Back Matter

Appendix I. The MTDS Analytical Tool: An Overview

71. The purpose of the MTDS Analytical Tool (MTDS AT) is to support the process of decision-making by illustrating the consequences of following a particular financing strategy under various scenarios or stress tests. As with any tool, the outputs are driven by the assumptions made, so careful judgment must be applied when interpreting the results and taking the final decision on the appropriate choice of debt management strategy.

72. The AT allows the debt manager (DM) to simulate the impact of meeting their financing requirement using a variety a strategies. Strategies can be specified by either specifying a financing plan to be followed over the course of the simulation horizon or by specifying a desired debt portfolio composition to be achieved. The evolution of key cost and risk indicators for each strategy are assessed.

73. The AT has an excel-based structure (Figure 3) developed on the basis of scenario-analysis models typically used by debt management offices. It projects cash flows as a function of three main variables: (i) market scenarios (financial variables); (ii) borrowing strategies (e.g., combination of instruments); and (iii) macroeconomic assumptions (e.g., primary balances). Summary statistics are then computed based on complete cash flows and multi-currency instruments.

74. It is comprised of four separate spreadsheets (see Figure 3 below), three of which are used to (i) specify the model; (ii) various financing strategies; and (iii) shock scenarios. The fourth spreadsheet combines the information detailed in the other three spreadsheets, and runs the various financing strategies defined under alternative shock scenarios.

Figure 3.
Figure 3.

Schematic of the MTDS Analytical Tool

Citation: Policy Papers 2009, 027; 10.5089/9781498336222.007.A999

75. The key inputs for the AT consist of (i) the macro-economic framework, including the assumed path of the exchange rate––this is taken from the DSF; and (ii) details of the existing debt portfolio. Key assumptions include the (i) specification of the yield curves that will apply in both domestic and international markets for each period of the simulation; (ii) the pricing of other nonmarket instruments; and (iii) the strategies to be tested.

76. The model produces as output a number of cost and risk indicators for each strategy considered. These include the evolution of debt and debt service, indicators of repayment capacity, refinancing and interest rate risk, the debt composition (by instrument type and currency), and debt sustainability. Detailed amortization profiles are also produced for each point in time. The key output sheet is the Cost-Risk worksheet which compares key indicators across all the strategies to enable the trade-off to be evaluated.

Appendix II. Developing a Medium-Term Debt Management Strategy in Practice: An Illustration

77. The objective of an MTDS mission is to provide TA to authorities to support their efforts to either develop or improve upon an existing debt management strategy. The GN provides a framework to focus the TA, and the AT can help add quantitative rigor to support the analysis of various strategy options. The elements of the toolkit are demonstrated to the authorities by assessing how a set of specific strategies might perform under a given set of pricing and macroeconomic assumptions—typically those used in the last DSA. However, the missions are not intended to produce an actual strategy. Indeed, even the various strategy options that are considered are not to be taken as staff suggestions or as a prescriptive list. The intention is that the authorities use the knowledge transfer to subsequently formulate a new, or modify an existing, MTDS, which could then be discussed with Fund and Bank country teams in the context of the overall discussion of the macroeconomic framework.

78. The aim of this Appendix is to provide an illustrative example of how the MTDS toolkit can work in practice. The country example below is based an actual country case where the toolkit has already been applied.

Country background

79. Prior to the HIPC/MDRI debt relief, this country’s implicit debt management strategy was cost reduction. Recently a national public debt management strategy document was published that charted a new course for developing the domestic debt market, and sought to institutionalize a closer consideration of the cost and risk trade-offs of new borrowing options going forward, while maintaining long-term debt sustainability. The MTDS exercise was to help provide a framework to quantitatively evaluate these options, by providing the cost and risk trade-offs involved in alternative debt management strategies.

Costs and risks of the existing debt portfolio

80. The existing debt portfolio is broadly composed of 60 percent external and 40 percent domestic debt. Overall the portfolio is relatively low cost. Almost all external debt is contracted at concessional rates, while the presence of captive investors, and practice of forced placements, has kept the cost of domestic debt below a true market rate. With regard to key vulnerabilities, foreign exchange risk is the dominant risk as there is no domestic currency debt—all debt is denominated in or linked to foreign currencies. Refinancing and interest rate risk are moderate as only 6 percent of the total debt matures in the next 5 years, and over 80 percent of the total portfolio is fixed rate.

