MEDIUM TERM DEBT STRATEGY Maria A. Oliva Senior Economist International Monetary Fund
Public debt management Public debt management is the process of establishing and implementing a strategy for managing debt to achieve the government s financing, risk, cost objectives and other goals, such as developing the domestic debt market Guidelines es for Public Debt Management: ageme IMF/World Bank, 2001 This training material is the property of the International Monetary Fund and is intended for use in IMF Institute for Capacity Development courses. Any reuse requires the permission of the IMF. The views expressed in this material are those of the course staff and do not necessarily represent those of the IMF or IMF policy.
Debt Management Strategy Period 1 Period 2 Period 3 Period 4 Period 5 Budget Overall Fiscal Overall Fiscal Overall Fiscal Overall Fiscal Overall Fiscal Balance Balance Balance Balance Balance Financing What type of Instruments? Fixed/Variable? Maturity? Currency? Official or Market?
Sovereign debt management is distinct from fiscal policy and the DSA exercise Fiscal policy determines the level of public debt; Public debt management involves its composition, ii i.e. exposure to market risks
The Capacity to Fund the Debt Matters Stock of Debt to GDP 2013 2014 Algeria 9.8 10.2 Bahrain 35.4 39.5 Djibouti 38.6 34.5 Iraq 17.5 14.9 Jordan 83.8 87 Kuwait 2.4 2.4 Lebanon 143.1 147.9 Mauritania 98.5 83.1 Qatar 33.2 30.2 Sudan 66.2 66 Syria Tunisia 45.55 49.7 West Bank & Gaza 21.7 20 Yemen 48.1 50.1 Stock of Debt to GDP G7 2013 2014 USA 106.0 107.3 Japan 243.5 242.0 EU 89.5 90.0 Canada 87.1 85.6 France 93.5 94.8 Germany 80.4 78.1 Italy 132.3 133.1 UK 92.1 95.3 Source: World Economic Outlook, http://www.imf.org/external/index.htm
Medium-term Debt Sustainability Framework (MTDS): Framework to design the characteristics of the sovereign debt portfolio taking into account a medium-term/long-term objective. Framework to examine costs and risks associated to possible borrowing strategies to cover a financing need.
Why an Explicit Debt Management Strategy Framework?? Because we need to understand cost-risk tradeoffs of our sovereign debt portfolio how the composition of our debt portfolio can help minimize amplify the magnitude of external and domestic shocks how the macro affects borrowing how monetary policy affects domestic debt issuance new risks and complexities affecting the debt portfolio
The Framework: A 8-step approach Step1: Identify Objectives & Scope Step 2: Identify Costs & Risks of the Existing Debt Step 3: Identify Potential Funding Sources Step 4: Identify Baseline Projections & Risks _ fiscal, monetary & market IF Needed Step 5: Review Key Structural Factors Step 6: Identify Cost-Risk trade-offs for alternative debt management strategies Step 7: Review Implications for macroeconomic policies and market IF Needed Step 8: Recommend MTDS for approval
MTDS Toolkit Guidance Note Analytical tool provides generic template for quantitative analysis of costs and risks of borrowing strategies The analytical tool is just one component of the framework.
DEBT MANAGEMENT S ANAGEMENT STRATEGY: THE TOOLKIT OUTCOMES 3
Cost and Risk Indicators as of end-t 0 Cost and Risk Indicators External debt Domestic debt Total debt Nominal debt as % of GDP 10 4.6 14.6 Implied interest rate 1.9 3.6 2.4 ATM (years) 8.6 2.6 5.9 Refinancing risk Debt maturing in 1yr (% of total) 4.3 75.5 36.7 ATR (years) 6.5 2.6 4.7 Debt refixing in 1yr (% of total) 30 75.5 50.7 Interest rate risk Fixed rate debt (% of total) 71.3 100 84.4 FX debt (% of total debt) 54.5 FX risk ST FX debt (% of reserves) 7.4
R d Redemption ti P Profile fil att T0
Quantifying i the Characteristics ti of the Alternative Portfolios Risk Indicators T 0 As at end-t Current S1 S2 S3 S4 Nominal ldebt as % of fgdp 14.6 29.0 28.9 29.7 30.4 PV as % of GDP 12.8 21.0 24.6 24.8 31.2 Implied interest rate 2.3 2.4 2.5 3.9 5.4 Refinancing risk ATM External Portfolio (years) 12.4 18.3 14.0 17.7 16.8 ATM Domestic Portfolio (years) 4.3 3.0 3.0 2.0 3.5 ATM Total Portfolio (years) 97 9.7 15.8 12.22 11.7 98 9.8 Interest rate risk ATR (years) 9.6 15.6 11.6 11.6 9.7 Debt re-fixing in 1yr (% of total) 11.5 14.3 31.0 32.6 9.2 Fixed rate debt (% of total) 96.4 88.6 71.9 69.4 95.5 FX risk FX debt as % of total 66.8 83.2 83.2 61.7 46.9 ST FX debt as % of reserves 26.3 45.44 36.7 45.44 45.44
Quantifying Refinancing Risks Strategy 1 (S1): External borrowing accounts for 70 percent of new borrowing. Domestic borrowing is mostly short-term. te Strategy 2 (S2): Same external/domestic composition but less highly concessional and fixed rate loans. Strategy 4 1,000,000 800,000 600,000 400,000 200,000 External Domestic 0 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 2062 2065 Strategy 3 (S3): Domestic borrowing increases, especially the issuance of short-term instruments. Strategy 4 (S4): Domestic borrowing increases, specially the issuance of 2- and 5-year fixedrate instruments.
Quantifying Risk-Cost Trade-Offs Debt/GDP (end-year T) Interest/GDP (end-year T) PV of Public Debt to GDP Debt Service to GDP Cost (%) 39 37 35 33 31 29 27 25 23 21 19 S1 S2 S3 Risk 0.0 0.2 0.4 0.6 0.8 1.0 S4 Cost (%) 1.4 S4 1.2 1.0 0.8 0.6 0.4 S1 S2 Risk 0.0 0.2 0.4 0.6 0.8 1.0 S3
What Would You Conclude? Cost-Risk trade offs vis-à-vis objectives The Structural Agenda
MEDIUM TERM DEBT STRATEGY STEP 1
The Framework: A 8-step approach Step1: Identify Objectives & Scope
KEY ISSUES MAIN MESSAGES OBJECTIVES Clear about: The main goal and intermediate goals Steps to reach the goal. SCOPE Choosing the appropriate definition of government matters. THE CURRENT DEBT PORTFOLIO The characteristics of the current debt portfolio is legacy that conditions future decisions.
Medium MTDS: Framework to design the characteristics of the sovereign debt portfolio taking into account a medium-term/long-term objective.
