sustainability of external debt- conceptual issues and measures by tarun das

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    UNITAR Lecture-1 External Deb-Tarun Das 1

    Sustainable External

    Debt Management

    P r e s e n t e d b y

    Dr Tarun Das

    Economic Adviser

    Ministry of Finance

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    UNITAR Lecture-1 External Deb-Tarun Das 2

    Contents

    1. Definition of external debt2. Conceptual issues

    3. Debt Sustainability Measurements

    3.1 Economy wide model in ALM framework

    3.2 Different Types of Risk

    3.3 Risk Management

    3.4 Sustainability Indicators

    3.5 World Bank Classification of Ext debt

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    UNITAR Lecture-1 External Deb-Tarun Das 3

    . xdebt

    Gross external debt, at any time, is the amount of disbursedand outstanding contractual liabilities of residents of a

    country to non-residents to repay the principal with orwithout interest, or to pay interest with or without principal.

    1. Gross external debt2. Contractual obligation3. Disbursed and outstanding4. Principal with or without interest

    5. Interest with or without principal6. Concept of residency not nationality7. Current not contingent

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    . debt

    - Other Issues1. Valuation2. Present value of debt3. Short-term debt original and residual maturity4. Interest costs- actual / accrued5. Foreign and domestic currency

    6. Traded and unlisted securities

    7. Govt and non-govt( monetary authority, banks, others)

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    UNITAR Lecture-1 External Deb-Tarun Das 5

    . xdebt

    Gross external debt, at any time, is the amount of disbursedand outstanding contractual liabilities of residents of a

    country to non-residents to repay the principal with orwithout interest, or to pay interest with or without principal.

    1. Gross external debt2. Contractual obligation3. Disbursed and outstanding4. Principal with or without interest

    5. Interest with or without principal6. Concept of residency not nationality7. Current not contingent

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    UNITAR Lecture-1 External Deb-Tarun Das 6

    2 Conceptual Issues

    on Sustainable Debt 2.1 Debt Sustainability and Fiscal

    Deficit

    2.2 Debt Sustainability and CurrentAccount Deficit

    2.3 Liquidity versus Solvency

    2.4 Economy wide models

    2.5 Asset Liability framework

    2.6 Debt sustainability indicators

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    UNITAR Lecture-1 External Deb-Tarun Das 7

    3.1 Different types of risk

    Market-Based Risks

    a) Liquidity risk

    b) Interest rate risks

    c) Credit riskd) Currency risk

    e) Convertibility risk

    f) Budget/ Fiscal Risk

    g) Contingent liabilities

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    UNITAR Lecture-1 External Deb-Tarun Das 8

    3.2 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

    a) Control system failure risks

    b) Financial error risk

    c) Auditing/ Accounting/ Monitoring Risk

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    4.1 Management of liquidityrisk(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 ofdebt services

    (i) Develop liquidity benchmarks

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    UNITAR Lecture-1 External Deb-Tarun Das 10

    4.2 Management of

    interest rate risk(a) Fix benchmark for ratio of

    fixed versus floating rate debt

    (b) Maintain ratio of short-termversus long-term debt

    (c) Use interest rate swaps

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    UNITAR Lecture-1 External Deb-Tarun Das 11

    3.3 Management of

    credit risk (a) Have credit rating of various scrips by

    international credit rating organizations such asS&Ps, Moodys, JBR etc.

    (b)

    Identify key factors that determine credit-rating(c) Develop a culture of co-operation and consultationamong different departments and with credit ratingorganisations

    (d) Set overall and individual counter-party credit limits

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    3.4 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 currencypool debt

    (e) Use currency swaps

    (f)Try to have natural hedge by linking

    dominant currency of exports &remittances to the currency denominationof debt

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    UNITAR Lecture-1 External Deb-Tarun Das 13

    3.5 Convertibility Risk

    (a)Have gradual and cautious approachtowards capital account convertibility.

    (b) An orderly and sequenced manner inline with strengthening domesticfinancial systems through adequate

    prudential and supervisory regulations.(c) Encourage initially non-debt creating

    financial flows followed by long termcapital flows.

    (d) Short term or volatile capital flowsmay be liberalised only at the end ofcapital account convertibility.

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    3.6 Budget Risk (a) Enact a Fiscal Responsibility Act.

    (b) Put limits on debt outstanding and annualborrowing as a percentage of GNP or GDP

    (c ) Use government guarantees and othercontingent liabilities (such as insurance andpensions 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

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    3.7 Operational Risk(a) Have stable and sound macro-economic

    policies

    (b) Have co-ordination among monetary andfiscal authorities

    (c) Allow independence and transparency of

    different offices (such as front, back, middleand head offices) dealing with public debt

    (d) Strengthen capability of different offices

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    4.1 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 / revenueratio

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    4.2 Liquidity monitoringratio

    (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 toXGS ratio

    (c)Interest payments to reserves ratio.

    (d)Ratio of short-term debt to exports ofgoods and services

    (e)Import cover ratio- Ratio of total imports tototal foreign exchange reserves.

    (f) Reserves to short-term debt ratio

    (g)Short-term debt to total debt ratio

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    4.3 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 totaldebt

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    UNITAR Lecture-1 External Deb-Tarun Das 19

    4.4 Debt structure indicators(a) Rollover ratio- ratio of

    amortization (i.e. repayments ofprincipal) to total disbursements

    (b) Ratio of interest payments tototal debt services

    (c) Ratio of short-term debt to totaldebt

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    4.5 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-concessionaldebt

    (f) Foreign currency debt over total debt

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    4.6 Financial sector indicators(a) Open foreign exchange position- Foreign

    currency assets minus liabilities plus long termposition 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

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    4.7 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 overequity

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    4.8 Dynamic ratios

    (a)Average interest rate/ growth rate ofexports

    (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/ changeof revenue

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    Thank you

    Have a Good Day