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30103RIFFWAVEfmt ++data~~~~~~~~~~~~~~~~~~~~~~~~~~~|||~~~~~zvtvxz|~zvrnlrv||vtrpptz~|xvtv|~~zxvvvz|~xrlhntzzvrrpprrx~|j[QU_|bICCYn[ICY~zlnh]_r|]SUSSjz|x__l~v_]drnUb|nfd_]d]5=rrnj]jz~lMldrx[[_f|YQfWK_xh[zx[CIjzxxdSQz|_fI9WӹM;QnvK;OUx~xj]]YS~ɵlM?plM;CGpٵ[)Kh|% %;xtKQS]ɖbGr|lSnvz~nfS[nëx;Az=+AYݻ|=/1r_ ?|潄W5/Czãf)/pvbMQr|O=OtjdhjlG?G_ɊK3לdQCMppW;1SŷAMz/#?bx͖SAM[hvhYp~~zrvt[]ptWOUtxxd]v~vvxzd_xzh_nrSQltbdp~_lrQ_l][tf]W]~hWfp|fWhnhbU[hzlSCWbYbnxpdhjvjM9Ot]GQ[dpp~hhhdpx~xh]Yntnrp]dlvjQMb|vdjpzxzztljr||_[r~~jb_j|z|xpp~~v]Wh||zx|x|zzndhpxr]Yfntzjl|z||~vppnrzphrxz|~|xtrjjtv~~vz|z||xrrv~xrprtz|||vzxvx|xtx~~~~~~~zxxxx|zxz~~~rrz~|xz~~|vtx|zxz|~~~||zx|||~~zz|zz~~~~|~~||~~||zz|~||z~~~~zxzz|~~~~|~~~|~||~~~~~~~~~~~~~|||~~~~~~~~~~~~~||~~||~||~~~~|||~~~~||||~~~~~~||||~~~~~~~~~~~|~~~~|zz~~~~~~~||||~~||~~~~~|||~~~~~|||~|~|~~~~|z|~~~~~~~|||~~~~~~~~||~~~~~~~~7A d\qZL     ! $&/,  .#(  !$%)-/"#59   L* + 7 " #M`r$yuIӘqiR$Hξ^(Y٘׭"iR$XBvSKtF#b$2EJge)$ R>"$dE^F#uLeTs@]2$T+2*VL/1A0t^2$N{ʡlFӷ٩`2$VN?Z/c> >8Mc 0@8/̊ ʚ;2Nʚ;g4GdGd )0bppp@ <4!d!d 0b(8b<4dddd 0b(8b <4KdKd,by 0b bg4KdKd )0b$p pp=5___PPT9n 8X(4u`ePNG  IHDRF} PLTEfffff3GtRNS@f cmPPJCmp0712Om&IDATc`  @gNS( IENDB`z< $? %O =MI*Global Trends in Sovereign Debt Management* oIan Storkey, Storkey & Co Limited Public Sector Finance and Treasury Management Conference Tuesday, 27 May 2003ppo  Presentation Outline Sovereign Debt Management IMF/World Bank Guidelines Global Trends Developing Countries Central/State/Local Governments including case studies Key Observations Consulting experiences and some suggestionsdBN,B7, 2   ,&Sovereign Debt Management % Definition    Importance  *Often largest financial portfolio in the country Potential for use of inside information Possible conflicts of interest Need for transparency of operations Need for open process for formulating debt management policies and public disclosure Should be applied to Central, State and Local governments+P+ 'IMF/World Bank Guidelines$   Basis for the Guidelines Based on the knowledge, experience and wisdom of many sovereign debt managers from debt offices and international agencies Released in April 2001 after international consultation 7 regional workshops were held around the world to discuss the draft Guidelines Guidelines not commandments Plenty of scope for tailoring to each government s unique circumstances  can be used as a benchmark^PPPPePPe     Components  Guidelines cover six components: Debt Management Objectives and Coordination Transparency and Accountability Institutional Framework Debt Management Strategy Risk Management Framework Development and Maintenance of an Efficient Market for Government SecuritiesD!pwxZ wZ! *Accompanying Document Released in November 2002 Provides 18 Country Case Studies Lessons from the Country Case Studies Rapid evolution that is taking place in public debt management More sophistication in managing stock of debt Addressing the Guideline s six components&bb-Prudent Practices RRecognition of benefits of clear objectives for debt management Weighing risk against cost considerations Separation and coordination of debt and monetary management objectives Limit on debt expansion Developing a sound institutional structure and policies for managing operational risks Identify and manage risk of contingent liabilitiesSZSR  Key Outcomes  Clearer objectives for public debt management Development of risk models (eg BaR, CaR, VaR) Greater clarity in the roles and responsibilities of the debt managers and their agents Open and accountable process for the formulation and reporting of public debt management policies Development of benchmarks and measures of performance Development and maintenance of an efficient market for domestic government securities8P\W""jMW  7&Institutional Structures Separate DMO Austria (OEBFA) Germany Hungary (AKK) Ireland (NTMA) Portugal (IGCP) Sweden (SNDO) UK (DMO) Australian State Borrowing Authorities2 ZZ                    (  }MoF DMO Australia (AOFM) Belgium Canada France (AFT) Netherlands (DSTA) New Zealand (NZDMO) Poland USA Denmark (Central Bank)@Z_ZZvj     +  ! ( Global Trends  6%Evolution Phases r6Debt Issuance & Recording 8'Debt Issuance & Recording dFocus is on issuing debt given significant fiscal imbalance and accounting for debt Four key characteristics: Focus on developing domestic debt markets Fragmentation and problems in coordinating debt management with monetary policy Problems in analysing and controlling the impact