Subnational Debt Management Strategy: (DPI 3)

Transcription

1 Subnational Debt Management Strategy: (DPI 3) Outline What is a debt management strategy? Do we need one? What does SN-DeMPA assess regarding debt management strategies? What is the (joint WB/IMF) MTDS tool kit? 2 1

2 What is a debt management strategy? Do we need one? What is a Debt Management Strategy? A plan consisting of: Objective(s) = what we want to achieve (where we want to go) within the next 3-5 years. An navigation chart on how we are going to get there (the best way to do it). In choosing the strategy (roadmap) we take into account constraints, costs and risks involved, etc. 4 2

3 Why a Debt Management Strategy? Think of you getting into a sail boat: you face two alternatives regarding your sailing away adventure: Go anywhere the tides and winds take you; just be ready to react to avoid rocks and shallow waters ( survival on a day to day basis or passive strategy); Know where you want to go (know your final destination) and have a defined itinerary (how to get there); be prepared to adjust your itinerary as needed if and when circumstances change ( have a medium term active strategy ). 5 Example: The objective is to get from A to E B C Go with the tides and wind A Start (initial portfolio) Note: plans are made subject to constraints (navigation skills, weather conditions and forecast, ship size, etc.) 6 D E Final destination (final portfolio) 3

4 In the same way as accounting differs from financial planning Go with the tides and wind may be well documented in the ship s travel documents (logbook), in the same way as a good accountant can register the firm s transactions But having a strategy implies knowing where we want to go (what we want to achieve) and being prepared for unexpected changes in the environment, in the same way as a good financial planning prepares the firm for future contingencies 7 Objectives and strategy To ensure that subnational government s financing needs are met To minimize the borrowing costs over the medium to long run, consistent with a prudent degree of risk The DMS is the plan for how to achieve these objectives Objectives and strategy should not be mixed Different purposes, time horizons, evaluation processes Separate decision-making 8 4

5 Cost and risk Objectives typically refer to costs and risks How should these be defined for a government debt portfolio? Cost interest payments on debt? May not be a sufficient measure Risk the negative effects that could arise from an undesirable outcome For a government debt manager an undesirable outcome is an increase in the cost of debt servicing; the impact is more severe if this occurs when revenue is low, i.e. to assess risk arising from government debt, need an understanding of the assets and revenue 9 The DMS helps us manage cost and risk prudently A strategy is usually focused on the trade-off between cost and risk, for the next 3-5 years, and is frequently updated Interest rate and rollover risks: Shall we borrow short-term to reduce cost, or long-term to reduce risk? Foreign currency risk: Shall we borrow in foreign currencies to reduce cost, or in our local currency to reduce risk? What is the right balance? 10 5

6 Principal benefits of a DMS Having a formal DMS, i.e. making constraints, costs and risks explicit, helps a subnational to avoid expensive mistakes Improves evaluation of cost-risk tradeoff Improves risk measurement and management Facilitates policy coordination among public entities and domestic debt market development 11 What does SN-DeMPA assess regarding debt management strategies? 6

7 SN-Debt management strategy (DPI 3) Two dimensions to assess Quality of the SN-debt management strategy document Decision-making process, updating, and publication of the SN-debt management strategy 13 SN-Debt management strategy (dimension 1) Score C Covers medium term and all existing and projected debt, is based on debt management objectives. Has guidelines for preferred direction of risks. And minimum target of grant element for external borrowing. Score B Plus Has realistic target levels for risks Score A Plus Target levels are based on through cost/risk analysis 14 7

8 SN-Debt management strategy (dimension 2) Score C Strategy proposal prepared by the principal debt management entity or jointly by entities Approved by the SN Council/Cabinet and made public Score B Plus Updated at least every third year Score A Plus Updated annually 15 What is the (joint WB/IMF) MTDS tool kit? 8

9 What is the MTDS? Objective Methodology (developed in partnership with the IMF) Implementation Provides guidance on the process for developing a plan that the government intends to implement over the mediumterm (3-5 yrs) to achieve an optimum/desired composition of the government debt portfolio Evaluates the costrisk tradeoffs associated with different strategies. Guidance Note (GN) provides practical guidance on the process of developing an MTDS. The Analytical Tool (AT) allows to undertake a cost-risk analysis to guide the MTDS decisionmaking process. A Handbook explains the use of the AT. Implementation mission plus training follow-up missions It is implemented jointly with the IMF Report release at authorities discretion Demand driven. 17 The eight steps of an MTDS I. Identify objectives for public debt management and scope of the strategy II. Analyze the cost and risk of the existing debt III. Identify and analyze potential funding sources IV. Identify baseline projections and risks in key policy areas V. Review key longer-term structural factors VI. Assess and rank alternative strategies on the basis of the cost-risk trade-off VII. Review candidate strategies with fiscal and monetary policy authorities VIII.Submit and secure agreement on the MTDS 18 9