Domestically Issued Public Debt As A Sustainable Alternative


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Domestically Issued Public Debt As A Sustainable Alternative

  1. 1. Domestically Issued Public Debt <br />A research conducted by Artak Kyurumyan <br />Within CRRC Research Fellowship Program<br />
  2. 2. Methodology used<br />Cross-country analysis of domestic debt developments using recent IMF and other publications.<br />Analysis of Armenian debt developments.<br />Analysis of Armenian financial sector.<br />
  3. 3. Armenian Public Debt<br />Armenia started borrowing from international financial institutions immediately after independence<br />Public debt is comprised of external and domestic debt<br />Armenia was considered a heavily indebted nation in late 1990s and early 2000s.<br />The situation improved in early 2000s but dramatically worsened in 2009.<br />
  4. 4. Armenian Debt Indicators<br />
  5. 5. AMD per USD Average and End-of-period Exchange Rates (Q1/1997-Q1 2009)<br />
  6. 6. Some Historical Data and Expected External Debt Developments<br />
  7. 7. Public Debt Developments in the Region<br />Source: IMF First Review Under the SBA. July 2009. Page 18.<br />
  8. 8. The Research Question<br />Can the domestic currency denominated debt become a sustainable alternative for debt managers to meet the needs of public sector and what Armenia needs to do to better use domestic financial resources?<br />
  9. 9. Armenian domestic debt - 1<br />Armenia started issuing marketable domestic debt in 1995.<br />Interest rates were very high in 1990s (between 40-50%% most of the time reaching 70% level at certain times).<br />Weak investor base. Government securities are held mostly by Armenian commercial banks.<br />Very thin secondary market.<br />
  10. 10. Armenian domestic debt - 2<br />No debt management strategy. Annual debt issuance programs are driven not by strategy but by annual budget.<br />Weak coordination of fiscal, debt management and monetary policies.<br />The CBA refrains from using outright purchase and sale of government securities as an important monetary policy instruments.<br />Unexpected exchange rate fluctuations.<br />
  11. 11. Armenian domestic debt - 3<br />Armenia issues medium & long term notes and bonds (up to 20 years).<br />Armenia has standard instruments in the medium and long term segments of the market (3, 5, 10, and 20 year).<br />Transparent (but frequently changing) issuance program.<br />Successful retail program.<br />
  12. 12. Weighted average monthly interest rates of auctions of Armenian Gov securities (09/1995 –12/2008)<br />
  13. 13. Investor Structure<br />
  14. 14. Armenian Financial Industry<br />Mostly banks<br />Although the banking sector is considered advanced one, it has a small role in economy.<br />No long-term financial assets.<br />IMF country report No 10/97 from April 2010: “By regional standards, financial intermediation in Armenia is relatively low, with bank loans-to-GDP ratio at 22 percent in 2009, up from 17 percent in 2008 largely as a result of GDP decline”.<br />
  15. 15.
  16. 16. Crowley, J. Credit Growth in the Middle East North Africa, and Central Asia Region. IMF Working Paper 184. July, 2008<br />
  17. 17. Asset Structure of Armenian Banks<br />
  18. 18. CBA transactions<br />
  19. 19. Domestic Debt Around the World<br />Domestic debt as percent of GDP increased from 23% in 1995 to 35% in 2004<br />Share of domestic debt in total debt increased from 38% in 1995 to more than 58% in 2004.<br />The main reasons for increase in domestic debt<br />Financial crisis<br />Sterilization of capital inflows<br />Attractiveness of domestic borrowing<br />Increased demand for developing country debt<br />
  20. 20. Debt in Other Countries of South Caucasus<br />Georgia terminated its domestic debt program in mid 2000 when the interest rates reached double digit numbers and restarted the program in 2009 with issuance of short term treasury bills.<br />No reliable information about domestically issued debt of Azerbaijan.<br />
  21. 21. Conclusions and Recommendations<br />Armenian total public debt is still below the 50% GDP threshold. However, the revenues are also at dangerously very low level.<br />In the past (in 2003-2004) Armenian external debt to GDP ratio has already been at 46%. Armenia faced problems and needed debt restructuring (debt to equity swap).<br />Armenia borrowed heavily from external sources in 2009. Armenia is going to have heavy external debt repayment decade (2011-2020).<br />
  22. 22. Policy Options<br />Increase Revenues<br />Increase Tax Revenues<br />Increase Other Revenues<br />Borrow<br />Borrow Internationally<br />Borrow Domestically<br />Default<br />
  23. 23. Untapped financial assets in Armenia<br /> Attractiveness of domestic borrowing(Hanson).<br />Increased demand for emerging/developing country public domestic currency debt(Hanson).<br />Under-mattress savings of about USD 1-2 billions (or about AMD 400-800 billions)<br />See, e.g. the speech of the PM of the RA at the financial banking conference in Dilijan May 24, 2008 ( and the press conference of the head of the financial system policy and analysis department of the CBA on September 11, 2007 (Capital,<br />
  24. 24. Debt Option<br />Develop Debt Management Strategy<br />where Armenia is going in terms of debt<br />Implement Pension System Reforms <br />already postponed twice<br />Broaden relations with Primary Dealers<br />make them intermediaries not investors<br />Broaden the Role of Monetary Authority in the Secondary Market of Government securities<br />buy and sell more government securities as monetary policy instrument<br />Standardize the Instruments and Issuance Calendar <br />the behavior of the issuer is transparent but the issuance program is volatile<br />
  25. 25. Thank you<br />Questions please.<br />