Period 1 Period 2 Period 3 Period 4 Period 5 Budget Overall Balance Overall Balance Overall Balance Overall Balance Overall Balance Financing What type of Instruments? Fixed/Variable? Maturity? Currency? Official or Market?
OBJECTIVES
OBJECTIVE: GO FROM A TO E B C Go with the tides and wind D A Start: initial portfolio Note: plans are made subject to constraints (navigation skills, weather conditions and forecast, ship size, etc.) E Final destination: desired portfolio
THE STRATEGY Plan that provides direction and benchmarks for debt management THE FORMAL OBJECTIVE Government s medium term goals Standard goals: 1.- attaining i a given risk/cost level 2. - domestic debt market development 24
SUBJECT TO: THE REALITY & CONSTRAINTS MT Macro-economic outlook Stock of debt Market development Market access Legal and institutional framework 25
SCOPE
Liabilities: Financial claims to financial sector, Non-fin private sector and to the rest of the world But.. MARKETABLE DEBT O OTHERS LOANS What is the relevant coverage? Is it feasible? Central Government, General Government, Public Government, Public Enterprises? Should contingencies be included? If so, which ones? How should these be valued? Explicit/Implicit guarantees
Contingent liabilities Implicit contingencies Financial Sector (SIFIs) Foreign exchange in fixed ERs Explicit contingencies Credit guarantees SInFIs bail outs/soes Natural Disasters State insurance schemes Legal g proceedings and disputes Sub-national debt : And others And others On lending Implicit Contingent liability?
MEDIUM TERM DEBT STRATEGY: STEP 2
The Framework: A 8-step approach Step1: Identify Objectives & Scope Step 2: Identify Costs & Risks of the Existing Debt
. Period t-3 Period t-2 Period t-1 Period t Budget Overall Fiscal Overall Fiscal Overall Fiscal Overall Fiscal Overall Fiscal Balance Balance Balance Balance Balance Debt Outstanding Domestic and External Debt The sovereign debt portfolio at time t is 1 New Debt Issued t Legacy Debt t 1 maturity t i*debt t 1 g y y Primary Balance t Contingent Liabilities t Valuationt
Financing of Debt: What Instruments? Fixed/Variable? Maturity? Currency? Official/ Market? Cost characteristics Risk characteristics: Market risk Refinancing risk
Analyzing the current portfolio implies using some matrix 800,000 600,000 Baseline Domestic debt 400,000 200,000 External debt 0 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046 2049
Risk Indicators External debt Domestic debt Total debt Amount (in millions of USD) Nominal debt as % GDP NPV as % of GDP Cost of debt Weighted Av. IR (%) ATM (years) Refinancing risk Debt maturing in 1yr (% of total) ATR (years) Debt refixing in 1yr (% of total) Interest rate risk Fixed rate debt (% of total) FX debt (% of total debt) FX risk ST FX debt (% of reserves)
Debt Portfolio and Cost Measures
Defining Cost: Debt management objectives usually focus on the economic cost Measures that focus exclusively on prevailing accounting/budgetary practices may also be inadequate Cost can be measured in different ways Accrual, due-for-payment, cash Nominal versus real value Discounted cash-flows (Present Value) versus cash-flow measures Different cost measures provide different information on cost - do not rely on one cost measure
Cost indicators? Key indicators Interest cost key for budget preparation Interest / GDP captures economic burden (liquidity) Debt / GDP and NPV of Debt / GDP also capture extent of debt burden also costs (solvency) Annual interest payments + the potential impact of changes in exchange rates and other changes to the principal (e.g. inflation indexed debt)
Debt Portfolio and Risk Measures
Types of risk Exchange Risk Market Risk Interest Rate Risk Term premium Inflation Real interest rate Refinancing Risk + (e.g. operational risk,..)
Market Risk Market kt risk ik is a function of Volatility of underlying factors (risk factors = interest and exchange rate volatility) Trends Our main focus here is on downside risk
Interest rate risk Vulnerability of funding costs to higher interest rates when variable rates are reset and/or fixed rate debt needs to be refinanced Typical measures of exposure Fixed-Floating ratio Floating rate debt as a percentage of total debt Debt exposed to interest rate re-fixing within a specific time period Maturing fixed rate debt to be rolled over Variable rate debt (include interest rate swaps) Average Time to Re-fixing (ATR) ATR = time weighted average until all principal payments in the debt portfolio become subject to a new interest rate
Exchange rate risk The exposure of the portfolio to changes in the exchange rate Typical measure of exposure Share of foreign currency debt in total debt Can be split by specific currency (dollar risk, Euro risk etc.) Currency composition Degree of fforeign currency liabilities mismatch relative to foreign currency reserves
Refinancing i risk ik It captures the exposure to not being able to refinance debt Typical measures of exposure Redemption profile of the outstanding debt stock Share of debt falling due within a particular period Ratio of debt falling due to tax revenue Average Time to Maturity ATM = time weighted average to maturity of the all the ATM time weighted average to maturity of the all the principal repayments in the debt portfolio
What Can Mitigate Refinancing Risk? Smooth debt profile Official i reserves s as a buffer for BoP needs and to enhance confidence R/STD = reserves over short-term external debt Broad creditor-base concentration Macro-financial stability
Exercise Lets compute the average time of maturity and refixing of the following portfolio Principal Repayments T0 T0+1 T0+2 T0+3 Currency Indicator Type Code Years to maturity 1 2 3 4 USD 1 Fix USD_1 255 100 55 60 40 EUR 2 Fix EUR_2 85 40 30 10 5 EUR 3 VAR EUR_3 137 25 12 80 20 Total 477 165 97 150 65 All figures are in USD
An Indicator of Refinancing Risk Average Time to Maturity Calculate average time to maturity Time to maturity 1.0 2.0 3.0 4.0 Principal repayments (fixed rate only) $ 340=255+85 =100+40 =55+30 =60+10 =40+5 Principal repayments (variable rate only) $ 137 =25+12+80+20 25 12 80 20 Total principal repayments $ 477= 340+137 165 97 150 65 Weights of cash flow 034= 0.34= 02= 0.2= 031= 0.31= (100+40+25) / 477 (55+30+12) /477 (60+10+80) / 477 0.14= (40+5+20) /477 Weight * Time to maturity 0.34= 0.41= 0.94= 0.54= 0.34*1 0.2*2 0.31*3 0.136*4 Weighted average time to maturity (years) 2.24= 0.34+0.41+0.94+0.54 T P t t ; TD t t 0 P t = principal payments due TD = total outstanding debt T = time to maturity
An Indicator of Interest Risk Average Time to Refixing Calculate average time to refixing Time to refixing Principal repayments (fixed rate only) $ 10 1.0 20 2.0 30 3.0 40 4.0 =255+85 =100+40 =55+30 =60+10 =40+5 Principal repayments (variable rate only) $ =25+12+80+20 20 =25+12+80+20 20 Total principal repayments $ 255+85+137 =100+40+25+12+80+20 =55+30 =60+10 =40+5 Weights of cash flow 0.58= (100+40+25+12+80+20) / 0.18= 0.146= 0.09= (40+5) / (255+85+137) (55+30) / (255+85+137) (60+10) / (255+85+137) (255+85+137) Weight * Time to refixing 0.58=[(100+40+25+12+80+20) / (255+85+137)]*1 0356 = [(55+30) / (255+85+137)]*2 0.44 = [(60+10) / (255+85+137)]*3 0.38=[(40+5) / (255+85+137)]*4 Weighted average time to refixing (years) = 1.75 [(100+40+25+12+80+20) / (255+85+137)]*1+[(55+30) / (255+85+137)]*2+[(60+10) / (255+85+137)]*3+[(40+5) / (255+85+137)]*4
MEDIUM TERM DEBT STRATEGY: : STEP 3
The Framework: A 8-step approach Step1: Identify Objectives & Scope Step 2: Identify Costs & Risks of the Existing Debt Step 3: Potential sources of financing
KEY ISSUES MAIN MESSAGES OPTIONS All types of loans carry some type of risk. IDA loans are very concessional (long maturity/low rates) T-SECURITIES Not only a source of financing but also a tool to create benchmarks COST OF LOANS The cost is not only the interest but also other conditions i attached to them.
