Technical Assistance Report Project Number: 42532 December 2008 Public Debt and Risk Management Forum
ABBREVIATIONS ADB ADF Asian Development Bank Asian Development Fund DMC PDRM SDR developing member country public debt and risk management special drawing rights TA technical assistance TECHNICAL ASSISTANCE CLASSIFICATION Type Regional capacity development technical assistance (R-CDTA) Targeting Classification General intervention Sector Finance Subsector Finance sector development Themes Sustainable economic growth, regional cooperation, capacity development Subthemes Promoting macroeconomic stability, money and finance, organizational development NOTE In this report, "$" refers to US dollars. Vice-President Treasurer Assistant Treasurer Team leader B.N. Lohani, Finance and Administration M. Kashiwagi, Treasury Department (TD) J. Hua, Officer-in-Charge, Financial Policy and Planning Division, TD I. Unkavanich, Senior Treasury Specialist, TD
I. INTRODUCTION 1. As part of the implementation plan of the Asian Development Fund (ADF) currency management proposal, approved by the Asian Development Bank (ADB) Board of Directors in 2005, 1 ADB started offering to eligible ADF borrowers the option to convert all their multicurrency legacy ADF debts into special drawing rights (SDR) on 1 January 2008. 2 To inform the borrowers of the conversion option and its implications, and the conversion process, letters of agreements were sent at the end of December 2007, and workshops were conducted for major ADF borrowers. 3 2. Borrowers benefits from the SDR conversion include lower foreign exchange volatility, simplified and streamlined currency and debt management, and harmonized financial terms with those of the International Development Association. It is also envisaged that the conversion of all outstanding legacy ADF debts could help free up about $500 million in additional resources because of a reduction in required foreign exchange provision. As of 31 October 2008, 16 countries representing about 57% of total ADF outstanding debt balances have agreed to the SDR conversion. 3. Discussions with government officials on the occasion of the SDR conversion workshops indicated borrowers interest for ADB to provide (i) additional training related to public debt and risk management (PDRM), i.e., development of debt management strategy, portfolio management, debt management organization structure, systems, and back office operations; and (ii) opportunities to learn from and share experiences with officials of other governments on the challenges associated with PDRM. ADB s Treasury Department proposes to initiate regional capacity development technical assistance (TA) 4 that addresses borrowers requests for exchange of knowledge and specific training on currency and risk management through regional and country-specific workshops. II. ISSUES 4. Experience in previous financial crises, and the current one, has demonstrated the importance of a prudent public debt management strategy to prevent domestic financial crisis and its contagious effects. In the past 15 years, many developing countries with assistance from international organizations have endeavored to establish sound public debt management frameworks, and improved their institutional capabilities in the process. However, many are still at relatively early stages of development because of various external and domestic issues. Based on discussions with officials during the SDR conversion workshops, all countries indicated that there are gaps between their achievements and targets. Hence, assistance to bridge such gaps has been sought. 5. The area that governments are keen to strengthen, among others, is institutional capacity in PDRM. It was indicated that learning through experience, by sharing with peer countries and more developed economies, is the preferred approach. This TA will provide a forum for developing member country (DMC) government officials to learn the following from other debt managers: (i) different modalities, and (ii) the most appropriate approach to apply to their respective situations. The workshops and/or forums under this TA will be designed to meet 1 ADB. 2005. Asian Development Fund Currency Management Proposal. Manila. 2 ADB. 2007. Special Drawing Rights Conversion Option for Legacy Asian Development Fund Loans. Manila. 3 SDR conversion workshops were organized in 15 countries from September 2007 to October 2008. 4 The TA first appeared in the business opportunities section of ADB s website on 11 December 2008.
