DMS Newsletter. Management Forum held in Malaysia: November 2009 C O M M O N W E A L T H S E C R E T A R I A T

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1 C O M M O N W E A L T H S E C R E T A R I A T I N S I D E T H I S I S S U E : DMS Newsletter First Asian Regional Public Debt Management Forum held in Malaysia Debt Sustainability and Debt Strategy Workshop held in Belize 1 2 V O L U M E 5, I S S U E 1 D E C E M B E R First Asian Regional Public Debt Management Forum held in Malaysia: November 2009 Debt Management Business Process Study Central bankers take aim at surge in private sector external debt An Analytical Framework for conducting MTDS MTDS Missions: Jamaica and The Gambia Public Debt Management Mission in Maldives: July 2009 Joint Comsec- World Bank DEMPA Workshop held in Singapore Hot Support Topics Training Workshops The first Asian Regional Public Debt Management forum was held from 3rd November 2009 to 5th November 2009 in Kuala Lumpur, Malaysia. The forum was organised by the Asian Development Bank (ADB) in collaboration with the Central Bank of Malaysia and had delegates from over 40 countries and international organisations including the World Bank, IMF and UNCTAD. The Commonwealth Secretariat was represented by the Debt Management Section. During the forum, Mr Arindam Roy, Head of the Debt Management Section made a presentation on the recent initiatives in the COMSEC Debt Management programme aimed at assisting countries to formulate, implement and monitor debt strategies. In his opening speech, the Vice President of Asian Development Bank, Mr Bindu N. Lohani mentioned that although most of the ADB member countries were not hugely affected by the recent financial crisis and economic downturn, the timing and issues to be discussed were relevant in two main aspects: 1. The forum offered a rare opportunity for debt managers in the region to share experiences and establish regional and international networks; 2. The forum aimed to expose debt managers to recent developments and instruments in the financial market aimed at assisting countries to develop their domestic debt markets as well as manage risks in their debt portfolio. One of the major topics discussed was the rising Islamic finance market which offers an alternative source of sovereign financing. It was noted that globally, Islamic finance market has grown by approximately 15% in each year from 2005 to 2007 and Islamic compliant assets now total about US$70 billion. It was also noted that a total of 17 ADB member countries currently use CS-DRMS for recording and managing public and publicly guaranteed debt. The main objective of the forum was to provide a platform where government debt managers can meet and discuss public debt management practices from across the region, share experiences and develop a regional network. This year s theme concentrated on the financing needs of governments, including accessing international capital markets, developing the domestic market for government securities, recent innovation in financing instruments such as Islamic bonds, and investors' perspectives on Asian sovereign credits. The agenda also covered many of the existing analytical frameworks pioneered by the various multilateral institutions.

2 P A G E 2 Debt Sustainability and Debt Strategy Workshop held in Belize: October 2009 This workshop is the second to be conducted in Belize by the Secretariat and is a logical follow-up to the first in 2008, which dealt with the implementation of debt techniques and strategies using the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS). Debt Management has grown in complexity over the past decade as the scarcity of concessionary financing has caused many developing countries to increasingly turn to commercial sources of credit. Historically, small developing countries borrow to finance projects in an effort to fast track their economic development. However, if this process is not planned and executed properly, debt can quickly become unsustainable and problematic. Putting in place a proper debt management strategy is therefore a vital necessity for these countries and the debt management unit recently set up within the Ministry of Finance in Belize is in recognition of this. Against this background, the Commonwealth Secretariat conducted a Debt Sustainability and Debt Strategy Workshop in Belize from October 19 to 28, This workshop was the second to be conducted in Belize by the Secretariat and a logical follow-up to the first in 2008, which dealt with the implementation of debt techniques and strategies using the Commonwealth Secretariat Debt Recording and Debt Sustainability and Debt Strategy Workshop in Belize Management System (CS-DRMS). CS-DRMS is used to record and manage data on sovereign debt - both external and domestic. CS-DRMS is currently used by 59 countries at more than 80 government ministries or agencies like central banks, to manage their debt. Workshop facilitators included Mr. Walton Gilpin, a debt management advisor in the Debt Management Section of the Commonwealth Secretariat and two experts, Dr. Sanga Sangarabalan and Mr. Mike Flynn. Workshop participants included economists from the Central Bank's Research Department and technical staff from the Ministry of Finance. The workshop has been particularly important for Belize, which has already had to restructure a substantial portion of its external public sector debt. The principal objective has been to develop Belize's institutional capacity to formulate a sovereign debt strategy that will enable the country to align its debt management and growth objectives. Participants received guidance during the workshop that enabled them to produce a debt sustainability analysis report for Belize as well as draft the major components of a sovereign debt management strategy. D M S N E W S L E T T E R