Potential Sources of Financing Non-marketable Concessional loans Semi-concessional loans Commercial loans Other non-marketable sources Marketable International bond Domestic securities i 51
Non-marketable Debt Official sector loans Commercial bank loans Retail debt Other nonmarketable Structure Issues Cost Fixed or floating, amortizing, long-term Variable, bullet Domestic, international Short-term Fixed or variable Depends Size constraint; volatility and speed of disbursement; may be conditions attached Very low cash cost; indirect costs Liquidity conditions; health of Market tbased banking sector (domestic) Need efficient sales network. Reliable source. Non-transparent; hampers market development Can be competitive Cost born indirectly Principal Risk Exposure FX risk mitigated by LT FX where relevant; rollover; refixing Uncertainty as to quantum of supply Hidden costs; abuse
Marketable Debt T-bills T-bonds Inflation indexed International bond Structure Issues Cost Discount, bullet Fixed / variable, bullet Indexation structure Fixed / variable, ibl bullet Simple; robust demand from banking sector Market development will impact demand Requires reliable index. Can secure maturity extension. But complex instrument. Large size, timing risk, excess cash at issuance Low, except in liquidity crisis LT can be expensive (inflation risk premium). Deflation is costly. Depends on credibility of monetary policy Principal Risk Exposure Rollover and refinancing risk Depends on tenors achieved, may be some rollover and refinancing. Refixing if variable rate. Depends on link between inflation and tax revenue and likelihood of supply side shock. Reduces roll-over risk. Credit rating. Depends on RER FX, rollover risk trend
Concessional Borrowing Lenders: Multilateral and bilateral official creditors Cost characteristics: Low cost grant element 35% for multilateral Risk characteristics Interest rate exposure limited typically long-term, fixed rate Exchange rate exposure Factors that may influence the mitigated by amortizing structure amounts available Rollover exposure also Income level mitigated by amortizing Quality of institutions structure, and nature of creditor Access to market financing Size of multilateral balance sheet Amount often linked to an Economic developments allocation rule
Example: Current IDA terms http://www.worldbank.org/ida/financing.html /id /fi i h l 55
IMF Funding Facilities IMF s Stand By Arrangement (non-concessional) The IMF s Poverty Reduction and Growth Trust (concessional)
IMF loans: To help member countries tackle balance of payments problems, stabilize their economies, and restore sustainable economic growth. The global financial crisis Crisis resolution role Crisis prevention role Detail on program conditions is publicly available: http://www.imf.org/external/np/exr/facts/howlend.htm
Semi-Concessional Borrowing Lenders: Multilateral and bilateral official creditors Cost characteristics: at a discount to market financing. There could be indirect cost [exchange rate; purchase conditions] Factors that may influence the amounts available Funds availability Strategic factors Economic developments Risk characteristics: In specific cases, these could be negotiated. Interest rate exposure - floating rate Exchange rate exposure mitigated by amortizing structure Rollover exposure similar to concessional Amount can be linked to allocation rules
Commercial Bank Loans Lenders: Domestic and international banks Cost characteristics: At market rates (typically y more expensive than bonds, but cost of carry may be lower.) Factors that may influence the amounts available Strategic factors Economic conditions Liquidity conditions These may be marketable through syndication (fees increase). Risk characteristics: In specific cases, these could be negotiated. Interest rate exposure often floating rate Exchange rate exposure depends Rollover exposure shorter maturity Amount Depends on allocated credit line
Other Non-Marketable: Central Lenders: Bank Central Bank (fiscal dominance) Risk characteristics: Cost characteristics:?? Factors that may influence the amounts available External position Inflation levels Political factors Amount?
International Sovereign Bonds Lenders: Risk characteristics: International and domestic institutional Rollover risk and exchange rate investors exposure aggravated by bullet structure Cost characteristics: Reflects nature of market demand Market determined. d Exposed to sudden stops in High transaction cost international capital markets Tenors and interest rate structure can be customized Factors that may influence the Possibly longer tenors than in the amounts available domestic market Established track record of good Helps diversify investor base economic performance Positive medium-term outlook Credit rating Amount typically there is a Investors risk appetite/ global market conditions minimum (e.g. $200mn), maximum depends on market conditions
Financing Environment Debut Spreads Timeline of International Bond Issuance (in millions of US dollars) 3,500 3,000 2,500 2,000 Africa Eastern Europe Latin America Middle East Asia # of issues (rhs) 5 4 3 1,500 2 1,000 500 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (Q3) Source: Dealogic and IMF staff calculations. 1 0 Maturity (in years and percent of total issuers) 5 year 6 year 7 year 10 year 42 50 4 4
Financing Environment Debut Spreads Financial Characteristics of First-time International Sovereign Issuances (2004- December 2013) Issue size (in US$ and percent of total issuers) up to 200 mn. 201-499 mn. 500-649 mn. 650-749 mn. Spread at issue (in bps and percent of total issuers) below 200 bps. 200-299 bps. 300-399 bps. 400-499 bps. 8 25 33 8 50 58 17 Maturity (in years and percent of total issuers) 5 year 6 year 7 year 10 year Yields at issue (in bps and percent of total issuers) Less 4% 4%-5% 5.01%-6% 6.01%-7% 42 29 50 54 4 4 17 Source: Dealogic;and and IMF staff calculations.
