international monetary fund - world bank...a new wave of lics accessing the international market...
TRANSCRIPT
International Monetary Fund
Pros and cons of issuing an international bond
Gabriel Presciuttini Monetary and Capital Markets Department
IMF
2
Background
Frontier Markets: new opportunities, old risks?
Reasons for issuing in external markets
Benefits and Pitfalls
A new wave of LICs accessing the international market
Reference: “First-Time International Bond Issuance—New Opportunities and Emerging Risks” by A.Guscina, G. Pedras
and G. Presciuttini. IMF WP forthcoming.
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Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13
EMBI Global (lhs)
VIX Index
PAKVNM
ECU
SYCGHA
SLK
GAB GEO
SEN
BLR
MNE
ALB
JOR
NGA
NAM
AGO
ZMB
BOL
MNG
PRY
TZA
HNDRWA
ARM
bps bps
Africa
Asia
Europe
Latam
Middle-
East
Frontier markets: old risks?
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40
60
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120
140
160
180
t-3
t-2
t-1 t
t-3
t-2
t-1 t
t-3
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t-1 t
t-3
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t-1 t
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t-3
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t-1 t
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t-2
t-1 t
t-3
t-2
t-1 t
t-3
t-2
t-1 t
Seychelles Sri Lanka Mongolia Pakistan Jordan Ghana Ecuador Gabon Bolivia Georgia Paraguay
Selected countries. Debt to GDPin percent
Source: WEO (IMF)
High and decreasing
Low and decreasing
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10
20
30
40
50
60
70
t-3
t-2
t-1 t
t-3
t-2
t-1 t
t-3
t-2
t-1 t
t-3
t-2
t-1 t
t-3
t-2
t-1 t
t-3
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t-1 t
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t-1 t
t-3
t-2
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t-3
t-2
t-1 t
t-3
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t-1 t
t-3
t-2
t-1 t
t-3
t-2
t-1 t
Nigeria Namibia Rwanda Zambia Senegal Belarus HondurasMontenegroArmenia Vietnam Tanzania Albania
Selected countries. Debt to GDP in percent
Source: WEO (IMF). Note: t is the issue's year.
Low and increasing
Strategic Ones
Diversify financing sources and the investor base
Create reference for the corporate sector
Disseminate a positive image for the country to a broader community
of investors.
Foster market discipline
Opportunistic Ones
Lower cost
Longer maturity
Temporary access to specific demand
Refinance maturing bonds
Reasons for Issuing Externally
Significant Potential Benefits
Direct Supplements domestic savings and borrowing from official lenders
Sometimes lower costs versus domestic markets
Extend maturities farther than possible in domestic markets
Cash borrowing allows for speedier project implementation
Indirect
Establishes a pricing benchmark for private companies
Broaden sources of capital and reduce reliance on bank financing
Strengthen incentives for maintaining macroeconomic discipline
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But also significant potential macroeconomic risks
Higher borrowing cost (when shifting from non-concessional sources)
Higher Refinancing risk (maturity hump; private investors are prone
to bond sell-off if market conditions suddenly change)
Higher exchange rate exposure (when switch from local currency
debt)
Cost of carry (interest payment during investment period)
Terms of trade swings (lower international reserves or ER
depreciation)
External financing conditions (monetary conditions in G7 countries,
risk aversion, etc).
Overborrowing can lead to debt sustainability problems. 7
These countries are not immune to capital
outflows…
-200
-100
0
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200
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-200
-100
0
100
200
300
400
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Events in EMs (Jan.2014) 1/
QE Tapering (May-June, 2013) 2/
March 2014-May 2013
BB BBB B NR
Source: Bloomberg and IMF staff calculations. 1/ Refers to a series of events in EM economies, which comprises political events in Turkey, lower growth expectation in China and Brazil, devaluation in Argentina, among others. 2/ Refers to the distressed period driven by Bernanke's speech about tapering.
in bps
(change in bond yields, in bps)
…with potential impact on growth and fiscal balance
0.0
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1.0
1.2
1.4
1.6
Rollover risk (in percent of GDP)
Maturity profile
without new
bond
(period average)
First-time bonds
falling due
(period average)
average= 0.7
average= 1.0
Country sample includes Bolivia, Honduras, Mongolia, Namibia, Rwanda, Tanzania and Zambia.
max =1.5
average= 0.6
-10.0
-5.0
0.0
5.0
10.0
15.0
Growth gap (in percent)
Baseline (current debt strategy)
100% External Debt
Baseline+15% FX depreciation
100% External+15% FX depreciation
Source: Country desks and IMF calculations. Note: Growth gap is the difference between the required (implied) growth rate that makes the debt stock remains constant at current level and the average expected growth rate over the projection period .
Reference: “First-Time International Bond Issuance—New Opportunities and Emerging Risks” by A.Guscina, G. Pedras and G. Presciuttini.
IMF WP forthcoming.
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0.0
2.0
4.0
6.0
8.0
10.0
12.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Changes in the cost of borrowing (in percent)
Average interest rates on current debt portfolio 1/
Bond yield at issue date 2/
Source: WEO, Bloomberg and IMF staff calculations. 1/ Annual interest payments over previous year’s debt stock., wihich includes both local and foreign currency interests. 2/ This yield does not include the expected depreciation rate at issue date,
BB B BBB NR
…and higher borrowing costs
Take a pragmatic view
What is the scale of the infrastructure challenge/foreign funding
needs?
What is the shortfall compared to other sources of funding?
In what time frame can capacity be build?
Can complimentary domestic resources be found?
Developing domestic markets
Engaging new bilateral creditors
Tapping external commercial markets
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Strategic considerations
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Conducting debt sustainability is critical in reducing risks
of debt distress:
1. Evaluate the future payment capacity under different
macroeconomic scenarios (growth, exchange rate, interest
rates).
2. The use of the proceeds: finance deficit or investment
A comprehensive medium-term debt strategy exercise is
important to assess the impacts of the external bond on the
cost-risk trade-offs of the debt composition
Thank you
Background slides
Higher growth prospects, relative low inflation, sustainable
current account balance and high foreign reserves.
Sustainable levels of debt.
Prudent fiscal stance and policy transparency.
Factors affecting spreads at issuance
Factors affecting spreads at issuance
Supportive external environment “Push factors”
Low interest rate environment – “Search for yield”
Sufficient risk appetite (low volatility abroad - VIX)
Demand for diversification (correlation with either AMs or large EMs is low).
Successful marketing
Building investor base
Data dissemination
Obtaining credit rating prior to issuance
Close contact with investors (e.g.: Road shows and active
Investor Relation Program) 16