1

Debt Management and Financial Markets

FAD Professional Development SeminarWednesday, December 10, 2008

Allison Holland, Debt Management Advisor, Sovereign Asset & Liability Management Division, MCM

2

Out

line

of p

rese

ntat

ion

• Why

?•

Rece

nt tr

ends

• How

?•

Impa

ct o

f cris

is?

3

Wha

t is “

dom

estic

deb

t”?

•

Juris

dict

ion/

mar

ket o

f iss

uanc

e–

easie

st to

get

dat

a•

Cu

rren

cy–

very

rele

vant

to ri

sks

•

Resid

ency

of h

olde

r–

“off

icial

”

defin

ition

, e.g

. for

IMF

–

rele

vant

to in

tern

atio

nal r

esou

rce

trans

fer

–

hard

to g

et in

form

atio

n on

deb

t sec

uriti

es•

Re

latio

n be

twee

n ju

risdi

ctio

n an

d re

siden

cy in

crea

singl

y te

nuou

s; th

ough

pos

sibly

stre

ngth

enin

g be

twee

n ju

risdi

ctio

n an

d cu

rren

cy•

N

o “r

ight

”

defin

ition

, dep

ends

on

purp

ose

of a

nalys

is

4

Why

?

5

Deb

t Man

ager

’s P

ersp

ectiv

e?

