Debt Management and Sustainability: Strengthening Liability Management Sri Lankan Perspective 27 February 2018 Colombo, Sri Lanka C J P Siriwardana Deputy Governor
2 Overview 1. Evolution of Public Debt in Sri Lanka 2. Current Challenges 3. Key Debt Management Strategies
3 Overview 1. Evolution of Public Debt in Sri Lanka 2. Current Challenges 3. Key Debt Management Strategies
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 % of GDP % Rs. / USD 1.1 Overview of Public Debt Liability of public debt stock has been increasing since the independence of Sri Lanka in 1948 mainly due to two reasons: persistent fiscal imbalances and depreciation of the domestic currency. During last 40 years, as a percentage of GDP, overall annual average budget deficit was recorded at 8.6% USD/LKR exchange rate depreciated to Rs. 155.25 as at 26 February 2018 compared to Rs. 8.83 recorded at end 1976. (Please note that the Current Exchange rate determination is market driven whereas in 1976, it was fixed.) Chart 1 Overall Budget Surplus(+)/ Deficit(-) as a % of GDP 1950-2016 Chart 2 LKR Depreciation against USD 1950-2017/ Sep 5.0 50 200 0.0 40 160-5.0 30 120-10.0-15.0 20 80-20.0 10 40-25.0 0 - Overall Budget Surpus (+) / Deficit (-) LKR Depreciation against USD Rs. / USD (RHA) 4
Rs. Bn. 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 % 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 5 1.1 Overview of Public Debt (Contd.) Debt to GDP ratio, which had a maximum of 108.7% in 1989 declined to stand at 79.3% at end 2016. As at end December 2017, the Total Debt Stock stood at Rs. 10,334 bn (US$ 67.6 bn) 12000 Chart 3 Outstanding Government Debt 1950 - June 2017 120 Chart 4 Debt to GDP Ratio 1950-2016 108.7 (1989) 105.6 (2002) 9000 100 79.3 (2016) 6000 80 60 3000 40 0 20 0 Outstanding Government Debt Debt to GDP Ratio
6 1.2 Key Developments in Government Security Market during Last Three Decades 1992 Introduction of Primary Dealer (PD) system 1997 Commencement of the issuance of Treasury bonds (T-bonds) 1998 Introduction of an electronic bidding facility 2001 Issuance of Sri Lanka Development Bonds (SLDBs) 2003 Enactment of the Fiscal Management (Responsibility) Act 2004 Introduction of Scripless Securities Settlement System (SSSS), RTGS and CDS
7 1.2 Key Developments in Government Security Market during Last Three Decades (Contd.) 2006 Opening up the T-bond market to foreign investors (Limited access) 2008 Opening up of the T-bill market to foreign investors (Limited access) 2010 Introduction of participant managed Intraday Liquidity Facility to the LankaSettle and LankaSecure Systems 2016 Introduction of Bloomberg trading platform 2017 Introduction of new Primary issuance system for T-bonds 2018 Liability Management Bill (Presented to the Parliament)
8 1.3 Current Status of Public Debt Domestic Debt 92% of domestic debt was raised through market based instruments. As at end September 2017, Non Banking Sector accounted for 58% of the Domestic Debt Chart 05 Composition of Domestic Debt by Instrument as at end December 2017 Chart 06 Ownership of Domestic Debt as at September 2017 8% 11% 13% 58% 42% 68% Treasury bonds Treasury bills Other SLDBs Banking Non Banking
1.3 Current Status of Public Debt (Contd.) 9 External Debt Concessional Debt (As per the IMF classification) accounted for 58% at end December 2017 in comparison to 83% in 2007. Outstanding Commercial Debt accounted for 43% of the Total External Debt and high reliance of External Commercial Borrowing were reported during last 10 years. Chart 07 Concessional and Non Concessional External Debt as at end 2017 Chart 08 Composition of External Debt by Creditors as at end 2017 11% 21% 46% 54% 43% 25% Concessional Non-concessional. Bilateral Multilateral Commercial Export Credit
10 Overview 1. Evolution of Debt in Sri Lanka 2. Current Challenges 3. Key Debt Management Strategies
