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 1 One representative did, however, state that recent turbulence has had some impact on the re-pricing of risk. 2 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 3 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 framework. 2 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. 4 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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