Digging into the composition of government debt in CESEE: a risk evaluation 82 nd OeNB East Jour Fixe June 11, 218 Markus Eller Principal Economist Oesterreichische Nationalbank Foreign Research Division Opinions expressed do not necessarily reflect the official viewpoint of the the OeNB or the Eurosystem. 1
68 th OeNB East Jour Fixe: Limited fiscal space in CESEE during the 28/29 global financial crisis 2
Crisis mitigation capacity of fiscal policy Recession: Is fiscal policy able to contribute to macroeconomic stabilization? Ideally, in order to cushion the downturn, fiscal policymakers would want to rely on: strong automatic stabilizers But difficult to achieve in practice, especially in emerging markets discretionary stimulus packages favorable borrowing conditions 3
Sovereign default risk perceptions: CESEE vs. EA countries Credit default swap premiums for government bonds with 5-year maturity 14 basis points basis points 14 12 12 1 1 8 8 6 6 4 4 2 2 28 29 21 211 212 213 214 215 216 217 218 Hungary Poland Romania Croatia Serbia Russia Turkey 28 29 21 211 212 213 214 215 216 217 218 Germany Italy Ireland Spain Greece Portugal Source: Macrobond. Note: Latest observation: June 1, 218. 4
Increased post-gfc focus on public debt management and sovereign balance sheet structures Das et al. (IMF, 21): Public debt management (PDM) => financial stability Baldacci et al. (IMF, 211): Sudden changes in financial market conditions => sovereign liquidity (early warning exercises) Blommestein & Turner (OECD, 212), Zampolli (BIS, 212): PDM <=> monetary policy Kose et al. (World Bank, 217): cross-country database of fiscal space Ostry, J. (IMF, 218): o Given pending monetary policy normalization, paying down increased post-gfc public debt levels is the issue of the day (@ IMF Spring Meetings, 218) o Rating agencies pay now more attention to fiscal space o PDM as underappreciated channel to boost fiscal space 6
Deep recessions following the GFC significantly pushed up government debt ratios in CESEE General government gross debt % of GDP 9 8 7 6 5 4 3 2 1 RU BG TR CZ RO MK SK PL RS ME HU AL SI UA HR Source: IMF World Economic Outlook, as of April 218. 217 (estimated) 212 29 27 7
Government debt structure & macro-financial risks Based on: Eller, M. and J. Holler. 218. Digging into the composition of government debt in CESEE: a risk evaluation. In: Focus on European Economic Integration Q2/18. Vienna: OeNB. 56 8. 8
Creditor structure Long-term investors who are less sensitive to current market conditions reduce liquidity and refinancing risk o Typically the case for domestic investors such as pension funds However, comparatively shallow capital market make it hard to issue sufficient portions of sovereign debt domestically A high share of debt owed to nonresident creditors: o Underlines a country s creditworthiness. As long as sufficiently diversified investor base lower funding costs in normal times o But also: first-round economic consequences of a default have to be borne mainly by foreign investors drives up country risk premia o During periods of high global uncertainty: increasing risk to lose access to market funding (liquidity risk) or at favorable conditions (refinancing risk) o More difficult access to international capital markets during downturns: When it rains, it pours (Kaminsky et al., 24) 1
