Memo by tyndale


									                 Highlights of the 7th IMF Public Debt Managers Forum

                                              IMF Headquarters
                                               Washington D.C.

                                              November 5-6 2007

The 7th IMF Public Debt Managers’ Forum, which was organized by the Monetary and
Capital Markets Department of the IMF was well attended by debt management
representatives from both emerging and developed economies, private sector market
participants, and representatives from the World Bank. The Fund’s Deputy Managing
Director, Mr. Murilo Portugal, opened and closed the event. Private sector representatives
participated only in the first-day sessions.

                                                       Day 1

Session 1: Global Economic and Financial Market Developments
This session focused on global economic and financial developments. The central scenario
presented by the Fund that global growth would only be marginally affected in 2008, with
emerging markets (EMs) escaping relatively unscathed as a result of the subprime crises, was
largely shared by other participants. But all participants agreed that there were significant
downside risks to this scenario.

Session 2: Impact of Market Turbulence on Emerging Market Debt
All country representatives agreed that the impact had so far been small with only limited
impact on credit spreads being evidenced. A consensus was that this problem is different
from other “crises” in that it is not an EM-led problem but rather emanates from the
advanced economies. While spreads have widened and volatility has increased, this has not
been dramatic and in most cases spreads are still low by historical standards.1

Equally, the consensus was that financial systems in EMs would be relatively untouched by
recent turmoil, given the lack of exposure of EM financial institutions to subprime assets,
although the possible withdrawal of foreign investors was mentioned as a concern. Despite
this, most participants stated that improved macroeconomic performance, including better
fiscal numbers and higher reserve levels, have contributed to the ability of EMs to retain the
confidence of foreign investors in their domestic bond markets.

Despite the generally upbeat assessment, EMs did experience some volatility in the markets
that temporarily increased their domestic bond yields. There was a discussion on how debt
    One representative did, however, state that recent turbulence has had some impact on the re-pricing of risk.

managers should react in a situation like this. Some EMs are currently sitting on healthy cash
cushions and took advantage of this to cancel preannounced auctions as they felt the yields in
the market were unacceptable. The ability to postpone funding was cited as an advantage and
a way of not adding “fuel to the fire.” Some of the participants agreed with this approach
while others felt that this was a short-term approach and that markets are not happy when
transparency and predictability are disrupted. This view was shared by the private sector
participants. Using a cash cushion to fund a cancelled auction, may not necessarily prevent
adding “fuel to the fire” as this injects liquidity into the market that needs to be mopped up
by the central bank.

Session 3: Debt Issuance Strategies and Liability Management Operations
The discussion centered around the recent trend towards decreasing external debt issuance in
most EMs, both as a result of the increased use of domestic sources of borrowing and the
reduction in borrowing levels in general. Most of the participants saw this trend continuing
but there were some warnings about possible imbalances from increasing mismatches
between domestic currency liabilities and foreign currency assets due to the increase in
reserve levels in many EMs and the creation of new sovereign wealth funds (SWFs). Some
private sector participants warned that the main area of concern may now concern the level
of private sector rather than public sector debt being issued in many emerging markets.

Session 4: Composition of the Debt Portfolio
This session focused on EMs desire in recent years to increase the share of domestic debt in
their portfolios. This move towards increased use of domestic debtmarkets was broadly
welcomed although some EMs expressed the need to maintain a presence in international
markets to broaden their investor base and to ensure a track record if domestic financing
were to dry up in less benign markets. Financial market discussants posed the question
whether the move to domestic debt may have gone too far.

The impact of foreign investors on domestic markets and the risks associated with capital
flight in turbulent market conditions was also discussed. Most of the participants felt that
foreign investors were essential to the development of liquid domestic markets and, while
risks of flighty capital existed, surprisingly in some cases foreign investors had proved to be
more resilient than domestic. There was a feeling that some of the risks associated with
foreign capital were overplayed. There was a discussion on the need to develop instruments
to improve liquidity, such as repo and stock lending facilities as well as settlement and
trading platforms to encourage foreign investment. The consensus view was of a need to
make it easy for foreign investors to invest.