3 V O L U M E 5, I S S U E 1 P A G E 3 Debt Management Business Process Study The Debt Management Section is conducting a comparative study of public debt management practices in different economies including a mix of advanced economies, emerging economies and developing countries. The objective is to capture the actual business processes of a representative set of economies covering both external and domestic debt and to draw out a generic debt management business process model. The consultancy services of Storkey & Co. Ltd have been enlisted by the Commonwealth Secretariat to carry out this study. As part of the study, DMS is analysing practices in a number of countries including New Zealand, Brazil, Hungary, India, Indonesia, Nigeria and the Eastern and Southern African countries. The study is focusing on debt management business processes, information flows, authorisation processes, functions and responsibilities within the different debt management institutions (covering front office, middle office and back office operations) as well as between the debt management institutions and external entities such as the Accountant General s Office, Central Bank and Ministry of Finance. In addition, the study will draw upon the principles of sound practice in public debt management as published by other international agencies such as the OECD, World Bank, IMF, Central Banking Publications and United Nations. The Secretariat is conscious of the diversity of operational practices, institutional arrangements, and organisational and/or personnel structures for public debt management across different countries. For example, institutional arrangements for public debt management can range from a structure that is highly centralised in a debt management office (DMO) or equivalent to a decentralised structure with a number of entities across government responsible for public debt management operations. The challenge is therefore to develop a generic model that best captures this diversity. It is envisaged to structure the generic business model around the following public debt management activities and structures: Public Debt Management Activities and Structures The findings of the study will be compiled into a Public Debt Management manual which would be a useful vehicle for disseminating sound practices as part of the ongoing initiative of the Commonwealth Secretariat to strengthen debt management capacity within member countries. DMS is also planning to use the outcome of the study to review where necessary the Commonwealth Secretariat Debt Recording and Management Software (CS-DRMS) to closely mirror practices including internal control mechanism as per sound debt management principles. The Public Debt Management manual is expected to be published by mid

4 P A G E 4 The sharp rise in corporate cross-border lending is a recipe for possible crises in the future, according to Walton Gilpin, Debt Management Adviser at the Commonwealth Secretariat. This needs to be closely monitored with appropriate macroeconomic policies and monitoring frameworks, he said. Central bankers take aim at surge in private sector external debt Central bankers and economists from Africa, Asia, Europe and Latin America gathered in London in September 2009 to discuss monitoring of private sector external debt. Such debt flows in recent years have led to balance of payment crisis and financial instability in many developing countries. The conference examined the sharp increase in the amount of foreign loans, securities and other liabilities incurred by private companies and financial institutions between 2002 and the boom period - and looked at how policy-makers can better monitor corporate cross-border lending. Private sector external debt, especially in developing countries like Zambia, has significantly grown over the past few years, said Alice Konga, a senior economist at the Bank of Zambia, during the conference. For our country, the short-term debt capturing and monitoring has not been sufficiently recorded, and I am hoping I can learn from other countries which are doing it more consistently. Total debt flows to corporations in developing Private Sector Debt Seminar, London, September 2009 countries rose from US$81 billion in 2002 to US$423 billion in 2008, while the proportion of private debt out of total external debt rose from 12 per cent in 1991 to approximately 50 per cent in The sharp rise in corporate cross-border lending is a recipe for possible crises in the future, according to Walton Gilpin, Debt Management Adviser at the Commonwealth Secretariat. This needs to be closely monitored with appropriate macroeconomic policies and monitoring frameworks, he said. The fact that the private sector has acquired so much more debt in the past five or six years brings to the fore the need to monitor such flows. Over the course of the two-day programme, participants from 17 countries looked at the institutional arrangements, policy issues and regulatory frameworks required to monitor and manage private sector external debt. Sessions covered the need for more robust information management systems to assist countries in recording data. The conference, which was attended by officials from the Bank of International Settlements, the International Monetary Fund, the United Nations Conference on Trade and Development (UNCTAD), and the World Bank involved presentations from countries as diverse as D M S N E W S L E T T E R