Government debt by creditor (countries with debt ratio > 6%) General government gross debt by creditor: BULGARIA General government gross debt by creditor, % of GDP % of GDP 6 HUNGARY 9 8 5 7 6 5 4 3 4 2 1 24 25 26 27 28 29 21 211 212 213 214 215 216 217 3 SLOVENIA 9 8 7 6 5 4 3 2 1 24 25 26 27 28 29 21 211 212 213 214 215 216 217 CROATIA 9 8 7 6 5 4 3 2 1 24 25 26 27 28 29 21 211 212 213 214 215 216 217 SERBIA 9 8 2 7 6 5 4 1 3 2 1 24 25 26 27 28 29 21 211 212 213 214 215 216 217 24 25 26 27 28 29 21 211 212 213 214 215 216 217 Loans to government from abroad and other government liabilities vis-à-vis nonresidents Government debt securities held by foreign portfolio investors Government debt owed to other domestic investors (e.g. NCB, pension funds, investment funds, insurance companies) and statistical discrepancy Loans to government from domestic banking sector Government debt securities held by domestic banking sector General government consolidated gross debt Source: Eurostat, IMF, national central banks. ALBANIA 9 8 7 6 5 4 3 2 1 24 25 26 27 28 29 21 211 212 213 214 215 216 217 UKRAINE 9 8 7 6 5 4 3 2 1 24 25 26 27 28 29 21 211 212 213 214 215 216 217 11
Government debt by creditor (countries with debt ratio < 6%) General government gross debt by creditor: BULGARIA General government gross debt by creditor, % of GDP % of GDP 6 6 5 4 POLAND 5 6 5 4 CZECH REPUBLIC 6 5 4 SLOVAKIA 3 2 4 3 2 3 2 1 1 1 24 25 26 27 28 29 21 211 212 213 214 215 216 217 6 5 4 3 ROMANIA 2 24 25 26 27 28 29 21 211 212 213 214 215 216 217 6 5 4 BULGARIA 24 25 26 27 28 29 21 211 212 213 214 215 216 217 6 5 4 FYR MACEDONIA 3 2 1 3 2 3 2 1 1 1 24 25 26 27 28 29 21 211 212 213 214 215 216 217 24 25 26 27 28 29 21 211 212 213 214 215 216 217 Loans to government from abroad and other government liabilities vis-à-vis nonresidents Government debt securities held by foreign portfolio investors Government debt owed to other domestic investors (e.g. NCB, pension funds, investment funds, insurance companies) and statistical discrepancy Loans to government from domestic banking sector Government debt securities held by domestic banking sector General government consolidated gross debt Source: Eurostat, IMF, national central banks. 24 25 26 27 28 29 21 211 212 213 214 215 216 217 24 25 26 27 28 29 21 211 212 213 214 215 216 217 12
Substantial shares of government debt owed to nonresidents, often dominated by portfolio investors General government gross debt owed to nonresidents % of total debt 1 9 8 7 6 5 4 3 2 1 RU HR HU AL TR CZ BG UA PL RO SK RS MK SI Source: Eurostat, IMF, national central banks, OeNB. 217q4 212q4 29q4 13
Currency structure Issuing FC-denominated debt to attract foreign investors who are not willing to add FC risk to their asset portfolio reduce funding costs by reducing liquidity premiums and increasing demand A high share of foreign currency debt: o Implies substantial exchange rate risk: might be especially harmful since it implies not only potential changes in interest payments but also a revaluation of the debt stock o To which extent exchange rate risks materialize depends on a variety of factors: overall exchange rate stability, foreign currency debt being denominated in volatile currencies and/or currencies that are only poorly correlated with the issuer s economic cycle, presence of hedging instruments, However, foreign investors may also have an important share in domestic currency debt, which under certain circumstances may result in sudden outflows (e.g. HU in the fall of 28) 14
Exchange rate risks in countries with high FC shares and an already large debt stock Government debt denominated in foreign currency % of total debt 1 9 8 7 6 5 4 3 2 1 SK SI CZ HU RU PL TR AL RO MK RS HR UA BG Source: Bloomberg, OeNB calculations 217q4 212q4 29q4 15
