Debt Management: Coordination with Macroeconomic Policies DeMPA Tool Training Singapore September 21-25, 2009
Outline 1. Coordinating DeM with Fiscal and Monetary Policy: Why? What are the relevant or potential issues or problems? 2. DPI-3: Debt Management Strategy (a quick revisiting/reminder) 3. DPI-6: Coordination with Fiscal Policy 4. DPI-7: Coordination with Monetary Policy 5. Proposed ongoing revision 2
Coordinating Debt Management with Fiscal and Monetary Policy: Why? 3
Policy Objective Instrument(s) Debt Management To minimize long-term debt servicing cost, subject to attaining a prudent level of risk. Fiscal Policy To impose the least Monetary/ Exchange Rate Policy distorting expenditure policies/taxes that would provide (public) goods & services, and achieve distributive objectives on a sustainable basis, subject to prudent and sustainable debt levels. Manage the composition of the debt portfolio currency and rate (floating/fixed) composition, maturity, etc. Anchored by a debt strategy Manage the composition of spending and taxation. Manage the levels of deficits and debt. Anchored by a Medium Term Expenditure Framework/Fiscal targets. To achieve price stability Implemented through interest rates, exchange rate or monetary aggregates (the final goal is low and stable inflation) 4
But in pursuing each unit s objectives some conflicts may arise: Ex. 1: The CB is trying to mop up liquidity (in FX) while the DM office, is borrowing (from abroad) to finance a ST deficit interest rates will increase too much in the ST (policy inconsistency). Ex. 2: The government borrows money domestically while the DM office is swapping debt to foreign currency denominated, to have a better cost/risk mix (i.e., reduce borrowing costs). 5
Further: Ex. 3: The government is working on next year budget and is forecasting debt repayments, while the DM office has the exact information on when payments will become due (no uncertainty) Ex. 4: The DM office borrows in FX while the Ministry of Finance s debt sustainability assessment indicates that, given the country s exports, FX debt is near its upper bound. 6
And further: The MoF is imposing a levy on external (domestic) borrowing to dampen capital inflows (over borrowing), while the DM office is tapping foreign markets to attain a preferable cost/risk mix If the CB acts as a government agent in managing its debt, there is an obvious conflict of interest when moving interest rates or the exchange rate (two hats, one head) 7
Pressure on debt manager to issue low cost debt, ignoring the associated risks Fiscal Policy Debt Management DeM decisions must be independent of interest rate decisions Monetary Policy - DM-FP - Debt structure affects the costs of debt servicing and can impact fiscal sustainability - FP-DM - Tax and expenditure levels determine the levels of debt and may lead to poor debt structures if sustainability is in doubt - DM-MP - Poor debt structures can jeopardize the CB s ability to tighten interest rates - MP-DM - Exchange rate and interest rate policies affect the risks of foreign currency debt and floating rate debt 8
What emerges is that the DM office, as an operational branch of the Government, needs to be well coordinated with both the Ministry of Finance and the CB The DM office is subordinated to the policies and strategies of both the CB and the Ministry of Finance Must have a clear mandate from the government and separate its role from that of the CB if the latter acts as a government debt manager agent 9
DPI-3:Debt Management Strategy Quality (comprehensiveness and degree of details) Process by which it is set 10
Dimension 1: Quality of DeM strategy Coverage 90% of total debt, based on medium to longer-term DeM objectives Description of market risks currency, interest-rate, refinancing/rollover risks, and historical context for debt portfolio Description of future environment Fiscal and debt projections Assumptions about interest and exchange rates Constraints on portfolio choice: mkt. development, implementation of Monetary Policy Description of analysis undertaken to support recommended debt management strategy; clarify assumptions used and limitations of the analysis Recommended strategy and its rationale Analysis of Country-specific circumstances 11
Dimension 2: Process Decision-making Joint, involve all DeM entities; include consultation with Central Bank for consistency with monetary policy Approval at political level Updating check if assumptions hold in light of changed circumstances Update preferable on annual basis Availability/transparency Publicly available 12
Scores Summary Dimension 1: Moving from a C to an A is essentially a question of rigor and analytical robustness of the debt strategy Dimension 2: Moving from a C to an A is essentially a question of frequency of updating the strategy and degree of transparency in explaining the rationale for the strategy 13