•

Redu

ces r

isk–

A

llow

s gov

ernm

ent t

o m

ove

to m

ore

robu

st d

ebt p

rofil

e•

Impr

oves

the

choi

ce se

t

–

Prov

ides

resil

ience

in fa

ce o

f sud

den

stop

s in

inte

rnat

iona

l m

arke

ts–

Pr

ovid

es a

dditi

onal

flexi

bilit

y to

resp

ond

to b

udge

tary

shoc

ks

•

Redu

ces i

ssue

r’s c

osts

–

redu

ces l

iqui

dity

pre

mia

•

Link

bet

wee

n D

M a

nd D

Mkt

de

velo

pmen

t key

elem

ent

of B

ank-

Fund

MTD

S

fram

ewor

k

6

Oth

er B

enef

its

•

Incr

ease

the

effic

iency

and

com

plet

enes

s of t

he

dom

estic

cap

ital m

arke

ts•

Fa

cilita

tes t

he u

se o

f mar

ket s

ecur

ities

for m

onet

ary

polic

y op

erat

ions

–

Allo

ws m

ore

inde

pend

ent m

onet

ary

polic

y–

St

reng

then

s the

tran

smiss

ion

mec

hani

sm–

Co

ntrib

utin

g to

bro

ader

mac

ro-e

cono

mic

stab

ility

•

Spur

s ins

titut

iona

l and

regu

lator

y de

velo

pmen

t ne

cess

ary

for w

ider

priv

ate

sect

or m

arke

ts–

Cr

eate

s yiel

d cu

rve

(for p

ricin

g) a

nd p

rovi

des b

ench

mar

k–

G

ener

ates

inve

stor

app

etite

7

Oth

er B

enef

its

•

Facil

itate

s a m

ore

effic

ient a

lloca

tion

of fi

nanc

ial

reso

urce

s acr

oss t

he w

hole

econ

omy

–

True

opp

ortu

nity

cos

t of f

inan

cing

refle

cted

in m

arke

t in

tere

st ra

tes

–

Enh

ance

s mac

ro-e

cono

mic

grow

th•

E

nhan

ces f

inan

cial s

tabi

lity

–

Offe

rs a

gent

s too

l for

hed

ging

the

asse

t-liab

ility

mism

atch

on

their

ow

n ba

lance

shee

ts, r

educ

ing

risk

of c

reat

ing

unex

pect

ed c

ontin

gent

liab

ilitie

s (ba

nkin

g se

ctor

)•

O

vera

ll, e

nhan

ces e

cono

my’s

abi

lity

to w

eath

er

exte

rnal

shoc

ks–

Ra

tiona

le fo

r G8

initi

ativ

e to

dev

elop

loca

l bon

d m

arke

ts

in A

fric

a

8

Tre

nds

9

Impa

ct o

n ri

sk

• Man

y E

Ms

ha

ve b

een

follo

win

g an

exp

licit

stra

tegy

to re

duce

exc

hang

e ra

te ri

sk in

the

debt

por

tfolio

–

Incr

easin

g th

e pr

opor

tion

of d

omes

tic se

curit

ies•

DM

ofte

n w

orki

ng in

coo

pera

tion

with

oth

er

agen

cies

–

Bo

th p

ublic

and

priv

ate

–

Com

plem

enta

ry re

form

s

10

dom

estic

deb

t sha

res

perc

ent o

f tot

al, b

y ju

risdi

ctio

n

020406080100

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Sou

rce:

Pan

izza

(200

8)

Russ

iaMex

icoTu

rkey

Chi

na

Thai

land

Kor

ea

Bra

zil

Indo

nesi

a

11

Inst

rum

ents

• Gre

ater

div

ersit

y of

inst

rum

ents

–

Long

er, f

ixed

-rate

teno

rs–

In

flatio

n-in

dexe

d de

bt–

Fl

oatin

g ra

te n

otes

–

Reta

il de

bt•

Refle

ctin

g ex

pans

ion

of in

vest

or b

ase

…

12

Cha

nge

in D

ebt C

ompo

sitio

n (B

razi

l)

2%

35%

42%

31%

9%

24%

47%

10%

0%10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002

2007

R$

Fixe

dR

$ Fl

oatin

gR

$ Pr

ice

inde

xed

FX

13

Cha

nge

in D

ebt C

ompo

sitio

n (T

urke

y)

23%

34%

27%

33%

26%

23%

23%

10%

0%10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003

Oct

2008

Oct

YTL

Fix

ed

YTL

Var

iabl

eFX

Fix

ed

FX V

aria

ble

14

Impa

ct o

n ri

sk

•

Whi

le th

is ha

s gen

erall

y in

crea

sed

the

inte

rest

rate

ex

posu

re o

f the

por

tfolio

, ove

rall

vuln

erab

ilitie

s ha

ve b

een

redu

ced.

–

Braz

il, b

etw

een

2002

and

200

8, th

e se

nsiti

vity

of t

he n

et

publ

ic se

ctor

deb

t /G

DP

ratio

to a

com

bine

d 3

stan

dard

de

viat

ion

shoc

k to

bot

h in

tere

st a

nd e

xcha

nge

rate

s has

de

cline

d sig

nific

antly

from

+16

.5%

in 2

002

to -4

% in

20

08

–

Turk

ey, i

n 20

01 im

pact

of a

5%

dep

recia

tion

wou

ld a

dd

2.2%

to d

ebt /

GD

P; b

y 20

07 th

is ha

d de

cline

d to

0.6

%.

But i

nter

est r

ate

risk

still

hig

h –

5%

incr

ease

in ra

tes

wou

ld a

dd 1

.6%

to d

ebt /

GD

P in

200

1; re

duce

d to

1.3

%

in 2

007

15

How

?