of debt servicing on the budget Problems controlling contingent liabilities*nZZnn 9(Debt Issuance & Recording JApplicable to most developing countries Difficult to reform due to: Lack of necessary control and accountability to establish a separate debt management office High degree of interdependence between debt management and macroeconomic policies Inability to attract staff with the right skills under existing civil service structures&DDD N0Case Study: Indonesia  Large refinancing risk to rollover debt issued to recapitalise the banks Debt/Cash management is fragmented Domestic debt market not developed Legal and institutional reform is required Australian Government through AusAID funding a capacity building program for PMON Z D2   - s3Liability/Cash Management <+Liability/Cash Management 7Focus is on integration of liabilities and cashflows within a risk management framework Three key characteristics: Reducing or eliminating foreign currency debt Integration of debt management and aggregate government cashflows Risk management around budget debt service cost with techniques such as BaR and CaR*sZZs2s L/Liability/Cash Management  Case Study: Australia ~AOFM established in 1999 with responsibility for all aspects of debt management  ..to manage the Commonwealth s net debt portfolio at least cost over the medium term, subject to the government s policies and risk preferences. Debt portfolio/cash management focus Foreign currency liability position is being eliminatedF@Z@l < 1 Case Study: United Kingdom pUK DMO took over responsibility for debt management from Bank of England in 1998  ..to minimise over the long term the cost of meeting the government s financing needs, taking into account risk, whilst ensuring the policy is consistent with the objectives of monetary policy. Starting to move to an ALM approachD9wBT$F  &    O1Case Study: United Kingdom Recent additional responsibilities: supporting additional issues of the National Savings and Investments Guaranteed Equity Bond by reducing the Government's exposure to the equity market an expansion of the Deposit Facility to allow local authorities to deposit surplus funds with the DMO DMO is now operationally responsible for handling loans to local authorities and for managing funds for some government departments*$$,t4Asset-Liability Management ;*Asset-Liability Management #Focus is on debt issuance and managing debt within a risk management framework Four key characteristics: Full integration of assets and liabilities Full identification of contingent obligations Risk management based on market values with techniques such as VaR Benchmark portfolios and RAPM&ii:i "Case Study: New Zealand NZDMO established in 1988 and now is a part of the Asset-Liability Branch of Treasury  ..to maximise the long-term economic return on the Government s financial assets and debt in the context of the Government s fiscal strategy, particularly its aversion to risk.. Integrated ALM approach Use of VaR and Stop-Loss Limits Transfer pricing RAPM Zero net foreign currency debttzZW&M ~]      (    4#Case Study: New Zealand Auckland Regional Council typifies new treasury management regime under Local Government Act  Minimise the ARC s costs and risks in the management of its borrowings and maximise its return on investments. Liability Management Policy: Debt ratios, limits, borrowing & security Interest rate risk Liquidity management Counterparty credit risk^ZkZqkkFk  9   u5Full Treasury Management =,Full Treasury Management Focus is on providing full treasury services to government and government agencies Four key characteristics: Client servicing Asset-liability management framework Risk management based on market values with techniques such as VaR Benchmark portfolios and RAPM&mm:m u/Case Study: Ireland HNTMA established in 1990 as an independent agency  ..to fund maturing debt and the annual borrowing requirement of the government in such a way as to protect both short term and long term liquidity, contain the level and volatility of annual fiscal debt service costs, contain the government s exposure to risk and outperform a benchmark.. NTMA has now become the international benchmark for all debt management officesZZ2'o. Q KP2Case Study: Ireland Recent additional responsibilities: National Pensions Reserve Fund State Claims Agency: The mandate is to manage claims against the State to ensure that the State's liability and associated legal and other expenses are contained at the lowest achievable level. Central Treasury Service: To be offered to Local Authorities, Health Boards, Vocational Education Committees and other public bodies. Fund Investment Services: To be available to Ministers who have funds under their management or control. j$ZZ$2oR3"Australian State Governments 0QTC:  ..to minimise financial risk in the public sector, while sourcing the lowest cost of funds for our customers. TCorp:  ..to manage major debt portfolios for the NSW Treasury (the Crown debt portfolio) and 12 agencies & to achieve below benchmark cost of funds while observing agreed risk limits. 