public debt management in mics: challenges and emerging...
TRANSCRIPT
Multilateral Development Banks Meeting on Debt Issues
Washington, DC, July 2012PHILLIP ANDERSON
Senior Manager
Financial Advisory and Banking
Public debt management in MICs:Challenges and emerging issues
Table of Contents
1. Background: MICs well positioned before the financial crisis
2. Market environment
3. Issues and themes
1. Background: MICs well positioned before the financial crisis
EMs successfully decreased risks to public debt portfolios ahead of the financial crisis
Currency composition of government debt portfolios moved dramatically in favor of local currency
4
-
0.5
1.0
1.5
2.0
2.5
3.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Ratio of external to domestic debt
Emerging Markets ECA LAC EAP
Note: USD-linked domestic debt reallocated to external.Source: JP Morgan EM Debt and Fiscal Indicators (2009) and BIS Financial Stability and local currency bond markets (2008)
Net foreign currency debt was significantly reduced (1)
5Source: JP Morgan EM Debt and Fiscal Indicators (2009)
-12
-2
8
18
28
38
48
58
-60
-10
40
90
140
190
240
290
340
Ind
ia
Ind
on
esia
Mal
aysi
a
Ph
ilip
pin
es
Thai
lan
d
Hu
nga
ry
Pola
nd
Ru
ssia
Sou
th A
fric
a
Turk
ey
Bra
zil
Ch
ile
Co
lom
bia
Mex
ico
Peru
Gross external debt vs. Int. Reserves (ex. China)2001
FX Reserves FX debt Net FX debt to GDP (right axis)
USD
bill
ion
(%)
Net foreign currency debt was significantly reduced (2)
6Source: JP Morgan EM Debt and Fiscal Indicators (2009)
-50
-30
-10
10
30
50
-500
-300
-100
100
300
500
Ind
ia
Ind
on
esia
Mal
aysi
a
Ph
ilip
pin
es
Thai
lan
d
Hu
nga
ry
Pola
nd
Ru
ssia
Sou
th A
fric
a
Turk
ey
Bra
zil
Ch
ile
Co
lom
bia
Mex
ico
Peru
Gross external debt vs. Int. Reserves (ex. China)2009
FX Reserves FX debt Net FX debt to GDP (right axis)
USD
bill
ion
(%)
Exposure to refinancing and interest rate risks was also reduced (1)
There was a contraction in the ratio of floating rate to fixed rate bonds
Source: JP Morgan EM Debt and Fiscal Indicators (2009) and BIS Financial Stability and local currency bond markets (2008)
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Floating to fixed rate debt (excluding Brazil)
Emerging Markets ECA LAC EAP
7
Source: JP Morgan EM Debt and Fiscal Indicators (2009) and BIS Financial Stability and local currency bond markets (2008)
8
Exposure to refinancing and interest rate risks was also reduced (2)
There was an extension in the average life
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Average Life
Emerging Markets EAP ECA LAC
Ye
ars
2. Market environment
Eurozone crisis: Spread of credit jitters to EM borrowers is evident
Source: JP Morgan
EM CDS indices have moved higher, though muted vs. 2008/9
10
0
100
200
300
400
500
600
700
800
900
1000 CDS index spreads (5y on the run, bps)
Markit EM.CDX
Markit iTraxx SovX Western Europe
Long-term decline in overall EM sovereign USD-funding costs remains intact…
0
2
4
6
8
10
12
14
16
Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11
EMBIG spread
EMBIG yield
UST 10y yield
Source: JP Morgan
Rise of EM credit risk premia following Eurozone debt crisis more than compensated for by drop in global risk-free rates
…and hard currency issuance remains robust
0
5
10
15
20
25
0
5
10
15
20
25
30
2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1
$bn
EM Issuance Volume and Number of Deals
Total EM Volume Number of issuances (RHS)
Strong bounce-back after the financial crisis-induced stall, subsequently sustained
Source: Dealogic SystemNote: Global Market public issuances , Emerging Market countries, excluding China
For EMs, the real story is the growth of local currency sovereign bond markets
0
1
2
3
4
5
6
7
8
9
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012F
$trn
Emerging and developing economies’ sovereign debt
External Domestic
Source: IMF WEO (April 2012)
Rapid growth of EM domestic debt markets is a sign of successful development, but brings new challenges
13
Local currency: generally favourable trend for EM yields maintained
Key benchmark indices indicate that downward pressure on local currency yields continues, as does slow but steady increase in EM public debt portfolio duration
Source: JP Morgan
Blended YTM
Modified duration (rhs)
3.5