16

Gen

eral

Pre

-con

ditio

ns

• Mac

roec

onom

ic st

abili

ty–

H

igh

and

volat

ile in

flatio

n–

U

nsus

tain

able

debt

leve

ls–

Ba

lance

of p

aym

ents

vul

nera

bilit

y–

O

ver-v

alued

exc

hang

e ra

teall

lead

to h

igh

risk

prem

ia an

d lo

w in

vest

or

appe

tite

17

App

ropr

iate

Mar

ket I

nfra

stru

ctur

e

•

Soun

d (a

nd in

depe

nden

t) re

gulat

ory

fram

ewor

k•

Ro

bust

pay

men

t and

settl

emen

t sys

tem

s•

A

ppro

priat

e leg

al fr

amew

ork

–

Ade

quat

e an

d w

ell-e

nfor

ced

cont

ract

s–

In

solv

ency

pro

cedu

res

•

Supp

ortiv

e ta

x re

gim

e–

A

im fo

r tax

neu

tralit

y–

Co

nsid

er o

pera

tiona

l cos

ts•

Th

ese

cond

ition

s bui

ld c

onfid

ence

in th

e in

tegr

ity o

f th

e m

arke

t

18

Deb

t Man

agem

ent S

peci

fic

•

Com

mitm

ent t

o ac

cept

mar

ket-b

ased

out

com

es•

So

und,

tran

spar

ent d

ebt m

anag

emen

t stra

tegy

–

Enh

ance

s inv

esto

r und

erst

andi

ng–

If

intro

ducin

g ne

w in

stru

men

ts -

ne

ed to

com

mit

to

cont

inue

d m

inim

um su

pply

–

Help

s red

uce

risk

prem

ia

•

Regu

lar a

nd p

redi

ctab

le iss

uanc

e pl

an–

St

anda

rd, b

ench

mar

k in

stru

men

ts

•

Inve

stor

relat

ions

–

Effe

ctiv

e di

alogu

e lea

ds to

sync

hron

izat

ion

of n

eeds

19

Lin

ks to

eff

ectiv

e ca

sh m

anag

emen

t?

• Requ

ired

to p

lan is

suan

ce c

alend

ar e

ffec

tivel

y–

A

void

can

celli

ng (o

r add

ing)

auc

tion

at sh

ort

notic

e•

Regu

larity

of i

ssua

nce

–

May

resu

lt in

runn

ing

shor

t-ter

m c

ash

balan

ces

on T

SA•

Use

of b

ench

mar

k bo

nds

–

Chall

enge

on

rollo

ver

–

Reta

in fl

exib

ility

in le

gal p

rovi

sions

for b

uyba

cks

or o

ther

deb

t res

truct

urin

g op

erat

ions

20

Issu

ance

mec

hani

sm

•

Key

pol

icy c

hoice

•

Auc

tions

, syn

dica

tion

or ta

p /

fixed

pric

e te

nder

–

Exe

cutio

n ris

k–

Pr

ice

disc

over

y•

A

uctio

ns -

U

nifo

rm o

r Mul

tiple

–

Reve

nue

cons

eque

nces

–

“win

ner’s

cur

se”

–

Impl

icatio

ns fo

r par

ticip

atio

n•

Re

stric

tions

on

parti

cipat

ion

–

Cred

it ris

k–

“c

orne

ring”

th

e m

arke

t

21

Prim

ary

deal

ers?

•

Adv

anta

ges

–

Dist

ribut

ion

–

Prom

ote

mar

ket

–

Redu

ce e

xecu

tion

risk

–

Prov

ide

mar

ket i

nfor

mat

ion

and

advi

ce•

Pr

e-re

quisi

tes

–

Com

petit

ion

(and

num

ber)