Domestic Market
Domestic Securities: T-bills Lenders: Domestic (banks, pension, insurance and mutual funds, etc) and international investors Cost characteristics: Market determined. d Risk characteristics Interest rate risk: high Rollover risk Factors that may influence the amounts available Economic developments Size of banking sector Market development Amount? Others: Useful at early stages of market development Tools to meet reserve ratios, in payment systems, etc. Often tool of monetary policy
Domestic Securities: T-bonds Lenders: Domestic (banks, pension, insurance and mutual funds, etc) and international investors Cost characteristics: Market determined. They usually require a risk premium. Types: Fixed and floating rate bonds Zero coupon bonds Indexed bonds Risk characteristics Interest rate risk Factors that may influence the amounts available Rollover risk Exchange rate exposure Economic developments Size of banking sector Market development Amount?
SUMMARY
Non-marketable Debt Official sector loans Commercial bank loans Retail debt Other nonmarketable Structure Issues Cost Fixed or floating, amortizing, long-term Variable, bullet Domestic, international Short-term Fixed or variable Depends Size constraint; volatility and speed of disbursement; may be conditions attached Very low cash cost; indirect costs; LT RER trend. Liquidity conditions; health of Market tbased banking sector (domestic) Need efficient sales network. Reliable source. Non-transparent; hampers market development Can be competitive Cost born indirectly Principal Risk Exposure FX risk mitigated by LT FX where relevant; rollover; refixing Uncertainty as to quantum of supply Hidden costs; abuse
Marketable Debt T-bills T-bonds Inflation indexed Internationa l bond Structure Issues Cost Discount, bullet Fixed / variable, bullet Indexation structure Simple; robust demand from banking sector Market development will impact demand Requires reliable index. Can secure maturity extension. But complex instrument. Low, except in liquidity crisis LT can be expensive (inflation risk premium). Deflation is costly. Depends on credibility of monetary policy Fixed / Large size, timing Credit rating. variable, risk, excess cash at Depends on RER bullet issuance trend Principal Risk Exposure Rollover and refinancing risk Depends on tenors achieved, may be some rollover and refinancing. Refixing if variable rate. Depends on link between inflation and tax revenue and likelihood of supply side shock. Reduces roll-over risk. FX, rollover risk
MEDIUM TERM DEBT STRATEGY TRATEGY: STEPS 4&5
The Framework: A 8-step approach Step1: Identify Objectives & Scope Step 2: Identify Costs & Risks of the Existing Debt Step 3: Potential sources of financing Step 4&5 : Identifying baseline projections and risks in key policy areas fiscal, monetary, external sectors
To develop an explicit Debt Management Strategy There is a need to understand cost-risk tradeoffs of the debt how debt structures can dampen or amplify the magnitude of external and domestic shocks how the macro affects borrowing how monetary control helps domestic debt issuance constraints: institutional, market, new risks and complexities
The Economy Real Sector External Government Monetary Sector Sector Sector
National Accounts Fiscal Account Consumption Private consumption Government consumption Investment Private investment Government investment Exports of goods and services Imports of goods and services Revenue Tax Revenue Non-tax revenue Grants Expenditures Current expenditure Interest payments Capital expenditure Overall Balance The Macroeconomic Accounts & Interrelations Balance of Payments Current Account Exports of goods and services Imports of goods and services Income Current transfers Capital and Financial Account Direct Investment Portfolio investment, net Other investment, net Government investment Overall Balance Change in reserves Financing Domestic bank borrowing Domestic nonbank borrowing Foreign borrowing Depository Corporations Survey Assets Net foreign assets Net credit to the government Claims on other sectors Other items, net Liabilities Broad Money
Real GDP Growth Inflation Overall fiscal Balance (with grants) External Current Account (Percent) (Annual average, percent change) (Percent of GDP) (Percent of GDP) 2012 2013 (e) 2014 (p) 2012 2013 (e) 2014 (p) 2012 2013 (e) 2014 (p) 2012 2013 (e) 2014 (p) South Sudan -47.6 24.7 43.0 45.1 2.8 7.2-16.0-9.0 8.1-27.7-14.9 8.7 Middle-income Botswana 4.2 3.9 4.1 7.5 6.8 5.8 0.2 0.2 1.5-4.9-1.8-1.2 Lesotho 4.5 4.1 5.0 5.6 6.5 6.2 5.3 2.0 2.2-13.6-13.6-13.4 Namibia 5.0 4.4 4.0 6.5 6.4 6.2-3.0-4.2-1.6-2.6-3.4-5.2 Zambia 7.2 6.0 6.5 6.6 7.1 7.3-3.1-7.8-6.6 0.0-3.7-3.8 Kenya 4.6 5.9 6.2 9.4 5.4 5.0-6.3-5.8-4.2-9.3-7.8-7.3 Malawi 1.9 5.0 6.1 21.3 26 8.4-4.0-2.7-2.1-4.4-3.1-5.1 Tanzania 6.9 7.0 7.2 16 8.5 5.8-5.0-5.3-4.5-15.3-14.9-14.1 Uganda 2.8 5.6 6.5 4.4 5.2 4.8-3.5-1.8-6.0-10.5-12.0-13.9 Fragile countries Zimbabwe 4.4 3.2 3.6 3.7 2.6 3.3-0.7-0.7 1.3-26.2-21.7-16.8 Source: IMF REO (October, 2013)
Low Income Countries: Higher Growth Translated into Lower Debt Levels 180 160 LBR Debt to GD DP at t 140 120 100 80 ERI GIN GNB GMB DRC Average 60 40 20 COM HTI BDI KYR CAF KEN MDG NPL NER BEN TCD MLI SLE BFA MMR MWI MOZ TZA KHM UGA RWA ETH 0 0 2 4 6 8 10 12 Average Growth Rates at t-2 Average Growth Rates at t 2 (In Percent)
Stock of Debt (Percent) 2012 2013 (e) 2014 (p) South Sudan 3.5 20.4 17.5 Middle-income Botswana 18.1 15.9 13.8 38 Lesotho 38.9 38.8 37.3 Namibia 26.9 30.4 27.1 Zambia 32.4 36.2 38.9 Kenya 48.7 49.4 48.9 Malawi 54.9 47.7 40.3 Tanzania 40.8 42.5 43.6 Uganda 29.7 32.0 34.7 Fragile countries Zimbabwe 59.7 58.7 55.2
How much (Financing Need) Input 2013 2014 2015 2016 2017 Growth rate Inflation rate Macro Primary deficit Interest Debt Interest on existing debt Interest on new debt Debt Fiscal deficit (Net financing) Principal repayment Principal on existing debt Principal on new debt Gross financing requirement
2013 Financing Needs (In domestic currency) Gross Central Government Cash Requirements 20,000 Redemptions -- Example Total Financing Need 20,000 Financing Sources 20,000 External Financing (60%) 12,000 Multilateral concessional (40%) 4,800 Bilateral concessional (30%) 3,600 Eurobonds (10%) 1,200 Commercial bank loans (20%) 2,400 MTDS Domestic Financing (40%) 8,000 T-Bonds (60%) 4,800 T-bills (40%) 3,200