11 2. Current Challenges High debt to GDP ratio compared to peer rated economies High bunching of debt: Annual, monthly and daily Diminishing availability of external concessional funding Limited resource availability from domestic non-bank sources A relatively low Average Time to Maturity (ATM) High fragmentation of domestic T-bond market External commercial borrowing limited to the horizon of 10 years Government cash flow often deviate from original targets Limited flexibility in the Government budget Volatility in the international markets Limited scope to hedge future liabilities
Debt to GDP Ratio 12 2.1 High Debt to GDP Ratio Sri Lanka has a high debt to GDP ratio compared to peer countries. 90 Chart 09 Debt to GDP ratio 80 70 60 50 40 30 20 10 0 India Indonesia Malaysia Pakistan Philippines Sri Lanka Thailand Country Source: https://tradingeconomics.com
2.2 Bunching Issue USD Mn USD Mn 13 High Refinance Risk due to annual, monthly and daily bunching both in domestic and foreign debt service payments during short to medium-term. Domestic debt: Treasury bonds, Treasury bills and Sri Lanka Development Bonds (SLDBs, USD denominated) Foreign debt: ISBs, other commercial and foreign loans Bunching Issues: T-bonds Annual bunching 2018-2019 6 days of debt service payments over USD 700 mn (Rs. 110 bn) during 2018 Chart 10 Servicing of T-bonds 2018-2026 (USD Mn) Chart 11 Servicing of T-bonds 2018 (USD Mn) 7,000 6,000 5,000 4,000 3,000 2,000 1,000-2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Year 1,000 900 800 700 600 500 400 300 200 100 - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2018 Principal Interest Principal Interest
2.2 Bunching Issue USD Mn USD Mn 14 Bunching Issues: SLDBs Annual bunching: USD 2,304 mn maturing in 2018 1,000.0 800.0 Chart 12 Servicing of SLDBs - 2018 During 2018, 600.0 4 days of service payments over US$ 400 mn, with a peak of US$ 851 mn in July 2018. 400.0 200.0 0.0 Jan - 2018 Mar - 2018 Apr - 2018 Jun - 2018 Jul - 2018 Sep - 2018 Oct - 2018 Dec - 2018 SLDBs Principal SLDBs Interest Bunching Issues: ISBs Sri Lanka has issued 11 ISBs since 2007 Last issue: USD 1,500mn in May 2017 Maturities of USD 1,000 2,150 mn 2,500 2,000 1,500 2,059 Chart 13 Servicing of ISBs - 2018 to 2027 1,516 1,454 1,877 2,434 1,161 1,547 each year from 2019 to 2027 except 2018, 2023 and 2024 Annual interest bill 2018: USD 600 mn (around Rs. 90 bn) 1,000 500-602 304 304 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 ISB Principal Year ISB Coupons
% 15 2.3 Diminishing Availability of Concessional Funding With the Country graduating to middle income status, availability of concessional loans have been diminishing Chart 14 Share of Concessional & Non Concessional Loan 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Concessional Loans Non Concessional Loans
Percentage Revenue GDP Gap 16 2.5 Negative Revenue Expenditure Gap Sri Lanka has a higher Negative Revenue Expenditure Gap compared to peer countries. 35.0 Chart 15 Government Revenue to GDP Ratio 1.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 0.0-1.0-2.0-3.0-4.0-5.0-6.0-7.0-8.0 Country/ Region Revenue to GDP Ratio (percentage) Revenue Expenditure Gap (percentage) Expenditure to GDP Ratio (percentage) Source: Annual Report 2016,Central Bank of Sri Lanka
17 Overview 1. Evolution of Debt in Sri Lanka 2. Current Challenges 3. Key Debt Management Strategies
18 3. Key Debt Management Strategies GOSL has highlighted key debt management strategies in their Vision 2025, published in October, 2017, which focuses on 3 key areas; Revenue-based fiscal consolidation to reduce public debt in the medium term Rationalising Government expenditure Initiating liability management strategies
19 3.1 Revenue based Fiscal Consolidation The government is committed sturdily towards implementing revenue based fiscal consolidation measures, recognising the persistently low revenue mobilisation, which leads to high budget deficits, as the root cause of fiscal imbalances experienced during last several decades in Sri Lanka. Revenue based fiscal consolidation will expand the fiscal space and allow the government to accommodate mandatory recurrent expenditure while financing public investment programmes, without prejudice to the sustainability of the government s financial position. Moreover, enhanced revenue collection eases the need for increased foreign commercial borrowings, thereby easing the pressure on the exchange rate to depreciate.