5 V O L U M E 5, I S S U E 1 India and Botswana as well as non -Commonwealth countries such as Thailand and Mexico. A set of practical guidelines for countries dealing with the issue of external private sector debt is set to be produced and distributed by the Secretariat following the conference, which was held at Marlborough House in London, UK, on September Wasswa Kajubi, Director of Statistics at the Bank of Uganda, speaking after one of the sessions, acknowledged that private companies ability to access foreign debt has presented challenges for developing countries such as Uganda. As a central bank we are concerned about private sector debt becoming [unsustainable] in the long run, he said. The increased connectivity of Uganda to the global economic market exposes the economy to shocks from the international markets. Hannatu Suleiman, External Debt Team Leader at the Debt Management Office in Nigeria, agreed that it is important to keep a tab on private sector debt, adding that the conference had been very useful. Ms Suleiman said she was glad to learn from the experiences of countries such as India, Malaysia, Mexico and Thailand. I hope that when we go back we will be able to try to do it the way they have done it, she commented. Ransford Smith, Deputy Secretary-General of the Commonwealth, addressing the participants on the opening day, said: [The Secretariat] considers this seminar very timely not only because it will PSED Seminar at the Marlborough House, September 2009 address an issue of growing importance, but also because it addresses the need for a comprehensive and robust computerised system to comprehensively record such debt liabilities. Countries need to put in place appropriate institutional arrangements to capture debt flows contracted by the private sector and also to record and monitor trends in short-term external debt., he emphasized. P A G E 5 An Analytical Framework for conducting a Medium Term Debt Strategy (MTDS) The main aim of the Medium Term Debt Strategy (MTDS) is to evaluate cost-risk trade-offs of a debt portfolio, identify and manage risks, facilitate coordination between fiscal and monetary policy, identify the constraints that affects the choices of debt managers, potentially reduce cost by facilitating support from domestic markets, investors, creditors and rating agencies and to increase transparency. The MTDS further identify key inter linkages with regard to the impact of fiscal choices on debt management via the primary balance, monetary policy through the inflation premium, mopping up of liquidity and decisions regarding the balance of payments, through the real effective exchange rate (REER), its volatility and any decisions regarding the level of official reserves. It also links with the domestic market development through possible crowding out and the choice between foreign and domestic funding. Conducting MTDS consists of the following steps: Identify objectives for public debt management;

