Debt Management Tarun Das
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Debt Management Tarun Das

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Debt Management Tarun Das Debt Management Tarun Das Presentation Transcript

  • Sustainable External Debt Management Presented by Dr Tarun Das Economic Adviser Ministry of Finance UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 1
  • Contents 1. Definition of external debt 2. Conceptual issues 3. Different Types of Risk 4. Measures for Risk Management 5. Sustainability Indicators 6. World Bank Classification of Ext debt UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 2
  • 1.1 Definition of external debt “Gross external debt, at any time, is the amount of disbursed and outstanding contractual liabilities of residents of a country to non-residents to repay the principal with or without interest, or to pay interest with or without principal”. • Gross external debt • Contractual obligation • Disbursed and outstanding • Principal with or without interest • Interest with or without principal • Concept of residency not nationality • Current not contingent UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 3
  • 1.2 Definition of external debt - Other Issues • Valuation of external debt • Present value of debt • Short-term debt – original and residual maturity • Interest costs- actual / accrued • Foreign and domestic currency • Traded and unlisted securities • Govt and non-govt( monetary authority, banks, others) UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 4
  • 2 Conceptual Issues on Sustainable Debt a) Debt Sustainability and Fiscal Deficit b) Debt Sustainability and Current Account Deficit c) Liquidity versus Solvency d) Economy wide models e) Asset Liability framework f) Debt sustainability indicators   UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 5
  • 3.1 External Debt Management and Risk Management • A government should manage its debt in order to raise the required amount of resources subject to the lowest possible medium/long term cost and consistent with a prudent degree of risk • Poor debt management poses risks for both the public and private sectors – Risks include fiscal crisis; change in creditworthiness and insolvency (‘debt distress’); economic crisis and instability UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 6
  • 3.2 Transparency in Risk Management • Debt management objectives should be clearly defined and publicly disclosed • The measures of cost and risk that are adopted should be explained – Objectives/preferences of policy – Rules of the game (institutional and legal framework) UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 7
  • 3.3 Basic Principles of Risk Management • The risks in the structure of government debt should be carefully monitored and evaluated – Risks associated with foreign-currency and short-term or floating rate debt • The risks should be mitigated to the extent feasible – Modify the debt structure, taking into account cost of doing so UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 8
  • 3.4 Different types of risk • Market-Based Risks b) Liquidity risk c) Interest rate risks d) Credit risk e) Currency risk f) Convertibility risk g) Budget/ Fiscal Risk h) Contingent liabilities UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 9
  • 3.5 Different types of risk • Country specific and Political risks a) appropriation of capital, b) nationalisation of companies, c) no repatriation of capital etc. d) no sovereign guarantee • Operational Risks g) Control system failure risks h) Financial error risk i) Auditing/ Accounting/ Monitoring Risk UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 10
  • 4.1 Debt Management Strategy • Market risk management involves understanding financial characteristics of revenue flows to government and matching with liabilities with similar characteristics as far as possible (“asset and liability management”) – Not so feasible in countries without well- developed debt markets • Credit risk management depends on diversification • Rollover risk can be created by excessive short-term or floating rate debt (high potential impact) • Effective cash management is necessary for effective risk management (e.g., payment arrears) UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 11
  • 4.2 Risk Management Framework • A risk management framework should help to identify and manage the trade- offs between expected cost and risk in the debt portfolio • Cost includes: financial cost and potential cost of real economic loss – Market risk is measured in terms of potential increases in debt servicing costs associated with changes in interest or exchange rates UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 12
  • 4.3 Assessing Risk • To assess risk conduct stress tests of the debt portfolio based on economic and financial shocks • Simple scenario models: Fund/Bank Debt Sustainability Analysis (DSA) – Project future debt service costs over MT/LT – List key risk indicators – Summarize costs and risks of alternative strategies UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 13
  • 4.4 Management of liquidity risk (a)   Monitor debt by residual maturity (b)  Monitor exchequer cash balance and flows (c) Maintain certain minimum level of cash balance (d)  Maintain access to short-term borrowing (e)  But, fix limits for short-term debt (f)   Pre-finance maturing debt (g)   Do not negotiate for huge bullet loans (h) Smooth the maturity profile to avoid bunching of debt services (i)   Develop liquidity benchmarks UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 14
  • 4.5 Management of interest rate risk (a) Fix benchmark for ratio of fixed versus floating rate debt (b) Maintain ratio of short-term versus long-term debt (c) Use interest rate swaps UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 15
  • 4.6 Management of credit risk (a)      Have credit rating of various scrips by international credit rating organizations such as S&P’s, Moody’s, JBR etc. (b)  Identify key factors that determine credit- rating (c)  Develop a culture of co-operation and consultation among different departments and with credit rating organisations (d)   Set overall and individual counter-party credit limits UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 16
  • 4.7 Management of currency risk (a)    Fix benchmark for the ratio of domestic and external debt (b) Fix ratios of short-term /long-term debt (c)   Fix currency mix for external debt (d)  Determine single currency and currency pool debt (e)   Use currency swaps (f)  Try to have natural hedge by linking dominant currency of exports & remittances to the currency denomination of debt UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 17