Macro-Framework MTDs DSA National Accounts Consumption Investment Private consumption Government consumption Private investment t Government investment Exports of goods and services Imports of goods and services Balance of Payments Current Account Exports of goods and services Imports of goods and services Income Current transfers Capital and Financial Account Overall Balance Change in reserves Direct Investment Portfolio investment, net Other investment, net Fiscal Account Revenue Grants Expenditures Current expenditure Interest payments Overall Balance Capital expenditure Financing Domestic bank borrowing Domestic nonbank borrowing Foreign borrowing Depository Corporations Survey Assets Net foreign assets Net credit to the government Claims on other sectors Other items, net Liabilities Broad Money
Key Challenges in Funding Investor base: geography Local borrowing International ti borrowing Investor base: composition Market borrowing New bilateral official lenders Less concessional borrowing Instruments Conditions with Roll-over risks FX-risk exposures IR-risk exposures Operational risks
6 5 Average Yields for New External Credits Obtained by HIPCs (as percent) Average interest on new external debt commitments, official (%) Average interest on new external debt commitments, private (%) 38 Average Maturity of New External Debt Borrowings (in years) 33 28 4 23 3 18 Average maturity on new external debt commitments, private (years) 2 13 8 Average maturity on new external debt commitments, official (years) 1 3 0 2003 2004 2005 2006 2007 2008 2009 2010 2011-2 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
The Structural Agenda? Examples of structural t factors: Market Access? Investor Base? Pricing? Institutional constraints? Structural changes in monetary policy (inflation targeting) Domestic debt markets development Price of commodities trend Real effective exchange rate and productivity Trade liberalization reform
Why a MTDS? Mitigating Fiscal Vulnerabilities Choice of strategy can reduce risks and therefore, reduce the likelihood of crisis Longer debt maturity helps reduce fiscal vulnerabilities: reduces roll-over risk More domestic funding reduces foreign exchange rate risk exposure And, reducing variable rate debt can reduce budgetary uncertainty and exposure to interest risk
Why a MTDS? Financial Markets Development Public debt management a can effectively el support the development of more robust financial markets, improving the functioning of the financial system Facilitating corporate debt markets Providing a benchmark for the private sector Providing scope for securitization of banks assets Facilitate repo market development Improving liquidity of banks balance sheets Facilitate development of derivatives markets Allowing for more effective risk management within the economy
To develop an explicit i Debt Management Strategy There is a need to understand cost-risk tradeoffs of the debt how debt structures can dampen or amplify the magnitude of external and domestic shocks how the macro affects borrowing how monetary control helps domestic debt issuance constraints: institutional, market, new risks and complexities
Risks Macro-economic risks and implications for the debt strategy For the Governme nt Finances Implications for the MTDS Risks Real Sector Real Growth Inflation Fiscal Sector Fiscal receipts Primary Balance Monetary Sector Commodity Prices Interest rate Risks Further global economic slowdown Capital flow reversal Implications Reduce inflows of aid and FDI? Decline in oil and other commodity prices? Strains in financial markets? Homegrown risks Political instability?
They got speculative grades with few variations from Moody s and below investment grade from S&P S&P: Local and Foreign Currency Ratings, An Historical Perspective to Date B+ 4 4 3B B- 2 CCC 1 0 NR 0 Mar-11 Dec-12 May-10 May-09 Nov-05 Dec-111 Aug-13 Apr-06 Jul-04 Jul-08 May-04 Aug-13 Jun-12 Sep-09 Oct-08 Aug-10 Sep-07 Nov-05 May-06 Dec-04 Jul-06 Dec-10 May-07 Nov-05 BRB BFR CMR GHA HND MLI MOZ RWA SEN UGAZMB Moodys: Government Bonds Ratings, a Historical View B1 Local currency Foreign currency 3 B2 2 B3 Caa1 1 Nov-12 Mar-11 May-10 Jun-03 Mar-98 Sep-13 Nov-12 Feb-13 Jul-99 Sep-98 Dec-12 Sep-13 May-07 Jun-12 Dec-10 Jun-10 Sep-09 Apr-03 May-98 BOL KHM DRC GHA HND KEN MOZ NIC SEN ZMB and if rated by S&P and Moody s
Pricing and Monetary Policy
Baseline and Monetary Policy Key variables: Interest and Exchange Rates Interest rates: Short-term driven by monetary policy Nominal rates driven by inflation expectations Monetary policy stance may influence real interest rates given the impact of macroeconomic stability on risk premium Exchange Rates: Influenced by interest rates (parity equation) Relationship with foreign reserves, including a policy of foreign reserve accumulation
THE YIELD CURVE
Yield Curve or Term Structure Plots of yields to maturity of a series of bonds against their term to maturity Crude representation of risk: return trade off of bond investment alternatives with reasonably equivalent risk (liquidity, credit, call, premium/discount) Determinants: real interest rate inflation premium risk premium Term structure in one year n 2 3 ( 1 i) (1 i) (1 f1,2 ) (1 f1,3) (1 f1, 1 n n )
Term Structure Shapes YTM Normal YTM Symptoms of economic downturn, recession The longer maturity the higher the risk Inverse Term to maturity (in years) Term to maturity (in years) YTM Humped YTM Flat Term to maturity (in years) Term to maturity (in years)
Less liquid id bonds YTM Liquid bonds Term to maturity (in years)
EXCHANGE RATE POLICY Foreign currency denominated debt Exchange rate regimes: Fixed exchange rate regimes with an open capital account can aggravate liquidity risk in case of sudden stops or reversals (changes in market sentiment) Reducing FX debt and monetary policy, and exchange rate policy coordination. FX support, public debt management coordination and FX reserves
MEDIUM TERM DEBT STRATEGY TRATEGY: STEPS 6&7
The Framework: A 8-step approach Step1: Identify Objectives & Scope Step 2: Identify Costs & Risks of the Existing Debt Step 3: Identify Potential Funding Sources Step 4: Identify Baseline Projections & Risks _ fiscal, monetary & market IF Needed Step 5: Review Key Structural Factors Step 6: Identify Cost-Risk trade-offs for alternative debt management strategies Step 7: Review Implications for macroeconomic policies and market IF Needed Step 8: Recommend MTDS for approval
Setting up alternative strategies
% of gross borrowing - Over Projection Period New debt S1 S2 S3 S4 IDA FX 100% 0% 20% 50% AfDF FX 0% 0% 30% 0% Bilateral semi-conc FX 0% 0% 50% 0% Bilateral semi-conc FX 0% 0% 0% 0% Bilateral semi-conc DX 0% 0% 0% 0% Bilateral semi-conc DX 0% 100% 0% 0% Eurobond FX 0% 0% 0% 0% Dom 1 an DX 0% 0% 0% 25% Dom 3 ans DX 0% 0% 0% 0% Dom 5 ans DX 0% 0% 0% 25% Dom 7 ans DX 0% 0% 0% 0% Commercial DX 0% 0% 0% 0% Arrears FX 0% 0% 0% 0% Arrears DX 0% 0% 0% 0% 0 FX 0% 0% 0% 0% External 100% 0% 100% 50% Domestic 0% 100% 0% 50% 100% 100% 100% 100% Are these the right strategies? t s?