6 P A G E 6 The main aim of the MTDS is to evaluate cost-risk trade-offs of a debt portfolio, identify and manage risks, facilitate coordination between fiscal and monetary policy, identify the constraints that affect the choices of debt managers, potentially reduce cost by facilitating support from domestic markets, investors, creditors and rating agencies and increasing transparency. Identify the cost and risk of the current debt strategy; Identify the cost and risk of potential funding sources; Identify the baseline projections and risk with regard to monetary, fiscal, balance of payments and market development policy; Review key long-term structural factors; Asses and rank alternative strategies based on cost and risk; Review the implications of a potential strategy on economic policy; and Submit and secure agreement on the chosen MTDS. The design of a public debt management strategy involves the choice of various characteristics of debt instruments, such as the maturity profile, currency denomination and the composition between fixed and floating rate bonds. The MTDS provides for a framework to incorporate these choices into a tested strategy. The strategy aims to probe the debt manager to take various economic circumstances and stakeholders (responsible for policy) into consideration while concentrating on the technical choices in crafting a debt strategy. Alternative debt management strategies should be assessed under the performances of a set of different interest and exchange rate scenarios. Possible scenarios include: Scenario 1: Foreign yield curves shifts 2 percent upward, including the borrowing cost from multilateral institutions Scenario 2: A 2 percentage point upward parallel shift in the domestic yield curve. Scenario 3: A one off depreciation of 30 percent in the exchange rate against major currencies; and Scenario 4: A combined shock in which half (1 percent) of upward parallel shift in the domestic yield curve sustained over the time horizon, and half (15 percent) of currency devaluation followed the baseline devaluation trajectory takes place. The resultant cost and risk characteristics of the alternative debt management strategies are then plotted, and assessed. Two clusters of strategies clearly illustrate the cost-risk trade-off facing the debt manager. In addition, due attention must be given to other measures of risk, such as the redemption profile, so to avoid any undesirable bunching of maturities, which would imply excessive refinancing risk. Overall, the choice of strategy must be evaluated within the context of the government s overall risk tolerance, and taking into account its objective to develop the domestic debt market. The cost and risk performance of the alternative debt management strategies under different shocks are presented in terms of two measures: annual interest payment as percentage of GDP and total debt as percentage of GDP. Cost is derived from the baseline interest rate and exchange rate scenarios, while risk is derived from the maximum deviation from the baseline cost, given the shock scenarios. The results of implementing the alternative debt management strategies are also evaluated using the following risk indicators: Exchange rate risk: Share of domestic debt in total debt: exhibits the change in the composition of currency mix between external and domestic debt in total portfolio. Interest rate risk: Share of variable rate debt in total debt: The strategies differed in their proportions allocated to debt issued in variable rate and fixed rate debt. The higher the variable rate portion of strategies, the higher the risk of increasing interest rate cost. Average time to refixing (ATR): consistent with the changes in debt composition in terms of the share of variable rate debt in total D M S N E W S L E T T E R

7 V O L U M E 5, I S S U E 1 debt. The average time to refixing is shortest for the issuance strategies with a higher proportion in variable rate debt. Refinancing risk a. Percentage of debt maturing in one year: The percentage of debt maturing in one year in total debt outstanding is a function of the share of short term debt issued. b. Average time to maturity (ATM): Strategies with a high portion of multilateral debt usually have a longer average time to maturity. A general risk of government is an over dependence on Treasury Bills with maturities shorter than one year. c. Redemption profile: The redemption profiles display that the strategies that most aggressively pursue the issuance of longer maturities reduce refinancing risk and are most attractive. The authorities need to put in place mechanisms for regular monitoring of its implementation, and formal review of the strategy. At a minimum, the strategy should be reviewed once a year to determine whether key underlying assumptions remain valid. In addition, if there are significant changes in market conditions, the strategy should be reviewed. To implement such a strategy, it is important to make further progress in market infrastructure and organizational reforms, strengthen issuance techniques, and implement other ongoing reform initiatives to develop the domestic debt market. Maintaining macroeconomic stability is also a pre-condition for further development of a sustainable domestic debt market. In turn, strategy development must be supported by an enabling environment that assures that in-house capacity is available to regularly analyze the cost-risk trade-offs and monitor implementation of the strategy, and which also ensures the development and execution of these strategies within a clear accountability framework. P A G E 7 Medium Term Debt Management Strategy Missions : Jamaica and The Gambia Jamaica Further to the invitation of the government of Jamaica, a joint World Bank and Commonwealth Secretariat mission visited Kingston, Jamaica on June 29-July 10, The main objective of the mission was to provide technical assistance to the government to improve the analytical rigor and strengthen the process for developing an effective medium term debt management strategy (MTDS). The work was based on the framework developed by the World Bank and IMF over the past two years, that underscored the benefits of formulating a MTDS supported by an analysis of the cost-risk trade-offs of alternative debt management. The framework ensures that the strategies being considered are consistent with the overall macroeconomic framework and are realistic and implementable, based on an assessment of current and future availability of various sources of financing. The Gambia The Gambia reached the completion point under the Heavily Indebted Poor Country (HIPC) process in December 2007 and qualified for debt relief from the Multilateral Debt Relief Initiative (MDRI). The country is currently under a three-year arrangement of the IMF s Poverty Reduction and Growth Facility (PRGF). Despite the debt relief received under the HIPC and MDRI, The Gambia is faced with high risk of debt