DPI-6 Coordination with Fiscal Policy 14
Two-way communication Fiscal Authority to the Debt Manager Government s financing need is why the debt manager comes to the office each day Debt manager needs relevant fiscal variables - actual and forecasts- for planning purposes/cost-risk analysis, and a DSA (i.e., are there any important tax in/out flows foreseen in coming months?) Debt Manager to the Fiscal Authority Debt manager must convey costs and risks of the government s financing requirements and debt levels Debt service forecasts (existing and new borrowing) are provided to the Budget office Both What is the government s tolerance for risk? 15
: DIMENSIONS TO BE ASSESSED Dimensions to Assess DPI-6 Coordination with Fiscal Policy 1. Coordination with fiscal policy through the provision of accurate and timely forecasts on total debt service under different scenarios 2. Availability of key fiscal variables and an analysis of debt sustainability, and the frequency with which it is undertaken 16
Scores Summary Dimension 1: Moving from a C to an A is essentially a question of degree of analysis surrounding the forecasts of debt service Dimension 2: Moving from a C to an A is essentially a question of timeliness (and government ownership/understanding of the DSA) 17
Coordination with Fiscal Policy New & Existing Debt CS-DRMS or DMFAS Fiscal Data Financing Gap New Borrowing Debt Strategy Market Rates Dim1 C B BUDGET A Total central govt debt Service Forecasts DeM Entity Within past 3 years C DeM entity(s) has access to fiscal variables and DSA undertaken by government Dim2 Updated Annually 18 B A FISCAL Variables and DSA
DPI-7 Coordination with Monetary Policy Final Objective: DM does not jeopardize the implementation and effectiveness of Monetary Policy 19
Debt Management and Monetary Policy Functions Low-income country characteristics may not allow for clear separation between DeM and MP o Level of financial development o Capacity constraints Debt management is not a core Central Bank function In this context, transparency and sharing of information is key o Clarity about domestic debt issuances for monetary policy purposes and fiscal policy purposes o Domestic debt data to the MoF o MoF to CB: central government cash flow 20
Debt Management and Monetary Policy Functions Why are separation and information flows important? Avoid policy conflicts, maintain (market) credibility and lower costs o Market Development (MD): Market must know what is issued to cover the fiscal gap (otherwise in the dark about fiscal risks and cannot properly price issuances) o Price stability (PS): Central bank should not be perceived as compromising key objective of price stability to meet Debt Management objectives o Example: cost minimization objective cannot be seen to influence CB s interest rate decision o Both MD and PS: Importantly, a cost minimization objective should not be taken as a free pass for the CB to issue credit to the government 21
Dimensions to Assess DPI-7 Coordination with Monetary Policy DIMENSIONS TO BE ASSESSED: 1. Clarity of separation between monetary operations and debt management transactions, and coordination through regular information sharing on debt transactions and central government s current and future cash flows with the Central Bank 2. Extent of a limit to direct access of resources from the Central Bank 22
Scores Summary Dimension 1: Moving from a C to an A is essentially a question of periodicity of information sharing. Fundamental is the clarity of separation between MP and DeM transactions Dimension 2: Moving from a C to an A is essentially a question of the tenor of the limit to accessing central bank financing 23
Coordination with Monetary Policy Dim1 C Monthly Information Sharing Debt Management Operations DeM Entity B A Central Bank Monetary Policy Operations Weekly Information Sharing Dim2 Legislation Ceiling on Borrowing from Central Bank Tenor: < 3 months Tenor: < 2 weeks (emergency only) 24 C B A
Proposed ongoing revision 25
Proposal: 3 Dimensions to Assess (DPI-7 Coordination with Monetary Policy) 1. Clarity of separation between monetary policy operations and debt management transactions. 2. Coordination through regular information sharing on current and future debt transactions and central government s cash flows with the Central Bank. 3. Extent of a limit to direct access of resources from the Central Bank. 26
Proposed Scores Summary Dimension 1: Moving from a C to an A is a matter of how clear, formal and publicly known is the separation between MP and DeM transactions. Dimension 2: Moving from a C to an A is essentially a question of periodicity of the information sharing meetings. Dimension 3: Moving from a C to an A is essentially a question of the tenor of the limit to accessing central bank financing. 27
Thank you! 28