Or, are these the most reasonable strategies? % of gross borrowing - Over Projection Period New debt S1 S2 S3 S4 IDA FX 19% 13% 8% 15% AfDF FX 11% 8% 5% 9% Bilateral semi-conc FX 11% 8% 5% 9% Bilateral semi-conc FX 11% 8% 5% 9% Bilateral semi-conc FX 11% 8% 5% 9% Bilateral semi-conc FX 11% 8% 5% 9% Eurobond FX 0% 0% 0% 0% Dom 1 year DX 13% 0% 14% 7% Dom 3 year DX 13% 0% 28% 13% Dom 5 year DX 0% 0% 14% 10% Dom 7 year DX 0% 50% 14% 9% Commercial loan DX 0% 0% 0% 0% Arrears FX 0% 0% 0% 0% Arrears DX 0% 0% 0% 0% Instrument EUR Var FX 0% 0% 0% 0% External 75% 50% 30% 60% Domestic 25% 50% 70% 40% 100% 100% 100% 100%
Issues: Debt Rollover? Many economies fit under the group of long-term external debt holdings and short-term domestic debt The question is: could the FX risk of external debt be rebalanced using domestic market instruments? Committed but undisbursed loans?
Evaluating alternative strategies
Evaluating Strategies: cost and risk trade-off Step1: Simulate range of candidate viable and realistic i strategies under specific baseline Step 2: Have already defined the set of alternative strategies and alternative scenarios the stress tests Step 3: Consider and compare the outcomes k f d d i h Step 4: Rank performance and determine the preferred strategy
Assessing performance Need to be critical in the assessment Consider ex ante the possible ranking / effects of stress scenarios Which strategy is likely to be least costly? What risk exposures are likely to increase with each strategy? Do expectations differ from outcomes? If so, why? Need to determine in advance indicators and Need to determine in advance indicators and cost/risk levels
Recall Cost and Risk Indicators Cost? Interest Interest / Revenues or Interest / GDP Interest t + Adjusted d Principal i Debt / GDP Which h measures are relevant for the economy? Risk? What is the reasonable level of risk?
Measurement of risk Cost Risk Scenario 1 Risk 1,X Baseline Scenario Cost 1,X Cost baseline Time
Borrowing Strategies 100% IDA AfDF 80% Bilateral semi-conc Bilateral semi-conc 60% 40% 20% Bilateral semi-conc Eurobond Dom 3 year Dom7 year Arrears Bilateral semi-conc Dom 1 year Dom 5 year Commercial loan Arrears 0% Current S1 S2 S3 S4 Instrument EUR Var
Outcomes: Interest / Revenues Cost (% %) 07 0.7 0.6 0.5 0.4 0.3 0.2 0.1 - S3 S2 S1 S4 Risk - 0.01 0.01 0.02 0.02 0.03 0.03 No real trade-off: S1 clearly l least cost and least risk ik
250,000 Strategy 1 External Domestic 500,000 Strategy 2 External Domestic 100,000 150,000 200,000 200,000 300,000 400,000 0 50,000 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 2066 0 100,000 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 2066 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 350,000 400,000 450,000 Strategy 3 External Domestic 250,000 300,000 Strategy 4 External Domestic 100,000 150,000 200,000 250,000 300,000 100,000 150,000 200,000 0 50,000 100,000 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 2066 0 50,000 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060 2063 2066
Risk Indicators 2013 As at end FY2017 Current S1 S2 S3 S4 Nominal debt as % of GDP 17.6 13.3 13.9 14.0 13.6 PV as % of GDP 17.3 11.1 12.6 13.0 11.9 Implied interest rate (%) 3.6 2.6 4.2 4.4 3.3 Refinancing risk ATM External Portfolio (years) 77 7.7 16.5 15.7 15.6 16.2 ATM Domestic Portfolio (years) 2.3 2.7 4.5 3.2 3.4 ATM Total Portfolio (years) 3.2 14.6 10.2 8.4 12.1 Interest rate risk ATR (years) 3.2 13.2 9.4 7.8 11.0 Debt refixing in 1yr (% of total) 29.9 19.8 10.0 20.7 17.9 Fixed rate debt (% of total) 99.8 88.3 93.5 94.9 91.0 FX risk FX debt as % of total 15.5 85.8 51.0 42.0 67.6 ST FX debt as % of reserves 6.9 22.1 18.9 17.0 20.3
Other relevant indicators? Can compare. End-Simulation Horizon (2017) Current S1 S2 S3 S4 % DX in debt portfolio 1% 30% 27% 39% ATM (years) 15.6 13.0 9.3 8.3 % of debt refixing within 12 months 6.2% 24.4% 23.6% 33.0% % of debt refinancing within 12 months 5.5% 31.4% 28.6% 34.7% Short-term external debt / Reserves 3% 3% 3% 3% External debt / Reserves 102% 81% 91% 78% Average interest rate 2.4% 2.5% 2.6% 2.8%
Stress Scenarios 2013 2014 2015 2016 2017 Baseline FX depreciation USD 0.2% 0.4% 0.5% 0.4% 0.4% EUR 0.0% 0.0% 0.0% 0.0% 0.0% JPK 0.1% 0.3% 0.4% 0.3% 0.3% GBP 29% 2.9% 31% 3.1% 32% 3.2% 32% 3.2% 31% 3.1% CNY UTP 0.0% 0.0% 0.0% 0.0% 0.0% 2013 2014 2015 2016 2017 30% depreciation in year 2 (stand-alone exchange rate shock) 30.00% USD 0.2% 30.4% 0.5% 0.4% 0.4% EUR 0.0% 0.0% 0.0% 0.0% 0.0% JPK 0.1% 0.3% 0.4% 0.3% 0.3% GBP 2.9% 3.1% 3.2% 3.2% 3.1% CNY 0.0% 0.0% 0.0% 0.0% 0.0% UTP 0.0% 0.0% 0.0% 0.0% 0.0%