3.7
3.9
4.1
4.3
4.5
4.7
4.9
5
6
7
8
9
10
Jan-03 May-04 Sep-05 Feb-07 Jun-08 Nov-09 Mar-11 Aug-12
%GBI-EM Global Diversified index
3. Issues and themes
Building institutional capacity to manage debt in middle income countries (MICs)
MICs span a wide range of GNI per capita, as well as in the strength of institutions:
But nearly all have access to a broad range of financial sources (official, bilateral, international capital markets, domestic market)
Those with weaker institutions and capacity face significant challenges
Treasury approach to technical assistance and capacity-building reflects this diversity:
Based on a thorough needs assessment
Tailored program to address priority issues; the more advanced the country, the more specific are the initiatives
Issues and challenges across countries
1. Analysis of cost-risk trade-offs Those with weaker capacity are just starting – similar to LICs
Demand for deeper analysis (e.g. using stochastic techniques) by countries where the major risks are contained
2. Relationship between financial asset holdings and public debt (ALM) Asset accumulation significant in some countries, and “cost-of-carry”
is high (steep yield curves, high premium for AAA credit)
Size of liquidity buffers to weather further market turbulence?
3. Renewed focus on contingent liabilities Global financial crisis a reminder of their significance
Many countries have strengthened the “core” sovereign balance sheet: SOEs, sub-national government and parastatals are weak links
Issues and challenges across countries (2)
4. “Institutionalizing” the gains that have been made Modernizing the legal framework, with an emphasis on making a
strategy mandatory, clarifying roles and increasing transparency (sometimes in conjunction with fiscal transparency and rules)
Addressing staff capacity issues: high turnover, skill mismatches, key person risk
5. Continued strong focus on development of the domestic debt market Is the main source of financing for many MICs
A broad agenda of reform (and officials responsible for managing public debt control only some of this); work closely with FPD VP
May be facing head winds from banks’ capital constraints and regulatory change
Issues and challenges across countries (3)
6. Increased offshore participation in local currency bond markets: Foreign investors now key players in many EMs
Debate over possible trade-off between ↓ yields ↑ volatility
Significant new challenges for debt managers, influencing everything from investor relations to choice of funding mix
7. Impact of other types of risks on the government’s fiscal outcomes, e.g. commodity price volatility, natural disasters Officials responsible for managing debt being asked to expand risk
management mandate
Risk management and institutional frameworks are similar; requires a market interface
Concluding remarks
The success of emerging market countries in navigating the global financial crisis in 2008/2009 shows how much has been achieved in macroeconomic policy setting and public debt management
Continued volatility and changing trends in investor preferences continue to create challenges
Underscores the need for strengthening public debt management capacity , institutions and practices
Annex – debt management advisory services offered by Treasury
Needs assessment and reform plan development
Analysis of current situation, including development of the domestic market and recommendations for reform
Support for authorities in designing and prioritizing activities, with timelines and costing
Implementation of initiatives
Usually in conjunction with consultants and development partners, with a key role for Treasury in developing terms of reference, acting as a sounding board, and ensuring quality control
Around 15 – 20 countries at any time
Training, convening, knowledge products
Developing Debt Management Strategies (GDM1), and Implementing Debt Management Strategies (GDM2) twice annually
Sovereign Debt Management Forum (every two years)
Publications drawing on experience in countries
Financial Advisory and Banking Contacts
Axel PeukerDirector
Phillip Anderson Senior Manager, Government Debt and Risk Management
Issam AbousleimanHead, Banking Products
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