choosing between usd or eur-denominated debt in the...
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Sovereign Debt Management Forum 2016The World Bank
Choosing Between USD or EUR-Denominated Debt in the International Markets
Lior David-PurHead of Risk Management Department
Debt Management Unit, Accountant General’s Office Ministry of Finance, Israel
Session 4
Distribution Between Local and Foreign Currency
Composition of the Foreign Currency
Overview1
2
3
Discussion Outline
2
Debt Overview
GDP (2015) $300 billion
Public Debt / GDP (2015) 63.9%
Total Debt (June 2016) $192 billion
ATM (June 2016) 7.4 years
Roll-over Ratio (June 2016) 10.6%
Ratings/Outlook A+ Stable / A1 Stable / A Positive
71.1%69.1% 68.4%
66.9% 66.0%63.9%
60%
65%
70%
75%
2010 2011 2012 2013 2014 2015
Public Debt
Source: MOF3
Distribution Between Local and Foreign Currency
75% 73% 75% 82% 86%
25% 27% 25% 18% 14%
0%
50%
100%
1996 2001 2006 2011 Q2-2016
Local Currency Debt Foreign Currency Debt
Source: MOF, Q2-2016
68%54%
47% 47% 51%
3%
3%1%
3%
7%9% 5%
6%
9% 18% 30%29%
25% 27% 25%18% 14%
0%
20%
40%
60%
80%
100%
1996 2001 2006 2011 Q2-2016CPI linked USD Linked FRN Nominal Foreign Currency
4
Debt Management Framework
5
Local Currency
Nominal Fix Rate
Local Currency
CPI Linked
Local Currency
Floating RateForeign Currency
Cost Risk Analysis and Quantitative Analysis
Qualitative Analysis
Sovereign Considerations
EURUSDRisk Exposure PolicyOptimal Composition of the debt
IssuancePolicy
Risk Exposure Policy
Cost Measure
o Average annual interest payments including inflation
Risk Measure
o Volatility in the average annual interest payments
o Tail (95%, 99%)
o Expected Shortfall (95%,99%)
Cost Risk Analysis and Quantitative Indicators
6
Quantitative Indicators
o Debt to GDP ratio
o Interest payments
o Average time to maturity (ATM)
o Rollover ratio
Qualitative analysis
o Market conditions
o Expanding the investor base
Sovereign Considerations (Strategic Targets)
o Liquid foreign benchmark curve for corporate issuances
o Exposure of foreign investors to the Israeli market
Challenges
o Resilience in times of crisis
o Designated bonds for pension funds and insurances companies
o Two liquid bond curves in the local market (Nominal Fix Rate, CPI linked)
o Liquid foreign benchmark curve for corporate issuances
Qualitative analysis and Sovereign Considerations
7
Risk Exposure Policy
Financial Risks
Refinancing Risk
Liquidity Risk
Market Risk
Credit Risk
Market Risk Drivers
Interest Rate
Inflation
FX fluctuations
Risk Metrics
Debt Portfolio
Interest
Expenditure
8
Mitigating Market Risk
Principals
o Minimum strategic hedge
o Short term hedge
o Long term hedge
o Consistence of the hedge
Tools
o Natural hedge
o FX Forward transactions
o Cross Currency Swap
Challenges
o Depth of derivatives market
o Decoupling of globally monetary policy9
Composition of the Foreign Currency Debt
84%
14%
0% 2%
71%
16% 11%2%
0%
50%
100%
USD EUR NIS Other
Without Hedging With Hedging
Source: MOF, First chart Q2-2016 , Second chart December 2015
MTM
Notional -
500
1,000
1,500
NISEURO
NIS CPI
111 46
4
3,115
300 150
US
D M
illio
ns
10
Case Study
Example for Issuances (Indication)*
Example for Hedge (Indication)*
Data: Bloomberg September, 29th 2016 * for 10 years **includes new issuances premium
USD Issuances (%) EUR Issuances (%)
Treasury 1.60 Mid-Swap 0.30
Spread** 1.00 Spread** 0.80
USD Coupon 2.60 EUR Coupon 1.10
USD Issuances Coupon 2.60 EUR Issuances Coupon 1.10
EUR Swap (+) 0.30 USD Swap (+) 1.45
USD Swap (-) 1.45 EUR Swap (-) 0.30
EUR Basis (+) -0.50 EUR Basis (-) -0.50
CCS EUR Coupon 0.95 CCS USD Coupon 2.75
11
Case Study 2
12