2 borrowers common interests on PDRM and specific requirements to address current challenges at the time of program formulation. 6. On the debt portfolio aspect, emerging markets generally borrow largely in foreign currencies because of lower interest rates and limited availability of local currency funding in domestic capital markets. Since their assets are principally in local currencies, borrowers are exposed to currency mismatches and exchange rate volatility. In addition, because many of their liabilities have floating interest rates, interest rate volatility is also higher. In this regard, solid capability in cash management and ability to hedge currency exposure would help borrowers mitigate adverse financial effects associated with foreign currency and floating interest rate debt. In the case of ADF, exposures are mainly on currency risk as borrowers liabilities are in SDR and/or multicurrencies. However, many borrowers have neither access to the derivatives market to undertake hedging transactions given their credit ratings, nor the appropriate tools and/or capability to analyze the financial implications of their exposures and alternatives. 7. Borrowers with more established domestic government bond markets could borrow in both local and foreign currencies. As such, these borrowers would like access to analysis tools that not only include functions for cost risk review but also the ability to explore options to structure debt portfolios by using different combinations of (i) funding sources (domestic versus foreign currency debts), (ii) currency mixes, and (iii) interest rate bases (floating versus fixed). 8. In this regard, the TA will provide borrowers with the analysis tools to formulate portfolio optimization and assess the impact of different financial scenarios, based on users own assumptions and exposures. Such analysis tools may be developed specifically for this TA. The TA may also use the medium-term debt strategy tool kit jointly developed by the International Monetary Fund and the World Bank. Optional users training will be provided during workshops upon request by borrowers. 9. In addition, ADB will share its experience and knowledge on debt and currency management with borrowers, and collect feedback regarding client needs for other debt management products. This would help ADB further enhance its future financial products and strengthen its relevance in Asia and the Pacific. 10. The undertaking of the proposed TA is in line with the third and fourth core areas of operations of the regional cooperation and integration and financial sector development indicated in ADB s long-term strategic framework 2008 2020 (Strategy 2020). 5 This effort represents an additional resource dedicated for capacity development on PDRM in Asia and the Pacific. Cooperation in this field, between ADB and relevant international organizations, will be sought as appropriate. The activities are expected to complement country-specific initiatives and programs being provided by ADB s regional departments; and the TA being developed by ADB s Strategy and Policy Department 6 and other relevant institutions such as the World Bank, International Monetary Fund, Commonwealth Secretariat, Crown Agent for Overseas Governments and Administrations, and United Nations Conference on Trade and Development. 5 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 2008 2020. Manila. 6 ADB s Strategy and Policy Department, with assistance from the World Bank, is in the process of developing a TA project to organize regional workshops for ADF borrowers, with emphasis on debt sustainability assessment and performance-based allocation.
3 11. For more detailed assessments or country-specific TA to enhance existing debt management frameworks or regulatory reforms, the Treasury Department will collaborate and refer such requirements to the regional departments. III. THE TECHNICAL ASSISTANCE A. Impact and Outcome 12. The overall goal of the TA is to promote a PDRM network among DMC government officials, which would enable cooperation and information sharing. Forums and workshops on specific PDRM techniques will be organized to provide a venue for target DMC government officials to share their experiences, and help strengthen DMCs knowledge and understanding of best-practice public debt management framework and techniques with emphasis on currency and risk management. B. Methodology and Key Activities 13. This TA will include (i) a survey of borrowers existing public debt management systems and challenges, (ii) three regional forums, and (iii) up to 10 country-specific workshops. These activities will be a platform for government officials to enhance knowledge and share information related to PDRM. Discussion topics include, among others: (i) strategic debt allocation methodology using different techniques, such as debt portfolio optimization and risk and cost analysis; (ii) different modalities of debt management office organization structure and decision-making processes, with emphasis on currency and risk management; (iii) hedging strategies and techniques; (iv) (v) diagnosis of weaknesses and constraints of existing processes; and building blocks and steps required to develop and/or enhance public debt management strategies, particularly currency and risk management, based on best practices. 14. The forum and/or workshop will be offered to ADF borrowers which have outstanding balances as of 31 December 2007 and have no arrears in debt service payments. These include DMCs in Central and West Asia, East Asia, South Asia, Southeast Asia, and the Pacific. C. Cost and Financing 15. The TA is estimated to cost an equivalent of $650,000. The TA will be financed on a grant basis by ADB s TA funding program. Detailed cost estimates and financing plans are in Appendix 2. 7 D. Implementation Arrangements 16. ADB will be the TA s Executing Agency, and the Treasury Department will administer the TA and supervise the work of the TA consultants. The TA will be implemented in consultation with the regional departments (governance and finance divisions) and the Strategy and Policy Department (Office of the Director General). Disbursements under the TA will be done in 7 Any activity in a member country would commence after ADB receives in writing the no-objection to its inclusion in the TA.