8 P A G E 8 Developing a broad-based and deep domestic debt market will provide government with a more secure and robust source of financing over the medium-term. distress on its public external debt front based on the IMF-World Bank s debt sustainability assessment (DSA) - debt sustainability framework (DSF). In 2008, the Commonwealth Secretariat assisted The Gambia by undertaking an independent DSA to support its deliberations with the IMF on the Fourth Review of the three year arrangement under the PRGF which confirmed the debt distress assessment. As part of its obligation to comply with various benchmarks agreed under the fifth review of three-year arrangement under the PRGF, The Gambia had to submit a Medium Term Debt Management Strategy (MTDS) by the end of September MTDS Mission: Jamaica, July 2009 Accordingly, in August 2009, the authorities in The Gambia requested the Commonwealth Secretariat to assist them in formulating a debt management strategy. In response to this, the Secretariat developed a medium term debt management strategy for the Gambia in early September The report was based on the IMF- World Bank MTDS framework. Developing a broad-based and deep domestic debt market will provide the government with a more secure and robust source of financing over the medium-term. If such consideration is a priority, then strategies that envisage more domestic debt issuance, especially those concentrated in the medium-term maturity range, may be more attractive. Public Debt Management Mission in Maldives: July 2009 The economy of Maldives has suffered in recent years from two substantial external shocks: the tsunami of 2004 and the financial crisis followed by the global downturn of which greatly affected tourist activity. This led to a balance of payments problem with implications for external debt payments. Against this background, in February 2009, the Ministry of Finance and Treasury (MOFT) in Maldives requested the Commonwealth Secretariat for comprehensive assistance on debt management capacity building. In response to this request, the Debt Management Section (DMS), fielded a needs assessment mission that visited Male, Maldives during 1-10 July, The mission comprised of Arindam Roy, head of DMS and a consultant, Mike Williams, former chief of the UK Debt Management Office. Following the mission, a diagnostic report on Public Debt Management in the Maldives: Sustainability, Strategy and Institutional Arrangements was submitted. The report served as a guide with detailed road map for strengthening public debt management including the institutional capacity. The report specifically focussed on the following issues related to debt management in Maldives: Debt Sustainability Developing a Medium Term Debt Management Strategy D M S N E W S L E T T E R

9 V O L U M E 5, I S S U E 1 P A G E 9 Institutional and Governance Arrangements Operations, Data and Capacity Building Domestic Market Development Based on the recommendations of the report and the acceptance of it by the authorities in Maldives, capacity building assistance in various areas of public debt management will be provided to Maldives over the next three years. Joint Comsec-World Bank Government Debt Management Performance Assessment (DEMPA) Workshop for Asia and South Pacific Countries held in Singapore, September 2009 Public Debt Management Mission: Maldives, July 2009 The first Joint Comsec and the World Bank regional workshop on Government Debt Management Performance Assessment (DEMPA) tool for Asia and South Pacific was held from 21st to 25th September 2009 at the Grand Mercure Roxy Hotel, Singapore. The Workshop aimed to provide an understanding of the rationale, scope, coverage and application of the DeMPA Tool, a public good developed by the World Bank in consultation with other international and regional providers of technical assistance including the Commonwealth Secretariat. The DeMPA tool is designed to assist countries undertake evidence based comprehensive assessment of public debt management performance. The output of the assessment, which essentially is a snapshot of the Govt Debt Management Performance Assessment Workshop Singapore, September 2009 strengths and weaknesses in government debt management, provides a firm basis for the government to design a reform plan to help improve public debt management. The workshop was held under the auspices of the Debt Management Facility (DMF), a World Bank led inititative with multi-donor trust fund, that provides grant-based technical