Evolution of indicators 2013 2014 2015 2016 2017 Strategy 1 Debt-to-GDP ratio Baseline 16.5 15.6 14.8 14.2 13.3 Exchange Rate Shock (30%) 16.5 16.7 15.8 15.2 14.3 Interest Shock 1 16.5 15.6 14.8 14.2 13.3 Interest Shock 2 16.5 15.6 14.8 14.2 13.33 Combined Shock (15% depreciation and IR Shock) 16.5 16.1 15.3 14.7 13.8 Interest-to-GDP ratio Baseline 0.6 0.5 0.5 0.4 0.3 Exchange Rate Shock (30%) 0.6 0.6 0.5 0.4 0.4 Interest Shock 1 0.6 0.5 0.5 0.4 0.3 Interest tshock 2 06 0.6 05 0.5 05 0.5 04 0.4 03 0.3 Combined Shock (15% depreciation and IR Shock) 0.6 0.5 0.5 0.4 0.3 PV of debt-to-gdp ratio Baseline 15.3 13.9 12.8 12.0 11.1 Exchange Rate Shock (30%) 15.3 14.8 13.6 12.8 11.9 Interest Shock 1 15.3 13.9 12.8 12.0 11.1 Interest Shock 2 15.3 13.9 12.8 12.0 11.1 Combined Shock (15% depreciation and IR Shock) 15.3 14.3 13.2 12.4 11.5 Strategy 2 2013 2014 2015 2016 2017 Debt-to-GDP ratio Baseline 16.5 15.7 15.0 14.6 13.9 Exchange Rate Shock (30%) 16.5 16.5 15.8 15.3 14.6 Interest Shock 1 16.5 15.7 15.0 14.6 13.9 Interest Shock 2 16.5 15.7 15.0 14.6 13.9 Combined Shock (15% depreciation and IR Shock) 16.5 16.1 15.4 15.0 14.3 Interest-to-GDP ratio Baseline 06 0.6 06 0.6 06 0.6 06 0.6 06 0.6 Exchange Rate Shock (30%) 0.6 0.6 0.6 0.6 0.6 Interest Shock 1 0.6 0.6 0.6 0.6 0.6 Interest Shock 2 0.6 0.6 0.6 0.6 0.6 Combined Shock (15% depreciation and IR Shock) 0.6 0.6 0.6 0.6 0.6 PV of debt-to-gdp ratio Baseline 15.6 14.6 13.7 13.2 12.6 Exchange Rate Shock (30%) 15.6 15.2 14.4 13.9 13.2 Interest Shock 1 15.6 14.6 13.7 13.2 12.6 Interest Shock 2 15.6 14.6 13.7 13.2 12.6 Combined Shock (15% depreciation and IR Shock) 15.6 14.9 14.0 13.6 12.9
Evolution of indicators Strategy 3 2013 2014 2015 2016 2017 Debt-to-GDP ratio Baseline 16.5 15.7 15.0 14.7 14.0 Exchange Rate Shock (30%) 16.5 16.3 15.6 15.2 14.6 Interest Shock 1 16.5 15.7 15.0 14.7 14.0 Interest Shock 2 16.5 15.7 15.0 14.7 14.0 Combined Shock (15% depreciation and IR Shock) 16.5 16.0 15.3 15.0 14.3 Interest-to-GDP ratio Baseline 0.6 0.6 0.6 0.6 0.6 Exchange Rate Shock (30%) 0.6 0.6 0.6 0.6 0.6 Interest Shock 1 0.6 0.6 0.6 0.6 0.6 Interest Shock 2 0.6 0.6 0.6 0.6 0.6 Combined Shock (15% depreciation and IR Shock) 0.6 0.6 0.6 0.6 0.6 PV of debt-to-gdp ratio Baseline 15.9 14.9 14.1 13.6 13.0 Exchange Rate Shock (30%) 15.9 15.4 14.7 14.1 13.4 Interest Shock 1 15.9 14.9 14.1 13.6 13.0 Interest Shock 2 15.9 14.9 14.1 13.6 13.0 Combined Shock (15% depreciation and IR Shock) 15.9 15.2 14.4 13.9 13.2 Strategy 4 Debt-to-GDP ratio Baseline 16.5 15.6 14.9 14.4 13.6 Exchange Rate Shock (30%) 16.5 16.66 15.8 15.2 14.44 Interest Shock 1 16.5 15.6 14.9 14.4 13.6 Interest Shock 2 16.5 15.6 14.9 14.4 13.6 Combined Shock (15% depreciation and IR Shock) 16.5 16.1 15.3 14.8 14.0 Interest-to-GDP ratio Baseline 0.6 0.6 0.5 0.5 0.4 Exchange Rate Shock (30%) 0.6 0.6 0.5 0.5 0.5 Interest Shock 1 0.6 0.6 0.5 0.5 0.4 Interest Shock 2 0.6 0.6 0.5 0.5 0.4 Combined Shock (15% depreciation and IR Shock) 0.6 0.6 0.5 0.5 0.5 PV of debt-to-gdp ratio Baseline 15.5 14.3 13.3 12.6 11.9 Exchange Rate Shock (30%) 15.5 15.0 14.0 13.3 12.6 Interest Shock 1 15.5 14.3 13.3 12.6 11.9 Interest Shock 2 15.5 14.3 13.3 12.6 11.9 Combined Shock (15% depreciation and IR Shock) 15.5 14.7 13.7 13.0 12.2
Resolving a conflict between indicators? Consider wider set of indicators? Consider more closely how well the strategies meet other objectives Consider how they perform relative to identified priorities for mitigate macro vulnerabilities At the end of the day need to use judgment
Implied Issuance Patterns Implied net borrowing (% of GDP) (Average over simulation) S1 S2 S3 S4 Net external borrowing 23% 2.3% 13% 1.3% 10% 1.0% 18% 1.8% Net domestic borrowing -1.9% -0.8% -0.4% -1.3% External net borrowing 2013 2014 2015 2016 2017 S1 3.9% 2.8% 2.2% 1.8% 1.1% S2 2.5% 1.5% 1.2% 0.8% 0.4% S3 1.5% 1.1% 0.9% 0.9% 0.6% S4 3.1% 2.1% 1.6% 1.5% 0.8% Domestic net borrowing 2013 2014 2015 2016 2017 S1-3.3% -2.3% -1.7% -1.5% -0.8% S2-2.0% -0.9% -0.6% -0.3% 0.1% S3-0.9% -0.5% -0.2% -0.4% 0.0% S4-2.5% -1.5% -1.1% -1.1% -0.4% Is this viable? How realistic are the strategies being analyzed? What do these decisions imply for the rest of the economy? Is this compatible with the monetary policy stance?
