THE ROLE OF SAIs IN PUBLIC DEBT

MANAGEMENT

ARUSHA 4TH SEPTEMBER 2013

Prepared by: Benjamin Mashauri

National Audit Office- Tanzania

Introduction

Public Debt Management definedPublic debt management is the process of

establishing and executing a strategy for managing public debt in order to raise the required amount of funding at the desired risk and cost levels.

Introduction

Public borrowing and debt can expand the production and consumption choices of current and future generations, allowing governments to increase productive investments and distribute the tax burden more fairly between current and future generations.

Introduction

However, public borrowing and debt entail significant risks if they are not managed properly.

An unsustainable public debt can impair the government’s ability to reduce unemployment and poverty levels precisely when counter‐cyclical budget actions are most needed, during an economic recession or financial crisis

Why public debt management?

The public debt portfolio is often the largest financial portfolio in many countries and can have a far-reaching impact on financial stability – consequently, effective management is essential.

To ensure that the level and rate of growth of public debt is sustainable in a wide range of circumstances;

Why Public debt management

To lower public borrowing costs over the long term, thus reducing the impact of deficit financing and contributing to debt and fiscal sustainability;

To avoid economic crises because of poorly structured debt;

Few examples of economic and debt crises experienced:

Economic and Debt crises

Latin America (1994) and East Asia (1996) crises

Eg. Mexico – the continued increases in U.S. real interest

rates put downward pressure on the peso and made Mexican debt securities less attractive to investors.

– Rather than reduce expenditures, devalue the peso or further increase the interest rate to continue attracting investments, the government increased the issuance of tesobonds to finance a current account deficit, even though the sustainability of the exchange rate policy was in doubt

Economic and Debt crises

KITMP did not develop sufficient capacity to adapt and manage capital inflows properly.

Outdated banking rules, poor risk management and weak supervision may have left these economies unprepared to deal with the capital flood.

Financial institutions had little experience in asset management.

Economic and Debt crises

Many were making the same mistake of having unhedged foreign currency exposure.

Investment funds were misallocated and institutions ended up with excessive currency exposure and maturity mismatch.

Corrupt practices seemed to have further magnified the banking weaknesses, all of which later proved fatal.

Economic and Debt crises

The Global Financial Crisis

The credit crunch–The global financial crisis is commonly

believed to have begun in July 2007 with the credit crunch, when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis.

Economic and Debt crises

This, in turn, resulted in the US Federal Bank injecting a large amount of capital into financial markets.

By September 2008, the crisis had worsened as stock markets around the globe crashed and became highly volatile.

Consumer confidence hit rock bottom as everyone tightened their belts in fear of what could lie ahead.

Economic and Debt crises

The sub-prime crisis and housing bubbleThe housing market in the United States

suffered greatly as many home owners who had taken out sub-prime loans found they were unable to meet their mortgage repayments.

As the value of homes fell, the borrowers found themselves with negative equity.

Economic and Debt crises

With a large number of borrowers defaulting on loans, banks were faced with a situation where the repossessed house and land was worth less on today’s market than the bank had loaned out originally.

The banks had a liquidity crisis on their hands, and giving and obtaining loans became increasingly difficult as the fallout from the sub-prime lending bubble burst.

Economic and Debt crisesEuro Zone Sovereign Debt Crisis, eg. Greek

debt crisis:

Causes:Government deficit

Expenditure increased by 78% against an increase of only 31% in tax revenue

Tax evasion and corruption– In 2010, the estimated tax evasion costs for the

Greek government amounted to well over $20 billion per year.

Economic and Debt crises

To keep within the monetary union guidelines, the government of Greece had also for many years misreported the country's official economic statistics

At the beginning of 2010, it was discovered that Greece had paid Golmansachs and other banks hundreds of millions of dollars in fees since 2001, for arranging transactions that hid the actual level of borrowing.

Economic and Debt crises

] Most notable is a cross currency swap , where billions worth of Greek debts and loans were converted into Yen and Dollars at a fictitious exchange rate by Goldman Sachs, thus hiding the true extent of Greek loans

The purpose of these deals made by several successive Greek governments, was to enable them to continue spending, while hiding the actual deficit from the EU.

Economic and Debt crises

Debt levels revealed – Despite the crisis, the Greek government's bond

auction in January 2010 had the offered amount of €8bn 5-year bonds over-subscribed by four times

– The continued successful auction and sale of bonds, was however only possible at the cost of increased yields, which in return caused a further worsening of the Greek public deficit.

The Role of SAIs

SAIs have no direct role to play in the establishment of public debt management, data disclosure policies and regulatory regimes for the financial services sector.

A SAI’s ability to influence and persuade public debt managers will depend on its legal mandate, responsibilities and credibility.

The Role of SAIs

ISSAI 5420 and ISSAI 5430 suggest that:– SAIs within the limits of their legal mandate,

could have a role in promoting and encouraging policy makers to adopt debt and risk management practices that will be sound and robust.

The Role of SAIs

SAIs could encourage governments to focus more on vulnerability monitoring and give high priority to risk management.

SAIs could encourage data disclosure and promote the need for a proper regulatory and supervisory framework to be adopted for the financial services sector.

The Role of SAIs

SAIs could encourage governments to produce better financial information and publish key debt information in order to assess their financial vulnerability and exposure

SAIs may wish to encourage their government to adhere to the international initiatives and standards aimed at improving statistics disclosure and data requirements

The Role of SAIs

SAIs should position themselves to help governments assess and monitor the potential costs associated with fiscal exposures eg:– Social security programs– Employee pension benefits – Health-related programs – Loans and guarantees to third parties – Insurance and reinsurance – Environmental clean-up costs – Banks failures

Evaluating the risk environment

Vulnerability analysis demands the construction of indicators that measure and prevent any situation that might compromise a government regarding its debt payment. It deals with answering these basic questions: – Can the government meet its obligations given the

current conditions? – Are there elements or phenomena that might

disturb the prevailing situation?

Evaluating the risk environment

Vulnerability indicators on foreign and domestic debt include maturity profiles, payment schedules, sensitivity to interest rate and debt composition in foreign currency.

These are useful indicators to define the debt evolution and payment capacity, and provide signs on the decline of economic conditions that the government and the economy might face.

Evaluating the risk environment

Some of these indicators include:– The ratio of debt/GDP– The rate of growth of total debt as compared to that of

GDP.– Deficit/GDP– Tax revenue/GDP– Tax revenue/Total debt

Understanding how these variables are used and what factors affect them will help the auditor to determine how debt managers can protect their portfolio various vulnerabilities.

Conclusion

Poor public debt management under degrading market conditions can lead to public finance weaknesses and fiscal vulnerability. Hence robust debt strategies and proper risk management is very critical for governments to withstand economic shocks

THANK YOU FOR LISTENING