•

Link

to se

cond

ary

mar

ket d

esig

n–

Dec

ision

s on

prim

ary

mar

ket a

cces

s sho

uld

be ti

ed to

mar

ket-m

akin

g ob

ligat

ions

•

Des

ign

ince

ntiv

es to

mee

t iss

uer’s

obj

ectiv

es–

Non

-com

petit

ive

faci

litie

s–

Fees

22

Pric

e tr

ansp

aren

cy

•

Ofte

n lin

ked

to c

hoice

of s

econ

dary

mar

ket t

radi

ng

mec

hani

sm–

N

eed

for c

oord

inat

ion

with

secu

rities

mar

ket r

egul

ator

•

Requ

ired

if m

arke

t to

prov

ide

soun

d re

fere

nce

poin

t–

N

eede

d fo

r rep

o

and

othe

r valu

atio

n

•

Role

for o

fficia

l pric

es–

Li

nk to

PD

obl

igat

ions

–

N

atur

al di

since

ntiv

e fo

r dea

lers t

o be

tran

spar

ent

•

Eve

n m

ore

criti

cal w

hen

cond

ition

s are

vol

atile

23

Div

erse

inve

stor

bas

e

• Nee

d to

redu

ce c

once

ntra

tion

of in

vest

or b

ase

/ in

crea

se d

iver

sity

–

Min

imiz

e lo

ss o

f acc

ess

–

Enh

ance

liqu

idity

• Bank

s–

Ca

ptiv

e m

arke

t?–

Bu

y-to

-hol

d?–

Co

ntin

gent

risk

?

24

Fore

ign

inve

stor

s?

•

Broa

dens

inve

stor

bas

e an

d im

prov

e m

arke

t liq

uidi

ty–

O

ften

cata

lyst f

or c

hang

e, fa

cilita

ting

the

intro

duct

ion

of

long

er-te

rm fi

xed

rate

bon

ds

•

Turk

ey: 5

yea

r fix

ed ra

te b

ond

in 2

006;

5 y

ear i

nflat

ion-

linke

d bo

nd in

20

07•

Braz

il: 1

0 ye

ar fi

xed

rate

bon

d in

200

6

•

But b

ring

chall

enge

s …–

M

ay e

ncou

rage

spec

ulat

ive

inflo

ws a

nd c

ompl

icate

mon

etar

y po

licy

–

May

agg

rava

te m

arke

t vol

atili

ty if

sign

ifica

nt c

apita

l out

flow

s

25

Oth

er in

vest

ors?

•

Inst

itutio

nal i

nves

tors

–

Regu

lator

y re

form

requ

ired?

–

Cont

ract

ual s

avin

gs m

arke

t hav

e pl

ayed

a c

ataly

st ro

le in

dev

elop

ing

liqui

dity

(E.g

. Chi

le a

nd P

olan

d –

pens

ion

refo

rm tr

igge

r)–

Mut

ual f

unds

can

also

be

impo

rtant

•

Reta

il–

Dire

ct o

r ind

irect

?–

Can

be im

porta

nt se

ctor

(e.g

. Sou

th A

fric

a, H

unga

ry, B

razi

l)–

Cost

-eff

icie

nt d

istrib

utio

n m

echa

nism

–

Regu

lator

y re

quire

men

ts (e

.g. a

void

mis-

selli

ng)

–

Spec

ializ

ed in

stru

men

ts•

In

vest

or e

duca

tion

criti

cal a

s sav

ings

opt

ions

incr

ease

26

Impa

ct o

f cri

sis

27

Ear

ly 2

008

…

•

Initi

ally,

prim

ary

mar

kets

look

ed to

be

fairl

y ro

bust

•

DM

s

did

revi

se fi

nanc

ing

plan

s–

Sw

itche

d in

to sh

ort-t

erm

or f

loat

ing

rate

not

e au

ctio

ns

•

Sept

embe

r con

ditio

ns d

eter

iora

ted

signi

fican

tly•

So

me

regi

onal

cont

agio

n–

Po

land

affe

cted

by

nega

tive

deve

lopm

ents

in H

unga

ry

28

Bra

zil

8.00

10.0

0

12.0

0

14.0

0

16.0

0

18.0

0

20.0

0

3M6M

1Y2Y

3Y4Y

5Y

Jan-

08N

ov-0

8M

ay-0

8

Mex

ico

6.00

6.50

7.00

7.50

8.00

8.50

9.00

9.50

3M

1Y

3Y

5Y

7Y

9Y

15Y

30Y

Jan-

08M

ay-0

8N

ov-0

8

Hun

gary

6.00

7.00

8.00

9.00

10.0

0

11.0

0

12.0

0

13.0

0

3M6M

1Y3Y

5Y10

Y15

Y

Jan-

08M

ay-0

8N

ov-0

8

Pola

nd

5.00

5.50

6.00

6.50

7.00

7.50

1Y2Y

3Y4Y

5Y9Y

10Y

Jan-

08M

ay-0

8N

ov-0

8

29

EM

BI

sp

read

s?