4 accordance with ADB s Technical Assistance Disbursement Handbook (2008, as amended from time to time). 17. Two individual international consultants public debt specialist (3 person-months) and debt portfolio analysis tool development specialist (4 person-months) will be engaged for a total of 7 person-months. For each forum, one national consultant will be hired for a maximum of 2 months to assist in the coordination and logistical arrangements. The quality-based selection basis will be adopted. Various experts from the academe, government agencies, and international organizations will be engaged as resource speakers. The terms of reference for consultants are in Appendix 3. The consultants will be engaged by ADB as individual consultants in accordance with its Guidelines on the Use of Consultants (2007, as amended from time to time). 18. The TA will be implemented over a period of 36 months. It is expected to commence in January 2009, and be completed by December 2011. It will include three regional forums for up to 29 ADF borrowers. Each country could nominate up to two participants per forum. Each forum will be held for 2 3 days. Forum venues will be decided based on logistical and cost considerations. The primary participants will consist of those nominated by target DMCs from debt management offices, ministries of finance, central banks, and other relevant agencies responsible for public debt management. 19. Country-specific workshops (up to 10 countries, for 2 days each) on the use of analysis tools and hedging techniques may be designed and organized for certain DMCs on a request basis. IV. THE PRESIDENT S DECISION 20. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance not exceeding the equivalent of $650,000 on a grant basis for the Public Debt and Risk Management Forum, and hereby reports this action to the Board.
Appendix 1 5 DESIGN AND MONITORING FRAMEWORK Design Summary Performance Targets and Indicators Data Sources and/or Reporting Mechanisms Assumptions and Risks Impact Public debt and risk management (PDRM) network among developing member country (DMC) government officials enables cooperation and information sharing Enhanced knowledge and PDRM techniques and/or framework Increased collaboration and information sharing with other governments on PDRMrelated matters Seminar feedback questionnaire forms Progress reports Assumptions Commitment to capacity development and adoption of learned techniques Governments ability to retain trained and/or experienced staff Willingness to share internal information and experiences Risk Political instability Outcome Strengthened knowledge and understanding of public debt management framework and techniques, with emphasis on currency and risk management Better understanding of the PDRM techniques and framework based on participants feedbacks and/or assessments Periodic feedback on the impact of the forum indicated in progress reports Assumptions Nomination of appropriate staff to attend the training program Commitment of participants, and sufficient feedback to assess the impact of the forum Outputs 1. Three PDRM forums 2. Up to 10 workshops on specific PDRM techniques Improvements in knowledge and understanding about various aspects of PDRM Increase in collaboration and information sharing on PDRM matters with other governments Seminar feedback questionnaire forms Summary and/or progress reports Assumptions Nomination of appropriate staff to attend the forums Willingness to share information and experiences Identification of future training needs and required enhancements in ADB's future financial products Activities with Milestones 1.1 Engagement of experts to prepare materials, analysis, and tools (2009 2011) 1.2 Design and conduct of survey on existing PDRM systems (2009) 1.3. Coordination of timetable, program, list of participants, and logistical arrangements with DMC governments (2009 2011) 1.4. Identification of eminent speakers for three forums (2009 2011) 1.5. Planning and organization of forums and workshops (2009 2011) Inputs Consulting services: (i) international: 7 person-months: $150,000; and (ii) national: 6 person-months: $10,000 Resource persons: $50,000 Travel expenses and per diem: $335,000 Training program and miscellaneous costs: $40,000 Total cost (including contingencies): $650,000 1.6. Preparation of annual progress reports (2009 2011)
6 Appendix 2 COST ESTIMATES AND FINANCING PLAN ($ 000) Item Total Cost Public Debt and Risk Management a 1. Consultants a. Remuneration i. International Consultants - Public Dent Specialist 90 - Debt Portfolio Analysis Tool Development Specialist 60 ii. National Consultants 10 b. International Travel 35 2. Forums and Workshops a. Participants' Travel and Per Diem 300 b. Resource Persons 50 c. Training Program 30 3. Miscellaneous Administration and Support Costs 10 4. Contingencies 65 Total 650 a Financed by the Asian Development Bank 's technical assistance funding program. Source: Asian Development Bank estimates.