Structural features and macroeconomic risks

81. Despite substantial debt relief and recent fiscal consolidation, the country remains at a modest risk of debt distress, underlining the importance of continuing to contain debt interest costs. A key factor affecting the risk of debt distress is the country’s vulnerability to exchange rate movements, particularly given its dependence on commodity exports and high oil imports. Given persistently high current account deficits, and the limited availability of concessional loans and volatility of aid, the authorities have sometimes felt the need to rely on domestic issuance or external borrowing from nontraditional sources to meet expenditure needs. Weather related events regularly impact the fiscal and balance of payments position, again potentially resulting in unanticipated financing needs. However, the domestic financial market is highly dollarized and shallow with limited institutional investors, limiting its ability to smooth the impact of these temporary budgetary shocks. In addition, the impact of rising food and fuel prices poses an additional challenge with respect to containing domestic financing costs, and pressure on the real exchange rate.

Assessing the alternative debt management strategies

82. Taking these factors into account, the relative performance of four alternative debt management strategies was considered (see Figure 4). The strategies tested were based on discussion with the authorities with respect to their goal of developing the domestic debt market and their perspective on their options for securing concessional financing going forward:

  • (S1) The existing strategy where financing needs are mostly covered with external concessional debt, implying a continued reduction in the domestic debt stock;

  • (S2) Strategy aimed at developing the domestic debt market, by rolling over some maturing domestic debt into new, more standardized, domestic debt instruments and implying lower external debt relative to S1;

  • (S3) Strategy that addresses the exchange rate risk by introducing domestic currency denominated debt at the same pace as domestic debt is issued under S2; and

  • (S4) Strategy to change the composition of external debt by reducing the degree of concessionality of external financing, reflecting the authorities’ concern that the availability of concessional financing may decline going forward.

Figure 4.
Figure 4.

Illustrating the Cost-Risk Trade-off

Citation: Policy Papers 2009, 027; 10.5089/9781498336222.007.A999

83. For a similar level of risk, strategy 1 is the least costly compared to strategies 2 and 4. This strategy implicitly maximizes concessional borrowing to help maintain debt sustainability. Strategies 2 and 3 are illustrative scenarios that highlight the potential increase in costs associated with the authorities’ stated objective of building the domestic debt market. Similarly, these strategies capture the impact of using domestic sources of financing in the event that the total amount of concessional funding is not forthcoming and external nonconcessional sources are limited. In addition, Strategy 3 highlights the potential cost of reducing exchange rate exposure in the portfolio. The primary benefit of presenting the cost and risk of each strategy in this context is to highlight the estimated cost to the government budget of pursuing a domestic debt market development strategy. In order to contain these costs, and to ensure that risks of debt distress are not excessively aggravated, this market development strategy would need to be supported by prudent macro policies that would help reduce the cost—by reducing credit and inflation risk premia, while creating sufficient budget space to accommodate these costs.

Appendix III. The DeMPA Tool: Preliminary Results

uA01fig01
uA01fig01
* When calculating the percentage of those sampled countries which met with the minimum effectiveness requirements for a particular dimension, those countries, which received N/R (Not Rated) are excluded from the sample. In some cases, this inflates the result for a certain dimension, e.g. for the second dimension of the DPI-5 Audit, only ten countries out of twenty sampled countries were assigned a score; 80% or eight out of ten countries met with the minimum effectiveness requirements for this dimension. Other similar cases are marked with asterisk.** Assessment result indicates that none of the sampled countries had derivatives, see DPI-10–3.
1

While the funding needs are large, many LICs indicate that the availability of concessional financing has not grown in line with demands. For example, as discussed at the IMF-World Bank Annual Meetings 2008 African Governors Roundtable on Emerging Financing and Debt Related Challenges.

2

Within the Fund, the paper has been prepared by staff of the Sovereign Asset and Liability Management Division, Monetary and Capital Markets Department. Within the Bank, the paper has been prepared by staff of Economic Policy and Debt Department, Poverty Reduction and Economic Management, and Banking and Debt Management Department, Treasury.

3

Indeed, improvements in PDM frameworks, strengthening of debt management strategies and resultant reduction in portfolio vulnerabilities have contributed to rating upgrades in several cases, including the recent upgrades of Brazil and Uruguay.

4

See “The Implications of the Global Financial Crisis for Low-Income Countries,” International Monetary Fund, forthcoming and “Weathering the Storm: Economic Policy Responses to the Financial Crises,” World Bank, November 2008.

5

For example, in the current context, applying the MTDS framework will help identify, and quantify, the key risks involved in using whatever financing options are available, allowing them to be managed more effectively.

6

The medium-term is typically defined as 3–5 years. This mitigates the risk that short-term expediency will dominate the choice of strategy.

7

See for example discussion in the IMF and World Bank, 2001, “Guidelines for Public Debt Management”, or Wheeler, Graeme, 2004, “Sound Practice in Government Debt Management”, World Bank.

