Forum 2011, Bern Domestic Debt Market Development and Public Debt Management June 9, 2011, Phillip Anderson Senior Manager Banking and Debt Management Why is domestic, local currency debt important in managing public debt? Lessons from sovereign debt crises of the 1980s and 1990s highlighted the risks that arise from external debt: Currencyrisk risk most governments service their debt from domestic currency revenues (balance sheet mismatch) Sudden stops sharp reversal of capital flows may create a liquidity crisis Most would agree that the ability to issue long term localcurrency bonds at a reasonable cost, in a deep domestic market, would reduce risk to governments Other reasons for market development: yield curve becomes a reference for interest rates, monetary policy transmission, overall financial sector deepening. the problem is achieving this goal 1

2 Risk reduction pursued in the last decade in many emerging market economies Currency composition of government debt portfolios moved dramatically in favor of local currency Ratio of external to domestic debt Emerging Markets ECA LAC EAP Note: USD linked domestic debt reallocated to external. Source: JP Morgan EM Debt and Fiscal Indicators (2009) and BIS Financial Stability and local currency bond markets (2008) 3 Exposure to refinancing and interest rate risks was also reduced (1) There was a contraction in the ratio of floating rate to fixed rate bonds Floating to fixed rate debt (excluding Brazil) Emerging Markets ECA LAC EAP Source: JP Morgan EM Debt and Fiscal Indicators (2009) and BIS Financial Stability and local currency bond markets (2008) 4 2

3 Exposure to refinancing and interest rate risks was also reduced (2) There was an extension in the average life Average Life Emerging Markets EAP ECA LAC Years Source: JP Morgan EM Debt and Fiscal Indicators (2009) and BIS Financial Stability and local currency bond markets (2008) 5 Developing a debt management strategy involves complex trade offs and constraints Cost/Risk Analysis Constraints Information on cost and risk Consistency/ Constraints Debt Management Strategy Development Demand constraints Macroeconomic Framework Information on cost and risk Initiatives Debt Market Development 3

4 Examples of trade offs Risk of crowding out finance to the private sector if debt levels rise too high (domestic borrowing not a substitute for sound fiscal policy) In the early stages of market development, maturities are typically short, so a trade off between interest rate risk and currency risk For low income countries with access to highly concessional finance, there is a significant cost differential. (Although such financing may be in limited supply compared to investment needs) Careful analysis required of investors capacity to manage risk when extending the yield curve Public debt managers play a role in supporting market development Are a key stakeholder, along with market participants, the central bank, and regulator Decisions on volume of individual securities, versus the number of securities, can influence liquidity in the market Decisions about the approach to the primary market will influence its efficiency (e.g. primary dealers, issuance method, transparency measures) 4

5 Trends and challenges The development of government domestic debt markets has been slower in most low income countries Data gaps gp on domestic debt levels and composition, it appears that there ahas been little growth in LICs on average, compared to MICs Debt intolerance by government may be a constraint (but leaves open the possibility of private debt markets) Other issues? Covered in later presentations Capacity issues remain a challenge in many countries: both in the analysis to support a debt management strategy and developing the market Increased interest in local currency bond markets by nonresident investors over the last two years Local currency markets have attracted large inflows since mid 2009 Tracking data for dedicated EM funds and ETFs Annual Cumulative EM Local Currency Flows Provides an opportunity to lower cost of borrowing But excessive flows to individual currencies may be destabilizing Source: JP Morgan, EM Fixed Income Flows Weekly, 19 may May

6 Disclaimers 2010 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433/ Telephone: / Internet: E mail: feedback@worldbank.org Allrights reserved. This work is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request to bdm@worldbank.org. 6