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P g FX Reserves" ( 2     TDƐ ԔԔ8c8c?"qP0 i External Debt"( 2  H  0޽h ? &L333333x&-LYMMM  um(  x  c $\     x  c $hА     6ݐԔ0 @N gLocal Government Act 2002 2 H  0޽h ? &L333333x&-LYMMM # x (  x  c $      F  `F    `F  6 : 0F hDebt Issuance & Recording 2   6P0& @ 2  gLiability/Cash Management 2   6@ P  hAsset-Liability Management 2   6P`  jFull Treasury Management 2 ^B  6D|`  @B   Z?D|?"@ `@   0Pf`@ eLevel of Sophistication 2    0\fp` ^Evolution Phases 2 H  0޽h ? &L333333x&-LYMMM @ $(  r  S D#     r  S $   H  0޽h ? &L333333x&-LYMMM   0(  x  c $f    f x  c $f  f H  0޽h ? &L333333x&-LYMMM  0$(  r  S L:     r  S ; `  H  0޽h ? &L333333x&-LYMMM  P0(  x  c $T`     x  c $a 0  H  0޽h ? &L333333x&-LYMMM  6.p(  x  c $s       0  T Consulting Experience Observations and Suggestions for Australia & NZ Debt Offices UST H  0޽h ? &L333333x&-LYMMM  $(  r  S ;     r  S ^   H  0޽h ? &L333333x&-LYMMM   $(  r  S      r  S ̡   H  0޽h ? &L333333x&-LYMMML 0  P(  X  C Tpp   h  S  hTp @P  h 6It is a honour to have this opportunity to begin the 2nd Public Sector Finance and Treasury Management Conference which follows on from the success of the conference held in April last year. Over the past 3 years, I have been encouraging the FTA to consider conferences to cover this important area of government financial management as sovereign debt management is not that well understood particularly throughout the Asia-Pacific region. There is certainly not the same level of knowledge and understanding as in Europe and North America where sovereign debt managers have been regularly meeting over the past 15 years. In fact, the Government Borrowers Forum met in Stockholm just last week. My objective is to enlighten you to global trends and some recent and rather innovative developments in public debt management.*76 AH  0޽hl= ? ̙33"  0 r(  X  C Tpp     S Tp @P   t I will provide an introduction to sovereign debt management, calling on the IMF/World Bank Guidelines for Public Debt Management released in April 2001. I will then cover global trends and developments calling on some country case studies to illustrate some of the more recent and innovative developments. I would like to wrap up with some key observations from my research and consulting assignments and leave you with some ideas and maybe challenges for you to consider both from a public and private sector perspective.  2L   H  0޽hl= ? ̙33 0 ph (   X   C Tpp   h   S  Tp @P   International financial markets assign the status of sovereign debt to the public debt issued by governments. This status reflects the highest quality debt issuers in the market, and most with the strongest credit rating. As a result of this status, sovereign borrowers are expected to have a risk management culture that reflects the special set of responsibilities associated with representing the government in international financial markets. These responsibilities are considerable, particularly if the government s reputation in the financial marketplace is to be maintained at the highest level.[[Z H   0޽hl= ? ̙33< 0 $(  $X $ C Tpp    $ S 5Tp @P   $I have extracted a definition for sovereign or public debt management from the IMF/World Bank Guidelines which I will cover shortly. Clearly cost and risk are key components. However, other goals often include developing and maintaining an efficient domestic market for government securities.