8

The working group comprised Bank representatives from PRMED, BDM, and FRM, and Fund representatives from MCM, AFR, FAD, and SPR.

9

The delivery of this work, and its contribution to domestic debt market development, has been recognized in the G–8 Action Plan for Developing Local Bond Markets in Emerging Market Economies and Developing Countries.

10

The GN is attached in an accompanying volume.

11

A user manual for the AT is being prepared; a preliminary version is available on request. This will be completed and posted on the Fund and Bank websites, along with the AT and the GN, by May 2009.

12

Such as COMSEC, CEMLA, Debt Relief International, MEFMI, Pole Dette, WAIFEM and UNCTAD. See Strengthening Debt Management Practices: Lessons from Country Experiences and Issues Going Forward, Annex IV for a description of the main debt management TA agencies.

13

As with the DSF, it is anticipated that the toolkit will be kept under review. The toolkit will be further refined as implementation of the framework becomes more widespread.

14

For example, the impact of issuing a sovereign bond on the international capital markets on future access to concessional borrowing (e.g., taking into account IDA’s nonconcessional borrowing policy).

15

The AT employs a deterministic rather than a stochastic framework for measuring risk. This need for a deterministic approach is largely driven by the severe data limitations in LICs. Consequently, it was decided that risk would be more reasonably captured by looking at the change in baseline costs resulting from the application of various stress tests.

16

Such as interest costs/revenues, debt service/exports, amortization profiles, average time to maturity, and share of variable rate debt. These indicators could be compared to the equivalent output from the LIC DSF to gauge the debt sustainability implications. The practical links between the MTDS framework and the DSF are discussed more fully in the GN.

17

Teams typical included a combination of Fund and Bank staff and a member from other debt management TA providers. UNCTAD joined the Bangladesh team, while COMSEC joined in Ghana. A debt management expert at the Central AFRITAC participated in Cameroon.

18

This is in line with Boards’ discussion of “Applying the Debt Sustainability Framework for Low-Income Countries Post Debt Relief,” November 2006, where Directors reiterated that concessional flows remain the most appropriate source of external finance for LICs. While such a strategy might not appear consistent with plans to develop the domestic debt market, it might be possible to pursue both objectives. In some cases, however, this could lead to reserves accumulation and/or overfinanced budgets.

19

This would not preclude countries with limited capacity to obtain assistance in specifying, assessing, and implementing projects.

20

The members are from the Bank departments (PRMED, BDM, DECDG, and GCMSM), the regions (AFR, EAP, ECA, LAC, MNA, and SAR) and the IMF (MCM, FAD, and SPR).

21

Inputs provided by the IMF; Debt Relief International (DRI); the DMFAS Programme of the United Nations Conference on Trade and Development (UNCTAD); the Debt Management Division of the Commonwealth Secretariat; the U.S. Department of the Treasury – Office of Technical Assistance; and international standard setting bodies (e.g., OECD, PEFA and the Task Force on Finance Statistics) enhanced the applicability of the tool.

22

These included participants at the First Annual Organisation for Economic Co-operation and Development (OECD) Forum on African Public Debt Management, Amsterdam, December 2006; the Fifth Inter-Regional Debt Managers Seminar, London, September 2007; UNCTAD’s Sixth Debt Management Conference, Geneva, November 2007; the Inter-Agency Task Force on Finance Statistics, March 2007; and the IMF, October 2007. Based on the past year’s operational application and suggestions received at training/outreach events from inter alia, Crown Agents, MEFMI, WAIFEM, Pole Dette, CEMLA, ADB, and AfDB, were considered in the latest amendment the DeMPA indicators in November 2008 in line with the DeMPA Amendments Policy (http://go.worldbank.org/5AHEF2KF70).

23

The tool is attached in an accompanying volume, and is complemented by a Guide that provides supplemental rationale and information on each indicator to assist users (http://go.worldbank.org/5AHEF2KF70).

24

The dimensions under the indicator “coordination with macroeconomic policies” reveal a sample bias that is likely to unwind with future assessments. A number of the countries in the current sample are part of either the Economic and Monetary Community of Central Africa or the West African Economic and Monetary Union; as such the governments are bound by strict legislation that limits the availability of direct resources from the regional central banks. Going forward we expect fewer countries in the sample to be part of currency unions with such legislation. Similarly, we expect that the ratings for the “coordination with fiscal policy” will fall due to an amendment to this indicator. Staff has strengthened the minimum requirement from simply having access to key fiscal variables to having undertaken a DSA within the last three years.

25

As with the DSF templates, the AT, and its accompanying user manual, will be revised further in light of ongoing country experience.

