Helsinki, Finland September 10-12, 2012 10.09.2012 | ASF Debt Management Offices Annual Meeting of...

Helsinki, Finland

September 10-12, 2012 10.09.2012 | ASF

Debt Management Offices

Annual Meeting of the INTOSAI

Working Group on Public Debt

1. Background information

ASF | 2


Public debt allows cost of current government expenditure projects to be postponed in time.

ASF | 3


1. Public investment expenditures

2. Increases in expenditure

3. Countercyclical public expenditures

These public projects are of different nature:

ASF | 4


Negative consequences of a poorly managed public debt

Discourage private investment

Be a source of financial volatility

Financial crisis, inflationary expansions and chronic low growth

Affect taxpayers of other countries

Restrict future access to financial markets

ASF | 5


Level of indebtedness remains on a sustainable path.

Risk management strategy to avoid excessive debt levels.

Managers of public debt and public officers must supervise:

ASF | 6

2. Effective Debt Management

ASF | 7


1. Executive Debt Management

2. Operational Debt Management

Effective Debt Management Office Functions are:

ASF | 8


The establishment of the normative framework overseeing any kind of debt acquired by the government.

Executive Debt Management

Main purpose:

ASF | 9


A group of high-ranking officials called the Executive Board on Debt Management (EBDM).


Responsible for the executive functions:

ASF | 10


i) Policy function

ii) Regulatory function

iii) Resourcing function


Executive debt management functions include:

ASF | 11


Involves the formulation of national debt policies and strategies in agreement with a country’s overall macroeconomic policy.


i) Policy function

ASF | 12


The establishment and review of the administrative and legal framework, rules and procedures of the debt management units.


ii) Regulatory function

ASF | 13


Ensure the existence of qualified personnel.

Supply maintenance and technical support for the debt management system.


iii) Resourcing function

ASF | 14


To perform the operational functions within the guidelines provided by the EBDM.

Operational Debt Management

Main purpose:

ASF | 15


The DMO perform the basic operational debt managements functions:

iv) Recording, analyzing and operating

Responsible for the operational functions:


ASF | 16


The DMO’s senior staff ensures that the guidelines issued by the EBDM are applied and followed.

v) Controlling, coordinating and monitoring functions

Responsible for the operational functions:


ASF | 17


Recording: Collect and provide detailed information on debt on a loan-by-loan basis.

iv) Recording, analyzing and operating functions


ASF | 18


Analyzing: Macroeconomic analysis to explore available options through given economic and market outlook.



ASF | 19


Operating: All activities related to borrowing, such as negotiating, utilization of loan proceeds and debt service.



ASF | 20


Supply substantive feedback to the EBDM for the implementation, evaluation and revision of the debt strategy.

v) Controlling, coordinating and monitoring functions


ASF | 21

3. Location and organizational structure of DMO

ASF | 22


The DMO’s physical location in the national organizational set-up is linked to the role that the office has been given.

Location of the DMO

ASF | 23


i) Office at the Central Bank

ii) Office at the Ministry of Finance

iii) Autonomous Debt Office

Most frequent models of location of the DMOs are:

Location of the DMO

ASF | 24


Operational debt management functions have been located inside the Central Bank given the interface between monetary policy and debt management.

Location of the DMOi) Office at the Central Bank

ASF | 25


Nevertheless, literature suggests a conflict of interests when the Central Bank has a dual mandate for conducting monetary and debt policy.


ASF | 26


The Central Bank may be reluctant to increase interest rates to control inflationary pressures since it would have an adverse effect on its domestic liability portfolio.

Conflict of interests


ASF | 27


It may be tempted to manipulate financial markets to reduce interest rates at which the government debt is issued or to inflate away the value of nominal debt.



ASF | 28


It may be tempted to inject liquidity in the market prior to debt refinancing.



ASF | 29


Since the main function of the Central Bank is to implement the monetary policy, debt management policy could be seen as an instrument to reinforce the price stability objective.