10 P A G E 10 The Workshop aimed to provide an understanding of the rationale, scope, coverage and application assistance with a view to strengthen debt management capacity and institutions through the supply of knowledge tools and the delivery of technical assistance while facilitating knowledge sharing and enhancing coordination among different debt management providers. The workshop was attended by 25 senior government officials - Directors, General Managers, Departmental Heads, Advisers, Financial Analysts and Debt Managers - drawn from Ministries of Finance and Central Banks of 17 Low Income Countries from Asia and the South Pacific. The workshop was facilitated by Ms Abha Prasad, Senior Debt Specialist and Professor Leonardo Hernandez, Lead Economist both from the Economic Policy and Debt Department, the World Bank; Mr Gregory Horman, Consultant, Banking and Debt Department, the World Bank; Carilus Odumbe, Adviser, Debt Management and Eleanor Chinkondenji, Programme Assistant both from the Special Advisory Services Division, the Commonwealth Secretariat. of the DeMPA Tool, a public good developed by the World Bank in consultation with other international and regional providers of technical assistance including the Commonwealth Secretariat. Mr. Carilus Odumbe, Advisor, Commonwealth Secretariat at the Joint Comsec-World Bank Government DEMPA workshop in Singapore, September 2009 D M S N E W S L E T T E R

11 V O L U M E 5, I S S U E 1 P A G E 11 Hot Support Topics Status Screen The status page within the Instrument Details under Loans displays figures based on a selected date up to and including the current date. This includes DOD, CUB, Principal and Interest Arrears. This is different to the rest of the system in that arrears persist beyond the cut-off date. To change the selected date click on the Set Date button and within the calendar that appears, navigate to and select the date you are interested in. The figures for Stock and Repayments will then be changed to reflect the selected date. Note: None of the other figures within the status page use this new date. Instead they are all based on the current date. The Set Date Option for Stock and Repayments Quarterly External Debt Statistics (QEDS) Since the release of the Service pack for CS-DRMS in October 2009 including the new QEDS export tool, the World Bank has released a new version of the GDDS Template output. This update can be retrieved from the World Bank website via the link siteresources.worldbank.org/ INTDECQEDS/Resources/ GDDS_template.xls Once downloaded it should be saved into the CS-DRMS 2000+\Templates folder replacing any existing file of that name in the folder. The current export has a validation check internally against the version number held within the template and this is expected to be version 1.1. However when a new template is downloaded from the World Bank the version number will have changed. This check is to prevent issues that may occur as a result of changes to the format of the template that are not compatible with the export tool. At present we know that version 1.2 can be used with the export tool, however you will need to edit the template and change the value of the cell [F:30] in the Readme sheet to version 1.1. You will then need to select the downloaded file when prompted for the template to use by the QEDS export tool in CS-DRMS.

12 Training Workshops The Debt Management Section will be running a number of training workshops and undertake country missions over the course of the forthcoming months. These workshops range from in-country training through regional training to Pan-commonwealth training. The workshops listed in the table on the right have been tentatively scheduled for the forthcoming months. For further details on these workshops and others that may have been arranged since please look at the DMS website Date Workshop Title Location 01/02/10 to 05/02/10 15/02/10 to 26/02/10 02/03/10 to 04/03/10 Debt Data Validation Mission and Training on CS-DRMS Training of Trainers Workshop on CS-DRMS Round Table on Public Debt Analytical Tool Male, Maldives London, UK London, UK Commonwealth Secretariat Debt Management Section Special Advisory Services Division Commonwealth Secretariat Marlborough House Pall Mall London SW1Y 5HX Organization Phone: +44 (0) Fax: +44 (0) csdrms@commonwealth.int We re on the Web!