26

For example, where borrowing choices are constrained by existing, pre-committed loans. Another example is explicitly modeling the implications of an LIC issuing sovereign debt on international capital markets.

27

Such strategies are envisaged under the proposed amendments to Fund policies discussed in “Changing Patterns of Low-Income Country Financing and Implications for Fund Policies on External Financing and Debt”, March 2009. It could also help demonstrate that a specific proposal to use nonconcessional loans would be consistent with IDA’s NonConcessional Borrowing Policy. See IDA (2006b). “IDA Countries and NonConcessional Debt: Dealing with the ‘Free Rider’ Problem in IDA14 Grant Recipient and Post-MDRI Countries,” July.

28

Areas like cost-benefit analysis of new borrowing, the design and implementation of an MTDS, cash flow forecasting and cash balance management, and the publication of a debt statistical bulletin.

29

That work requires close coordination of a wide range of stakeholders and covers a broad range of aspects from money, primary and secondary markets, the investor base, market infrastructure and regulation. See, for example, World Bank (2007) “Developing the Domestic Government Debt Market: From Diagnostics to Reform Implementation”.

30

See the August 1, 2008 Nouakchott Declaration on Financing for Development in Africa.

31

These work programs are coordinated with HQ activities.

32

This regular meeting, established early 2007, is an important mechanism to improve collaboration in the provision of TA and capacity building and advisory services, helping to address some of the concerns identified in the report of the external review committee on Bank–Fund collaboration, February 2007.

33

The Bank has also created a database of providers of training in PDM, centralizing training information that can be useful for public debt managers, available at http://treasury.worldbank.org/Services/Public+Debt+Management/Resources/DatabaseofProvidersofTrainingon PDM.html.

34

This follows three other trainings on the DeMPA: one training for trainers in collaboration with UNCTAD at Geneva, and two Regional trainings for client countries in collaboration with WAIFEM at Abuja and MEFMI at Nairobi.

35

For example, Commonwealth Secretariat has requested training for its staff on the framework, while MEFMI has scheduled a specific course for its fellows.

36

See Strengthening Debt Management Practices: Lessons from Country Experiences and Issues Going Forward, Annex IV for a description of the main debt management TA agencies.

37

The initial list of implementing partners is: the Commonwealth Secretariat, UNCTAD’s DMFAS Programme, Debt Relief International, CEMLA, MEFMI, Pole-Dette and WAIFEM.

38

This is one of the nine TTFs the Fund is seeking to establish in order to enhance capacity building in developing countries in the following areas: public finance management, revenue administration, management of natural resource wealth, compilation and dissemination of basic macroeconomic and financial statistics, monitoring of macroeconomic and financial vulnerabilities, financial sector stability, debt sustainability, anti-money laundering and combating financing of terrorism, and enabling macroeconomic environment in fragile states.

39

MTDS missions require two steps: an initial two-week mission consisting of two Bank and two Fund staff, and a one-week follow-up mission by one Bank and one Fund staff. In addition, some training and dissemination events, (e.g., 2–3 regional events plus one HQ-based event per year) will also take place in order to sensitize policymakers and disseminate best practice. As LICs’ awareness of debt sustainability and related issues improves over time, the frequency of these events is expected to decline. Country delivery of the planned DeMPA work program would involve one two-week mission with 3 Bank staff or experts.

40

Lessons learned on TA and capacity building activities in MICs, discussed extensively in Strengthening Debt Management Practices: Lessons from Country Experiences and Issues Going Forward, continue to hold.

41

Consequently, the pace and focus of delivery of Fund activities may be affected by the new policy on TA charging.

42

The Bank has recently begun providing capacity building in this specific area.

43

For the first time, the Fund will also be providing resource persons for this program in 2009.

44

These will be complemented by the initiation of a Forum for Asian debt managers, which will be supported by the Asian Development Fund and Bank.

45

Complementing the three research papers published since May 2007 on “A cross-country analysis of public debt management strategies”; “Choosing the currency structure for sovereign debt: a review of current approaches”; “Coordinating Public Debt Management with Fiscal and Monetary Policies: An Analytical Framework”.

46

The Fund has also recently published a number of debt related working papers, including “Strategic Considerations for First Time Sovereign Bond Issuers”, “A Risk-Based Debt Sustainability Framework: Incorporating Balance Sheets and Uncertainty”, “A Framework for Developing Secondary Markets for Government Securities”, “Measuring Sovereign Risk in Turkey: An Application of the Contingent Claims Approach”.

47

For example an assessment of the impact of the transfer of banking sector risk to the sovereign will be presented in the forthcoming GFSR.

Managing Public Debt-Formulating Strategies and Strengthening Institutional Capacity
Author: International Monetary Fund