Drawing conclusions Quantitative tools help inform decision-making process by allowing producing a ranking of candidate strategies on a consistent basis However, The quality of outputs is only as good as the quality of the inputs Decisions need to be made in line with Decisions need to be made in line with the pre-set objectives and take constrains into account
MEDIUM TERM DEBT STRATEGY TRATEGY: STEP 8
Outline KEY ISSUES IMPLEMENTATION MAIN MESSAGES Defining financing plan in line with budgetary cash needs Issuance plan MONITORING Impact on key targets Meet? STRUCTURAL REFORMS Developing/improving risk management system. Market development objectives Investor base relation
Developing a consistent borrowing plan
After choosing a DMS. Implementation What is the annual financing plan that is consistent with the selected strategy? Are there other portfolio management activities that are needed to attain the portfolio targets? (e.g. derivatives?) How is the monitoring of implementation going to be applied? And, if there are deviations, how are these going to be addressed?
The Financing Plan
How Does the Financing i Plan for the Next Budgetary Cycle Look Like? Determine the gross borrowing needs for each type of instrument to cover expected budgetary needs roll over needs/amortization needs Are these consistent with the debt strategy? Borrowing plan. What is the timing?
2013 Financing Needs (In domestic currency) Gross Central Government Cash Requirements 20,000 Redemptions -- Total Financing Need 20,000 Financing Sources 20,000 External Financing (60%) 12,000 Multilateral concessional (40%) 4,800 Bilateral concessional (30%) 3,600 Eurbonds (10%) 1,200 Commercial bank loans (20%) 2,400 Domestic Financing (40%) 8,000 T-Bonds (60%) 4,800 T-bills (40%) 3,200
Timing Issues and program design The debt program needs to be consistent with the cash management program. Calendar of issuances. Quarterly? Inputs: revenue & spending (including debt service) programming Level of deposits, TSA balances Programmed grants/loans disbursements
Ministry of Finance Tax and spending data Fiscal position forecasts Daily cash flows Defines debt and cash management policy Back Office Middle Front Office Office Debt manager Borrowing to meet medium/long term needs Developing secondary market Interfaces to investor base and creditors Central Bank Government s banker Manages monetary policy Key Relationships: Need for Prompt Updates
Key Relationships Ministry of Finance Tax and spending data Fiscal position forecasts Daily cash flows Defines debt and cash management policy Back Office Middle Front Office Office Debt manager Borrowing to meet medium/long term needs Developing secondary market Interfaces to investor base and creditors Central Bank Government s banker Manages monetary policy
Filling the Domestic and External Borrowing Plans: Consistency Domestic Borrowing: Options Marketable debt Instruments Overdraft facilities Non-marketable instruments Pre-funding Issues Market development objectives Fiscal dominance? External Borrowing: Options Official sector flows Access to market sources Financing from reserves Financing secured from FX market Postponing spending plans Issues Difficult to forecast the timing of disbursements Need for sterilization, bridge financing? i Identifying the matching liability
Examples
Example of an Issuance Plan: Target balance on TSA? Target bond financing: 4,500 Market development considerations Regular issuance: Bonds are auctioned on a Friday. Standard amounts: Minimum size of an auction is 150, maximum is 400, increments of 25 Frequency: Maximum frequency of every two weeks Seasonal factors: No auctions are scheduled in August or December
Example of an Issuance Plan: Implications Max of 22 auction dates available, Implies an average auction size of 205 to meet issuance target. Minimum i issuance size constraint t can be met, but not an increment Need to adjust For Instance, aim for 225 across 20 auctions
Example: The French Calendar for Domestic Debt Issuances http://www.aft.gouv.fr/articles/monthly-auction-calendar_669.html
LATEST T-BILLS AUCTION RESULTS 26W T-BILLS 13W T-BILLS AUCTION DATE 5-Nov-13 12-Νov-13 ISSUE DATE 8-Nov-13 15-Nov-13 MATURITY DATE 9M 9-May-14 14-Feb-14 AMOUNT AUCTIONED 1,000,000,000 1,000,000,000 TOTAL BIDS 1,860,000,000 2,025,000,000 COMPETITIVE BIDS 1,560,000,000 1,725,000,000 NON-COMP. BIDS 300,000,000 300,000,000 COVERAGE RATIO 1.86 2.03 TOTAL ACCEPT. AMNT 1,300,000,000 1,300,000,000 Greece: November 2013 Results UNIFORM YIELD 4.15% 3.90% CUT-OFF PRICE 97.945 99.024 CUT-OFF RATIO 71.60% 90.90% SECOND DAY BIDS AUTHORIZED AMNT 300 MLN EURO 300 MLN EURO EXERCISED AMNT 300 MLN EURO 300 MLN EURO http://www.pdma.gr/index.php/en/
Spain Tesoro Público funding in 2011 Forecast (in Bn Euros) Forecast 2 0 1 0 Forecast 2 0 1 1 2012 Jan-10 Close Jan-11 Close Strategy Funding requirement (=Net Issuance) 76.8 62.1 47.2 48.2 36.8 Redemptions of long-term bonds and loans* -35.4-35.8-46.6-47.1-50.1 Net issuance of long-term bonds and loans* 61.6 58.7 47.2 48.6 35.8 Gross issuance of long-term bonds and loans* 97 94.5 93.8 95.6 85.9 Net increase in Letras del Tesoro outstanding 15.2 3.4 0-0.4 1 Net change in outstanding Central Government Debt** 78.3 65.2 47.2 51.5 36.8 Central Government Debt outstanding at year-end** 553.5 540.6 588 592.1 628.9 *Including foreign-currency debt, medium- and long-term bonds and assumed debt **In nominal terms Spain: 2012 Financing i Needs Programming
Spain Auction Calendar for Spain http://www.tesoro.es/en/deuda/index_deuda.asptesoro es/en/deuda/index asp Debt Issuance Strategy for Spain http://www.tesoro.es/en/home/estrategia.asp
Brasil Indicators 2011 Limits for 2012 Minimumi Maximun Stock of FDP (R$ billions) 1,866.4 1,950.0 2,050.0 Profile (%) Fixed Rate 37.2 37.0 41.0 Inflation Linked 28.3 30.0 34.0 Floating Rate 30.1 22.0 26.0 Exchange Rate 44 4.4 30 3.0 50 5.0 Maturity Structure Average maturity (years) 3.6 3.6 3.8 % Maturing in 12 months 21.9 22.0 26.0 www.tesouro.fazenda.gov.br https://www.tesouro.fazenda.gov.br/en/federal-public-debt/annual-borrowing-plan
Turkey http://www.tukuphane.tcmb.gov.tr Canada http://www.fin.gc.ca/treas/frame/tmrf08_1-eng.asp
MEDIUM TERM DEBT STRATEGY STEP 8
The Framework: A 8-step approach Step8: Recommend MTDS for approval
Not only developed but also a number of developing countries have published their MTDS document and got Parliaments approval. Reports published include: Kenya (2009, 2010, 2011) Ghana 2010 Tanzania a 2011, 2012 Malawi 2011 Moldova 2011 Bangladesh Kyrgyz Republic Tool that permits Improved policy coordination p p y Enhanced transparency Better communication also with investors Commitment to a medium-term debt funding strategy