  • 4.8 Convertibility Risk (a) Have gradual and cautious approach towards capital account convertibility. (b) An orderly and sequenced manner in line with strengthening domestic financial systems through adequate prudential and supervisory regulations. (c) Encourage initially non-debt creating financial flows followed by long term capital flows. (d) Short term or volatile capital flows may be liberalised only at the end of capital account convertibility. UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 18
  • 4.9 Budget Risk (a)  Enact a Fiscal Responsibility Act. (b) Put limits on debt outstanding and annual borrowing as a percentage of GNP or GDP (c ) Use government guarantees and other contingent liabilities (such as insurance and pensions etc,) judiciously and sparingly. (d) Fix limits on contingent liabilities (e) Fix targets on fiscal deficit, primary deficit (f) Fix limits on short term borrowing (g) Monitor debt service payments UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 19
  • 4.10 Operational Risk (a)      Have stable and sound macro-economic policies (b)      Have co-ordination among monetary and fiscal authorities (c)      Allow independence and transparency of different offices (such as front, back, middle and head offices) dealing with public debt (d)      Strengthen capability of different offices   UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 20
  • 5.1 Solvency Ratio (a) Interest service ratio –interest payments / XGS ratio (b)   External debt / GDP ratio (c)  External debt / exports ratio (d)  External debt / revenue ratio (e)  PV of debt services/ GDP ratio (f)   PV of debt services / XGS ratio (g) PV of debt services / revenue ratio UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 21
  • 5.2 Liquidity monitoring ratio (a)  Basic debt service ratio- Ratio of debt services on long term debt to XGS ratio (b)   Cash-flow ratio for total debt or the total debt service ratio (i.e. total debt services to XGS ratio (c) Interest payments to reserves ratio. (d) Ratio of short-term debt to exports of goods and services (e) Import cover ratio- Ratio of total imports to total foreign exchange reserves. (f)  Reserves to short-term debt ratio (g) Short-term debt to total debt ratio UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 22
  • 5.3 Debt Burden Ratio (a) Total external debt to GDP (GNP) ratio (b)    Total external debt to XGS ratio (c)    Debt services to GDP (GNP) ratio (d)     Total public debt to revenue ratio (e) Ratio of concessional debt to total debt UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 23
  • 5.4 Debt structure indicators (a)    Rollover ratio- ratio of amortization (i.e. repayments of principal) to total disbursements (b)   Ratio of interest payments to total debt services (c)   Ratio of short-term debt to total debt UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 24
  • 5.5 Public sector indicators (a)  Public sector debt to total external debt (b)  Public sector debt services to exports ratio (c)   Public sector debt to GDP ratio (d) Public sector debt to revenue ratio (e)    Average maturity of non- concessional debt (f)    Foreign currency debt over total debt UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 25
  • 5.6 Financial sector indicators (a)              Open foreign exchange position- Foreign currency assets minus liabilities plus long term position in foreign currency stemming from off-balance sheet transactions (b)   Foreign currency maturity mismatch (c)   Ratio of foreign currency loans for real estate to total debt (d)   External sector related contingent liabilities (e)  Trends of share market prices (f)    GDRs and Foreign cur conv bonds issued (g)    Inflows of FDI and portfolio investment UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 26
  • 5.7 corporate sector indicators (a)   Leverage (debt/ equity ratio)- Normal value of debt over equity (b)  Interest to cash flow ratio (c)  Short-term debt to total debt (d)  Return on assets (e)  Exports to total output ratio (f)   Net foreign currency cash flow (g) Net foreign currency debt over equity UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 27
  • 5.8 Dynamic ratios (a) Average interest rate/ growth rate of exports (b) Average interest rate/ growth rate of GDP (c) Average interest rate/ growth rate of revenue (d)  Change of PV of debt service/ change of exports (e)   Change of PV of debt service/ change of GDP (f) Change of PV of debt service/ change of revenue UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 28
  • 5.9 Standard Stress Tests in the DSA • Real GDP growth = baseline – 1 SD • Export value growth = baseline – 1 SD • GDP deflator = baseline – 1 SD • Net non-debt creating flows = baseline – 1 SD • Primary balance = baseline – 1 SD • One-time major nominal or real depreciation • Combinations (with ½ SD shocks, e.g.) UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 29
  • 5.10 Identifying Debt Distress Episodes Debt distress indicated by recourse to any of three forms of exceptional finance: • Arrears: Years in which principal and interest arrears to all creditors is in excess of 5% of total debt outstanding • Paris Club Relief: Year of initial Paris Club agreement, plus two subsequent years • Non-Concessional IMF Balance of Payments Support: Years in which Standby Arrangement or Extended Fund Facility are in effect, commitments greater than 50% of quota. Normal times are non-overlapping periods of five years in which no indicators of debt distress are observed UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 30
  • 5.11 Determinants of Debt Distress • Traditional Debt Indicators – Present value of debt/exports, debt service/exports – Debt service/current revenues, debt service/reserves • Policy – CPIA – KKZ indices of institutional quality (single cross-section) • Shocks – Real GDP growth – Real depreciations – Income effect of changes in terms of trade UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 31
  • 5.12 Implications for Lending Strategies of Multilateral Concessional Lenders 1. Substantial value-added in looking at role of institutions/policies and shocks in addition to traditional debt burden indicators when assessing probability of debt distress 2. Using a common debt-burden threshold to assess sustainability for all countries is unlikely to be appropriate: strong tradeoffs between quality of institutions/policies and sustainable level of debt UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 32
  • 5.13 Indicative Policy-Dependent Debt and Debt-Service Thresholds (%) Quality of Policies and Institutions Poor Medium Strong NPV debt/GDP 30 45 60 NPV debt/Xs 100 200 300 NPV debt/rev 200 275 350 Debt svc/Xs 15 25 35 Debt svc/rev 20 30 40 UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 33
  • 5.14 Debt Distress Classification • Low risk—all indicators well below thresholds • Moderate risk—baseline ok, but scenarios/shocks near thresholds • High risk—baseline in breach over projection period • In debt distress—current breach that is sustained/significant UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 34
  • Thank you Have a Good Day UN-ESCAP- Lecture-1 Kathmandu Nepal External Deb-Tarun Das 35