%%2O   H $ 0޽hl= ? ̙33   0   (& (  (X ( C Tpp    ( S `FTp @P   (A government s debt portfolio is usually the largest financial portfolio in the country (or state/region). It often contains complex and risky financial structures, and can generate substantial balance sheet risk for the government. Large and poorly structured debt portfolios also make governments more vulnerable to economic and financial shocks and have often been a major factor in economic crises. Therefore, sound risk management and sound public debt structures are required by governments to reduce the exposure to market, funding, liquidity, credit, settlements and operational risk. Any government should be risk adverse in its financial management therefore protecting against adverse events that may impact negatively on the government s finances. You will see that I have included not only central and state government, but also local government. This is an area of public finance that has fallen behind central/state governments in most countries, the notable exception would be New Zealand. H ( 0޽hl= ? ̙33q  0 1)0,(  ,X , C Tpp   ) , S rTp @P   YIt is important to note that the Guidelines are not IMF or World Bank directives. They were designed through an extensive consultative process involving many countries including Australia and New Zealand. I have used the Guidelines as a benchmark for advising developing countries in building capacity and reforming their public debt management.ZZ24  ! H , 0޽hl= ? ̙33 0 00(  0X 0 C Tpp    0 S _Tp @P   2A key catalyst to recent trends and new developments has been the publication by the IMF and World Bank of Guidelines for Public Debt Management, which have been designed to assist policymakers in considering reforms to strengthen the quality of their public debt management and reduce their country s vulnerability to international financial shocks. The Guidelines cover both domestic and external public debt and encompass a broad range of financial claims on the government. They seek to identify areas in which there is broad agreement on what generally constitutes sound practices in public debt management.ee2U    H 0 0޽hl= ? ̙33  0 P4a(  4X 4 C Tpp    4 S Tp @P   cThe Guidelines cover six components and set out what are sound practices to address each component. Clearly, each country has its own specific characteristics and, therefore, the Guidelines have been designed to allow flexibility in their application to any particular country. H 4 0޽hl= ? ̙33j 0 *"p8(  8X 8 C Tpp   " 8 S Tp @P   RFollowing the release of the Guidelines in 2001, the Executive Boards of the IMF and the World Bank requested the two institutions to prepare an accompanying document containing sample case studies to illustrate how a range of countries from around the world and at different stages of economic and financial development are developing their debt management capacity in a manner consistent with the Guidelines. The accompanying document was released in November last year. Many of the case studies illustrate the rapid evolution and increasing sophistication in public debt management globally.SS2M   H 8 0޽hl= ? ̙33 0 <T(  <X < C Tpp    < S Tp @P   VThe Guidelines and Accompany document set out six key areas that constitute prudent practices. These cover clear objectives particularly around debt and monetary management, risk v cost considerations, and sound institutional structures. They also cover prudent debt levels or debt sustainability, which is still a major issue in most developing countries but less so now in the developed countries as fiscal surpluses or balance has been achieved. Finally, they cover the risk of contingent liabilities. These can pose a major threat as the World Bank has assessed that the level of contingent liabilities in many countries may exceed the recorded level of public debt. Those countries that have adopted prudent practices in these six areas have achieved some key outcomes.   H < 0޽hl= ? ̙33  0   @ (  @X @ C Tpp     @ S ӍTp @P    Many countries have clear and orthodox objectives for monetary policy, normally based on annual inflation targets. On the other hand, government objectives for debt management have not always been well specified, particularly in terms of cost and risk. The development of clear objectives and risk models has been a key outcome. Greater transparency and accountability has been another. Many debt offices now produce a detailed annual report setting out their debt management framework and policies along with the debt office objectives and their performance in meeting those objectives. This can have an adverse reaction if the results show significant losses whether realised or unrealised (as was the case last year with the Commonwealth s foreign currency liabilities). It is probably fair to say that similar losses have been incurred in the past. It is just that they were never reported and  buried within large budget revaluations. The development of benchmarks