The EUR dominates public FC borrowing in CESEE EU member states Currency structure of government debt % of total debt, end-of-year 1 9 8 7 6 5 4 3 2 1 29 217 29 217 29 217 29 217 29 217 29 217 Bulgaria Czech Rep. Croatia Hungary Poland Romania Local currency EUR USD GBP JPY CHF Other Source: Bloomberg, OeNB calculations. 16
The USD dominates public FC borrowing in Russia, Serbia, Turkey and Ukraine Currency structure of government debt % of total debt, end-of-year 1 9 8 7 6 5 4 3 2 1 29 217 29 217 29 217 29 217 29 217 29 217 Albania FYR Macedonia Serbia Russia Ukraine Turkey Local currency EUR USD GBP JPY CHF Other Source: Bloomberg, OeNB calculations. 17
Maturity structure Short-term debt issuance is usually associated with lower funding costs A high share of debt falling due in the short run (or debt with variable interest rates or short interest rate fixation periods): o Implies interest rate risk: An interest rate increase translates into a higher debt servicing burden and thus limits fiscal space o Implies also high rollover risk: i.e. the need to refinance a substantial part of debt under uncertain market conditions 18
Refinancing risks have been relieved somewhat due to lengthening maturities of debt instruments Average time to maturity - all instruments weighted average years to maturity of all principal payments in the debt portfolio, cross CESEE-15 average 8 7 6 5 4 3 2 1 31.12.29 31/3/211 3/6/212 3/9/213 31/12/214 31/3/216 3/6/217 Source: Bloomberg. Outstanding general govt debt maturing within 1 year, all currencies % of total debt 1 9 8 7 6 5 4 3 2 1 ME BG SI SK PL TR RO RU UA HR RS CZ HU MK AL 217q4 212q4 29q4 Source: Bloomberg, OeNB calculations Residual maturities of the sovereign debt profile have broadly lengthened since the GFC Nevertheless, a few countries are still subject to a considerable share of debt falling due in 218 19
Several countries face concentrated debt redemptions in the next few years HUNGARY 7 7, SLOVENIA 7 7, SLOVAKIA 7 7, 6 5 in % of GDP (lhs) in EUR mn (rhs) 6, 5, 6 5 in % of GDP (lhs) in EUR mn (rhs) 6, 5, 6 5 in % of GDP (lhs) in EUR mn (rhs) 6, 5, 4 4, 4 4, 4 4, 3 3, 3 3, 3 3, 2 2, 2 2, 2 2, 1 1, 1 1, 1 1, Q1 218 Q2 218 Q3 218 Q4 218 Q1 219 Q2 219 Q3 219 Q4 219 Q1 22 Q2 22 Q3 22 Q4 22 Q1 221 Q2 221 Q3 221 Q4 221 Q1 222 Q2 222 Q3 222 Q4 222 Q1 223 Q2 223 Q3 223 Q4 223 Q1 224 Q2 224 Q3 224 Q4 224 Q1 225 Q2 225 Q3 225 Q4 225 Q1 218 Q2 218 Q3 218 Q4 218 Q1 219 Q2 219 Q3 219 Q4 219 Q1 22 Q2 22 Q3 22 Q4 22 Q1 221 Q2 221 Q3 221 Q4 221 Q1 222 Q2 222 Q3 222 Q4 222 Q1 223 Q2 223 Q3 223 Q4 223 Q1 224 Q2 224 Q3 224 Q4 224 Q1 225 Q2 225 Q3 225 Q4 225 7 ROMANIA 14, FYR MACEDONIA 7 7, 6 5 in % of GDP (lhs) in EUR mn (rhs) 12, 1, 6 5 in % of GDP (lhs) in EUR mn (rhs) 6, 5, 4 8, 4 4, 3 6, 3 3, 2 4, 2 2, 1 2, 1 1, Q1 218 Q2 218 Q3 218 Q4 218 Q1 219 Q2 219 Q3 219 Q4 219 Q1 22 Q2 22 Q3 22 Q4 22 Q1 221 Q2 221 Q3 221 Q4 221 Q1 222 Q2 222 Q3 222 Q4 222 Q1 223 Q2 223 Q3 223 Q4 223 Q1 224 Q2 224 Q3 224 Q4 224 Q1 225 Q2 225 Q3 225 Q4 225 Q1 218 Q2 218 Q3 218 Q4 218 Q1 219 Q2 219 Q3 219 Q4 219 Q1 22 Q2 22 Q3 22 Q4 22 Q1 221 Q2 221 Q3 221 Q4 221 Q1 222 Q2 222 Q3 222 Q4 222 Q1 223 Q2 223 Q3 223 Q4 223 Q1 224 Q2 224 Q3 224 Q4 224 Q1 225 Q2 225 Q3 225 Q4 225 Q1 218 Q2 218 Q3 218 Q4 218 Q1 219 Q2 219 Q3 219 Q4 219 Q1 22 Q2 22 Q3 22 Q4 22 Q1 221 Q2 221 Q3 221 Q4 221 Q1 222 Q2 222 Q3 222 Q4 222 Q1 223 Q2 223 Q3 223 Q4 223 Q1 224 Q2 224 Q3 224 Q4 224 Q1 225 Q2 225 Q3 225 Q4 225 ALBANIA 7 7, 6 5 in % of GDP (lhs) in EUR mn (rhs) 6, 5, 4 4, 3 3, 2 2, 1 1, Q1 218 Q2 218 Q3 218 Q4 218 Q1 219 Q2 219 Q3 219 Q4 219 Q1 22 Q2 22 Q3 22 Q4 22 Q1 221 Q2 221 Q3 221 Q4 221 Q1 222 Q2 222 Q3 222 Q4 222 Q1 223 Q2 223 Q3 223 Q4 223 Q1 224 Q2 224 Q3 224 Q4 224 Q1 225 