                                            Day 2

Session 5: Use of Derivatives by Debt Managers

This session examined the use of derivatives by advanced economies and some (although
still relatively few) emerging markets. Most EMs have either used derivatives extremely
sparingly or not at all. Using derivatives to hedge domestic currency interest rate risk is also
problematic in many EMs due to the possibility of disrupting pricing in small relatively
illiquid domestic markets or of sending inappropriate signals.

Many of the less sophisticated debt management offices professed themselves to be wary of
using derivatives for reasons of not fully understanding these instruments and, perhaps more
importantly, the political risks associated with potential losses or perceived losses.2
Participants highlighted that transparency of operations and communication of the impact
and reasons for entering into derivatives contracts were an essential part of any strategy to
use derivatives as a hedging tool.

Session 6: Asset and Liability Management (ALM) Considerations
There was a prolonged discussion on the merits of managing debt portfolios using an ALM
approach. There has been considerable discussion on this issue over the last 10 years but very
few countries have progressed very far in implementing ALM. The main problem, as many
of the discussants stated, was a problem of definition. While financial liabilities are relatively
straight forward to quantify, the question remains as to what assets should be included in an
ALM portfolio.

Central Bank reserves were commonly cited as the main constituent of the asset side, but
problems with different institutional arrangements for management of debt (typically
Ministry of Finance or another fiscal agency) and reserves (Central Bank) complicate the
incentives to follow an ALM approach. In addition, the mismatch between reserve assets,
which tend to be relatively liquid, and liabilities, which are more long term, tends to make it
difficult to create hedging strategies using the two portfolios. Pursuing an ALM strategy may
also be easier where the same agent is responsible for debt and reserve management.

A discussion as to whether government revenues should be included in a more holistic
approach to ALM to try to immunize the government entire balance sheet led to agreement
that problems of information capture and the valuation of future revenue streams will likely
prevent this from happening in the vast majority of EMs and developed countries in the
medium and perhaps even long term. MCM is currently attempting to develop an ALM

  This has long been a concern of debt managers in both advanced and emerging markets and in particular in
countries that have cash accounting policies. Large cash calls due to mark-to-market margin calls or abrupt
changes in interest rates can impact heavily on the annual budget sometimes leading to difficult questions from
parliament as to the reasons. Debt managers have often been reluctant to put their ministers in a position where
these questions need to be answered.

Session 7: Debt Management and Subnational and Public Enterprise Debt
This session raised a number of interesting issues relating to issuance of subnational debt and
public enterprise debt. It was agreed that, while many governments have strict rules
governing the authority and extent of subnational borrowing, the need to identify and report
on the extent of subnational borrowing should be better emphasized.

Many subnational debt issuers do not have explicit guarantees, but many are assumed to be
implicitly guaranteed. Several issues were raised in the discussion on explicit guarantees
including identification and reporting and associated fiscal risks; rules for guarantee
issuance; fees; use of risk funds; and the need to ensure transparency and political approval.
Implicit guarantees for subnational government and public entities are more difficult to
address. No bail-out rules can be a problem if they are not enforceable and participants, in
particular the Argentine representative, emphasized that in light of previous experience,
inclusion of no bail-out clauses in the legal framework may not be a sufficient safeguard.

Debt issuance by central government for on-lending to subnational entities was also
discussed as an alternative to guarantees issuance. It was agreed that on-lending should be
governed under the same rules as guarantees. Indeed there are benefits associated with on-
lending as risks are more transparent and covered in the fiscal accounts of government.

The issue of PPPs was also raised, including the need to focus on efficiencies provided by the
private sector in projects using public sector comparators as a measure rather than on the
financing costs, which are unlikely to be any cheaper than through traditional public
investment mechanisms. One other comment was that the increase in the volume of PPP-
related financing vehicles was contradictory in an environment where debt managers are
seeking to make public debt issuance as simple and transparent as possible.

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