Reasons to separate the DMO from the Central Bank:


ASF | 30


Debt management decisions could be seen as influenced by inside information on interest rate decisions.

Reasons to separate the DMO from the Central Bank:


ASF | 31


This location has a clear system of delegation of authority from the Minister to the Head of the unit in charge of the debt.

Location of the DMO ii) Office at the Ministry of Finance

ASF | 32


Gives an explicit emphasis to public policy objectives in public debt management, including the development of the domestic debt market.

Advantages:


ASF | 33


Facing political pressure to use debt management as a vehicle for opportunistic reductions in debt servicing costs and in the budget deficit in the short term.

Risk:


ASF | 34


Political risk could be substantially reduced if the EBDM sets a clear strategy and goals for the government’s debt management.

Risk control:


ASF | 35


Autonomous Debt Management Offices (ADMO) are located outside the Ministry of Finance or the Central Bank.

Location of the DMO iii) Autonomous Debt Office

ASF | 36


To create better accountability and greater transparency.

Reasons to establish an ADMO:


ASF | 37


To achieve greater sophistication of debt management, given the growing emphasis on the risk control.



ASF | 38


To overcome problems of recruiting and retaining staff with special expertise.



ASF | 39


Political risk decreases.

Advantages:


ASF | 40


The ADMO will focus only on debt management.

Advantages:


ASF | 41


The ADMO will force the rationalization of public debt management and will set up a clear governance and report structures.

Advantages:


ASF | 42


ADMOs are more efficient because they follow market oriented principles and create an appropriate environment for quick decision-making.

Advantages:


ASF | 43


The agency risk. The risk of low coordination increases when the ADMO is further from the Ministry of Finance.

Risks:


ASF | 44


In countries with feeble organizational structures within the government, the ADMO may face problems with data collection.

Risks:


ASF | 45


The ADMO could be too partial in its debt management, forgetting it is part of the government and thus ignoring some aspects of the fiscal risk.

Risks:


ASF | 46


Setting up at the ADMO a board of directors with an experienced and reliable chairman.

Risk control:


ASF | 47


Create an independent risk control department and an internal auditing department within the ADMO, which are reporting directly to the board.

Risk control:


ASF | 48


Issues concerning DMO organization are whether if it is a centralized or a decentralized system and its organizational chart.

DMO’s organizational structure

ASF | 49


When the functions are performed either by the Ministry of Finance, or by an autonomous body.

Centralized system

DMO’s organizational structurei) Centralized and decentralized

ASF | 50


When a central DMO gathers information from all decentralized participants of the system.

Decentralized system


ASF | 51


In a decentralized system, a wide range of control/ coordination problems will need to be resolved concerning to the collection and recording of data.

Decentralized system


ASF | 52


The debt office can be organized by geographical units, loan sources, or specific tasks.

DMO’s organizational structureii) Organizational charts

ASF | 53


Officers are responsible for all creditors within an assigned country or region, while other staff members are responsible for multilateral organizations.

Geographical units


ASF | 54


One problem with this organizational chart is that the strategy and actions to reduce risks or costs for one sub-portfolio conflict with those of another.

Geographical units


ASF | 55


The reasoning behind this structure is that different types of financing have different characteristics, especially in the way they are negotiated and monitored.

Loan sources


ASF | 56


The organizational chart for this kind of model is divided into various offices specialized in the different types of loans.

Loan sources


ASF | 57


The lack of a correct coordination among the different units may conflict the actions to comply with an overall debt portfolio benchmark.

Loan sources


ASF | 58


The task oriented set up might be necessary when debt information is located in different institutions and ministries.

Specific tasks


ASF | 59


According to this organizational chart, one section of the DMO is focused on disbursements and the others on repayments, loan contracts and reporting.

Specific tasks


ASF | 60


The risks involved in this structure are: dispersion of responsibilities that can lead to bottlenecks and excessive specialization of the employees.

Specific tasks


ASF | 61


All the operative processes should be integrated in a vertical manner that clearly define roles, responsibilities, and reporting channels.