Appendix 3 7 OUTLINE TERMS OF REFERENCE FOR CONSULTANTS 1. The technical assistance will require consulting services carried out by two international consultants and one national consultant. A. Public Debt Specialist (1 international, 3 person-months on retainer basis) 2. The specialist should have (i) solid experience and in-depth knowledge of public debt management, as well as fiscal and monetary policy and management, (ii) extensive knowledge of Asia and the Pacific, (iii) working experience with government officials in the region, and (iv) a good reputation and experience in similar assignments. Tasks will include, but not be limited to, the following: (i) design of questionnaires for each regional forum and workshop to assess status and training needs of target developing member countries (DMCs) on a public debt and risk management framework; (ii) formulation of forum and workshop programs to meet the DMCs requirements based on results of questionnaires; (iii) participation in forums and workshops as resource speaker and/or facilitator; (iv) preparation of forums and workshop and training materials according to requests from the Asian Development Bank (ADB); (v) provision of inputs for development of the debt portfolio analysis tool, and performing tests to check the robustness of the tool; (vi) assistance in selecting and inviting resource speakers for forums and workshops; and (vii) preparation of progress and summary reports for all forums and workshops including, among others, achievements versus targets and future improvements. B. Debt Portfolio Analysis Tool Development Specialist (1 international, 4 personmonths) 3. The specialist should have (i) extensive experience in the development of debt portfolio analysis tool, (ii) proficient skills in Excel, and (iii) a good reputation and experience in similar assignments. Tasks will include, but not be limited to, the following: (i) development of an Excel-based debt portfolio analysis tool including functions as follows: (a) data input field for debt details and hedging transactions, (b) record debts in both local and foreign currencies (up to 20 currencies), (c) stress test for currency and interest rate, (d) portfolio optimization in various scenarios, (e) calculation of cost and budget at risk, and (f) presentation of effects of currency and interest hedging transactions including special drawing rights hedging in local currency; (ii) testing robustness and upgrade of the tools based on test results and users comments; (iii) provision of training to ADB staff and selected DMCs; and (iv) preparation and updating of user s manual. 4. The indicated responsibilities assume that the analysis tools will be developed internally. If ADB Management decides that the International Monetary Fund and World Bank s mediumterm debt strategy will be used, the scope of work will be revised to give focus to compatibility of the strategy to the Asian Development Fund debts and hedging functions, and fill the gaps between existing functions of the medium-term debt strategy and indicated requirements.
8 Appendix 3 C. Forum and/or Workshop Coordinator (1 national, 2 person-months for each regional forum) 5. The national consultant should have (i) solid experience and good reputation in coordinating training programs and organizing forums, (ii) a good knowledge of finance, and (iii) strong analytical and communication skills. Tasks will include, but not be limited to, the following: (i) support on forum and workshop arrangements, i.e., logistical requirements for participants and resource speakers of regional forums; (ii) assistance in the preparation of forum and workshop materials; and (iii) administrative and ad hoc assistance to ADB staff and international consultants.