and measures for assessing the performance of the debt managers has been the most significant development over the past 10 years.MMN       H @ 0޽hl= ? ̙33v& 0 6.D(  DX D C Tpp   . D S  Tp @P   In an attempt to increase the efficiency of debt management, a number of governments have delegated the operational dimensions of debt management to separate debt management offices (DMOs). Other countries have questioned whether it was advisable to operationally isolate public debt management from public policy. These countries have opted to establish a debt management office within the Ministry of Finance or Treasury portfolio with equally clear objectives and accountability as for the separate DMOs. The notable exception is Denmark where the debt office is located in the Central Bank. The responsibility was moved from the Ministry of Finance in 1991 as it was suggested that attracting and maintaining staff with the relevant skills would be easier if the debt office was placed in the Central Bank. The Danes have concluded that this move has helped centralise the retention of knowledge of most aspects of financial markets within a single authority and enabled stronger coordination between the management of foreign exchange reserves and central-government foreign debt. Most debt management offices have been established in the late 1980s and throughout the 1990s. The exceptions are the SNDO established in 1789 and the DSTA established in 1841.  ;  d   K     H D 0޽hl= ? ̙33O 0 H(  HX H C Tpp    H S *Tp @P   SI will now turn to global trends and key developments in sovereign debt management.TTS H H 0޽hl= ? ̙33o% 0 /'L(  LX L C Tpp   ' L S 4Tp @P   WTo demonstrate the evolution of sovereign debt management, I have found through my experiences that I can use four categories to characterise the different levels of development and sophistication. I will go through each category to identify the key characteristics, debt management policies and practices, and to provide country case studies.XX2    H L 0޽hl= ? ̙33N ' 0   PP(  PX P C Tpp    P S hxTp @P   RThe major characteristic of this category is the focus on debt issuance to fund maturing debt and often significant fiscal deficits. Therefore, most debt managers focus on identifying borrowing opportunities both in external and domestic debt markets. For many developing countries, the domestic debt market is not well developed and the government is forced to access international markets, primarily from multilateral or bilateral sources. A secondary but important function is to record, service and account for debt transactions, which is essentially a  debt ledger operation. There is often a  silo approach to managing debt with different agencies of government responsible for domestic debt, external debt, FX reserves, domestic investments, cash management, and capital flows. There is also significant problems with identifying and managing contingent liabilities. Indonesia is a good example here which I will cover shortly. H P 0޽hl= ? ̙33h ( 0 (  pT (  TX T C Tpp     T S $Tp @P   P Most developing countries fit into this category, although it should be noted that Australia and New Zealand were in this category up until the reforms in the mid-1980s. Why is it difficult to reform public debt management practices? To a large extent it will be dependent on the macroeconomic and fiscal environment. Australia and New Zealand did not start to focus on debt management reform until the fiscal deficit reduced and the debt managers were then able to give more attention to debt structures and management of risks in the debt portfolio. Developing countries are starting to consider reforms but have fundamental problems such as institutional rigidities and disincentives for change, low levels of remuneration leading to difficulties recruiting and retaining staff with the right skills, and strong political involvement in day-to-day debt management operations. Doesn t this sound familiar! It reminds me of the early 1980s in New Zealand and I suspect Australia. For the small number of countries in default, there has been an initiative out of the IMF to introduce a Sovereign Debt Restructuring Mechanism, but this is not gaining much support from the financial community.2+  y H T 0޽hl= ? ̙33 0 0   \b (  \X \ C Tpp     \ S ̪Tp @P   d I have chosen Indonesia as the case study in this category. The Government of Indonesia issued around US$50 billion of bonds to the banks for recapitalisation following the Asian econom