Jan

31O

ct 3

1Ch

ange

Braz

il25

445

1+

197

Mex

ico19

839

0+

192

Hun

gary

106

438

+33

2

Polan

d10

236

8+

266

30

Post

Sep

tem

ber

…

• Exi

t of f

orei

gn in

vest

ors a

dded

sign

ifica

nt

volat

ility

to e

xcha

nge

rate

s•

Dea

lers

hav

e w

eake

r bala

nce

shee

ts–

A

ggra

vate

d by

incr

ease

d vo

latili

ty in

mar

kets

–

Lim

iting

abi

lity

to m

eet P

D o

blig

atio

ns–

Se

cond

ary

mar

ket l

iqui

dity

dry

ing

up –

ab

senc

e of

pric

es …

• Prim

ary

issua

nce

decl

inin

g (E

Ms

dr

awin

g on

ca

sh c

ushi

ons)

31

Fore

ign

inve

stor

s …

exiti

ngN

on-r

esid

ent h

oldi

ngs o

f gov

ernm

ent b

onds

(Jan

200

8 =

1)

0.6

0.7

0.8

0.91

1.1

1.2

1.3

1.4

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sept

Oct

Nov

Turk

eyPo

land

H

unga

ryM

exic

o

32

Impa

ctin

g sp

read

s …

33

Lea

ding

to so

me

pric

e di

stor

tions

…Ev

olut

ion

of T

urki

sh Y

ield

s, 20

08

051015202530 1/3/

082/

3/08

3/3/

084/

3/08

5/3/

086/

3/08

7/3/

088/

3/08

9/3/

0810

/3/0

8

TUR

K 2

012

CPI

TU

RK

201

2 Fi

xed

Impl

ied

Bre

ak-E

ven

Infl

atio

n R

ate

34

Les

sons

?

• Nee

d to

dev

elop

stra

tegi

c, no

t jus

t rel

ativ

e va

lue,

inve

stor

bas

e•

Main

tain

stro

ng c

ash

rese

rves

• Main

tain

app

ropr

iate

scop

e fo

r fle

xibi

lity

–

in

both

issu

ance

and

oth

er a

spec

ts o

f mar

ket

mic

rost

ruct

ure

• Dev

elop

stro

ng d

ialog

ue w

ith m

arke

t pa

rtici

pant

s

35

Con

clus

ion

36

Con

clud

ing

rem

arks

•

DM

and

dom

estic

deb

t mar

ket d

evelo

pmen

t int

rinsic

ally

linke

d•

A

cces

s to

deep

and

liqu

id d

omes

tic m

arke

t ena

bles

DM

to

redu

ce ri

sk w

hile

cont

ainin

g co

st–

M

ore

robu

st d

ebt p

rofil

e–

In

crea

sed

capa

city

to a

bsor

b sh

ocks

•

Brin

gs w

ider

ben

efits

for t

he e

cono

my

–

Mor

e in

depe

nden

t (an

d ef

fect

ive

mon

etar

y po

licy)

–

Spur

s bro

ader

fina

ncial

sect

or d

evelo

pmen

t•

An

effic

ient

yie

ld c

urve

•

Refe

renc

e fo

r valu

ing

and

hedg

ing

othe

r sec

uriti

es

37

Con

clud

ing

Rem

arks

• Nee

d to

be

com

mitt

ed to

–

W

illin

gnes

s to

acce

pt m

arke

t out

com

es–

Tr

ansp

aren

cy–

E

ffect

ive

cash

man

agem

ent

• Supp

orte

d by

dev

elop

men

t of d

omes

tic in

vest

or

base