DMO’s organizational structureiii) Organization Structure of the DMO

ASF | 62


The organization of a DMO

EBDM

Front-Office Middle-Office Back-Office

DMO




ASF | 63


Is responsible for funding transactions and relations with investors, underwriters and banks.


The Front-Office

ASF | 64


Implements the debt strategy, helps designing funding plans and manages the portfolio within benchmark parameters.


The Front-Office

ASF | 65


The middle office performs two functions: analytical and risk analysis.


The Middle-Office

ASF | 66


Perform projections of the Debt-servicing cash-flow on existing loans and new financing.


The Middle Office/ Analytical function

ASF | 67


Evaluate the budgetary burden of public indebtedness.



ASF | 68


Analyze the total stock of domestic and external public debt.



ASF | 69


Evaluate the debt composition on currencies and interest rates.



ASF | 70


Assess the portfolio behavior against a given prudential trade-off benchmark.


The Middle Office/ Risk analysis function

ASF | 71


Determine the proper mix between external-domestic debt, the maturity profile, the desired currency and the interest rate composition.



ASF | 72


Foresee the ways and means to minimize the risk that contingent liabilities represent for fiscal stability.



ASF | 73


Back office’s objective is to create and maintain a high-quality up-to-date database of the debt portfolio.


The Back-Office

ASF | 74


The Back-Office functions operates through two functions: recording and operating.


The Back-Office

ASF | 75


Includes activities of collecting, storing, processing, validating, and disseminating debt data.


The Back-Office/Recording function

ASF | 76


Is the basic dynamics of debt: to trigger the disbursements in due time or to pay without falling into arrears, among others.


The Back-Office/Operating function

ASF | 77

4. Main issues and problems related to DMOs

ASF | 78


The interests of the principal (Ministry of Finance) and the agent (DMO) diverge, and it is either too expensive or too difficult to effectively monitor the behavior of the agent.

The principal- agent problem and the governance on DMO

The principal-agent problem

ASF | 79


The principal-agent problem could be solved with:

Benchmarks Incentives Monitoring and control Audits


ASF | 80


They have two key roles: 1. Provide guidance for the

management of costs and risk.

2. Define a framework for assessing portfolio performance in relation to cost, return, and risk.


Benchmarks

ASF | 81


The principal establish an incentive-compatible contract so that the agent will make the necessary efforts and perform well.


Incentives

ASF | 82


The principal set up an independent risk control department and internal auditing department reporting directly to the EBDM within the DMO.


Monitoring and control

ASF | 83


The role of the Supreme Audit Institutions is to go from routine practices to best practices, but this process cannot be isolated from the macroeconomic framework of each country.


The Role of Audits

ASF | 84


i) Regularity Audits

ii) Management Audits

iii) Human resources audits

iv) Information systems audits

v) Performance audits


Audits performed by Superior Audit Institutions are:

ASF | 85

5. Best practices in the DMO

ASF | 86


The practices contributing to a sensible sovereign debt management include:

ASF | 87


Establishing debt management clear objectives.

ASF | 88


Balancing costs versus faced risks.

ASF | 89


Separating goals and responsibilities of fiscal and monetary policies managers.

ASF | 90


Establishing limits to debt expansion.

ASF | 91


Creating an institutional structure in order to reduce operative risk.

ASF | 92


The case of United Kingdom

The Case of Portugal

The case of New Zealand

The case of Canada

The case of Norway

The case of Mexico

Debt management paradigmatic models:

ASF | 93

6. Conclusions

ASF | 94

6. Conclusions

Debt management could be done in very different ways and still offer good results in terms of meeting the needs of the government at the lowest cost and risk levels.

ASF | 95

6. Conclusions

Each country should aim to adopt the models of advanced economies as far as their market characteristics allow it.

ASF | 96

ASF | 97

Helsinki, Finland September 10-12, 2012 10.09.2012 | ASF Debt Management Offices Annual Meeting of...

Documents

Transcript of Helsinki, Finland September 10-12, 2012 10.09.2012 | ASF Debt Management Offices Annual Meeting of...