20 3.2 Rationalising Government expenditure The government will strengthen the Fiscal Management Responsibility Act with mandatory binding targets for the fiscal deficit and overall government debt levels. Rationalise public expenditure while eliminating unproductive expenditure. Restructuring of SOEs.
21 3.3 Liability Management Exercises Reasons to engage in Liability Management Exercises, include: Increase liquidity in government securities Manage risks in debt portfolio Decrease the cost of new funding Stabilise markets during times of stress Take advantage of market volatility
22 3.3 Liability Management Exercises (Cont.) Favorable Outcomes of Liability Management Exercises Liquidity Management Smoothening by reducing expected large bond maturities Reduce par value amounts of maturing bonds Purchase Target bonds Swap investor into Destination bonds Swaps always done to extend maturity
23 3.3 Liability Management Exercises (Cont.) Favorable Outcomes of Liability Management Exercises Promote liquidity in new issue benchmark bonds Buy back Target off-the-run bonds Reopen benchmark bond as the Destination bond Increase size of benchmark bond and reduce off-the-run illiquid bonds
24 3.4 Liability Management Strategy Initiatives in Sri Lanka The Active Liability Management (ALM) Bill was presented to the parliament. (during February 2018) The Act is expected to, execute new liability management techniques minimize rollover risk by altering the maturity profile of the outstanding debt stock with the expectation to improve the underlying risk profile of the public debt stock, to manage the domestic and foreign public debt. The Act has given authority to maintain Buffer funds, both in local currency and foreign currency to ensure smooth operations. The Act will bring new market techniques such as reverse auctions, buy-back and switching arrangements.
25 3.4 Liability Management Strategy Initiatives in Sri Lanka (Cont.) Under the new Liability Management Policy, new medium term debt strategy is being developed covering the following: Allocation of issuances Types o T-bonds, T-bills, SLDBs and ISBs Maturity o Short, Medium and Long term Currency o Rupee, foreign currency Interest rate o Fixed vs floating
26 3.4 Liability Management Strategy Initiatives in Sri Lanka (Cont.) Expected to contribute to proactively address part of the external refinancing requirements ahead of time (reduce rollover peaks) and extend the maturity duration beyond 2027 for ISBs. It will also enable the extension of the maturity structure of T-bonds and the smoothening of the coupon payments cycle. Lower the fragmentation of the T-bond market that helps improving the liquidity in the secondary market.
3.4 Liability Management Strategy Initiatives in Sri Lanka (Cont.) 27 This exercise will help GOSL to diversify the investor base, reduce the cost of borrowing, mobilise funds based on prevailing market rates, extend the duration of the liability portfolio, reduce refinancing risk in near term and create a favourable price tension for any new issuances. The LMA will give flexibility for active debt management initiatives such as buy-backs, switching and pre-funding arrangements.
3.4 Liability Management Strategy Initiatives in Sri Lanka (Cont.) 28 Government s action to reduce the budget deficit through the fiscal consolidation process and proceeds from divestment of non-strategic state assets which will be utilised strategically to manage liability of debt to lower the future borrowing requirement. Government s decision to earmark all proceeds of divestitures will play an important role in creating a buffer fund for more effective liability management. New issuance strategy under the effective liability management structure would address the fragmentation of domestic bond market thereby improving the secondary market operation.
29 3.5 In addition, the following measures are also expected to be implemented Improving cash flow management of the Central Treasury Strengthening the Primary Dealer System New Auction system for the Domestic Market (extending new auction system to T-bills market) Lengthening ATM for both Domestic and Foreign Debt Stock
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