Q2 225 Q3 225 Q4 225 SERBIA 7 7, MONTENEGRO 14 7, 6 5 in % of GDP (lhs) in EUR mn (rhs) 6, 5, 12 1 in % of GDP (lhs) in EUR mn (rhs) 6, 5, 4 4, 8 4, 3 3, 6 3, 2 2, 4 2, 1 1, 2 1, Q1 218 Q2 218 Q3 218 Q4 218 Q1 219 Q2 219 Q3 219 Q4 219 Q1 22 Q2 22 Q3 22 Q4 22 Q1 221 Q2 221 Q3 221 Q4 221 Q1 222 Q2 222 Q3 222 Q4 222 Q1 223 Q2 223 Q3 223 Q4 223 Q1 224 Q2 224 Q3 224 Q4 224 Q1 225 Q2 225 Q3 225 Q4 225 Q1 218 Q2 218 Q3 218 Q4 218 Q1 219 Q2 219 Q3 219 Q4 219 Q1 22 Q2 22 Q3 22 Q4 22 Q1 221 Q2 221 Q3 221 Q4 221 Q1 222 Q2 222 Q3 222 Q4 222 Q1 223 Q2 223 Q3 223 Q4 223 Q1 224 Q2 224 Q3 224 Q4 224 Q1 225 Q2 225 Q3 225 Q4 225 2
Both LC- and FC-denominated debt experienced a gradual decline in short-term maturities Share of debt maturing within 1 year - by currency in % of total 1 9 8 7 6 5 4 3 2 1 29 212 217 29 212 217 29 212 217 29 212 217 29 212 217 29 212 217 Bulgaria Czech Rep. Croatia Hungary Poland Romania All currencies In local currency In foreign currencies Source: Bloomberg, OeNB calculations. 21
& FC debt is across the board less of a short-run nature than the one issued in LC Share of debt maturing within 1 year - by currency in % of total 1 9 8 7 6 5 4 3 2 1 29 212 217 29 212 217 29 212 217 29 212 217 29 212 217 29 212 217 Albania FYR Macedonia Serbia Russia Ukraine Turkey All currencies In local currency In foreign currencies Source: Bloomberg, OeNB calculations. 22
Lengthened maturities also resulted in a reduced need to re-fix interest rates in the short run Government bonds with interest rates to be refixed within 1 year % of total government bonds 1 9 8 7 6 5 4 3 2 1 ME BG SK SI RO HR TR UA RS PL MK CZ RU HU AL Source: Bloomberg, OeNB calculations 217q4 212q4 29q4 23
Government debt structure & risk implications (1) Several CESEE countries show vulnerabilities to refinancing risk and market risk Strong increase of debt ratios following the GFC & increased shares of government debt owed to foreign portfolio investors accentuated refinancing risk At the same time, residual maturities of the sovereign debt profile have broadly lengthened alleviated refinancing risk o o o Only a few countries are subject to a considerable share of debt falling due in 218: AL, HU, MK and/or meaningful short-run repayments in FX: CZ, HU, RU, RS, UA Still, redemption profiles of several countries show pronounced repayment spikes, indicating potential liquidity constraints in the case of future macro-financial stress 24
Government debt structure & risk implications (2) As regards exchange rate risk, several CESEE countries have been able to keep constant or to reduce the share of FX-denominated public debt since the GFC However, a large share of FX-denominated public debt in combination with an already large debt stock reveals serious exposure to exchange rate risks in a few countries: HR, RS, UA Finally, interest rate risks have been relieved somewhat due to lengthening maturities and the resulting reduction in the need to refix interest rates in the short run But there are still a few countries with sizable portions of government bonds subject to a short-run realignment of interest rates: AL, CZ, HU, MK, PL, RU 25
How to improve the government debt structure? Strengthen public borrowing at home and in local currency via fostering the development of capital markets in the region (e.g. EBRD initiative) Avoid excessive unhedged positions of foreign currency debt: develop derivative markets to hedge exchange rate risk Link coupon payments to certain benchmarks to avoid procyclicality: e.g. inflation- or GDP-linked government bonds (especially in countries with limited fiscal space) 26