linking fiscal and debt management policies – the...
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Linking Fiscal and Debt Management Policies – The Role of Debt Sustainability Analysis
Seán Nolan International Monetary Fund
December 3, 2014
Deb Sustainability Analyses
The Tool Box
Handling Debt Portfolio Risks Handling Macro-Fiscal Shocks
Handling Contingent Liabilities Role in Fund –Supported programs
I. Debt Sustainability Analysis The Tool Box
DSAs: Origins and Lessons
LIC DSF was introduced in 2005: most recent review in 2012,
joint Bank-Fund product MAC DSA was introduced in 2002, major refinements in 2011
MAC DSA 2011 review identified several areas for
improvement, including: Realism of baseline assumptions Risks associated with the debt profile Analysis of macro-fiscal risks (including contingent
liabilities)
Previously, for MACs the focus was mainly on debt trajectories
What’s missing • Debt profile risks • Contingent liability risks • ……
Revised DSA for MACs
Public debt vulnerabilities are associated not only with the
level of debt, but with its profile Debt portfolio characteristics—maturity, currency
composition, and the creditor base—have received much attention in the analysis of public debt distress
The Fund’s MAC DSA brings these (and other) elements together in its new risk-based approach to public debt sustainability
The DSA assesses risks from the debt profile by comparing a set of indicators to early warning benchmarks
Public DSAs and Debt Profile
Revised DSA for MACs MAC DSA: Debt Profile Benchmarks
example Upper early warningLower early warning(Indicators vis-à-vis risk assessment benchmarks, in 2013)
Debt Profile Vulnerabilities
20
6013%
1 2
200
600273 bp
1 2
5
15
51%
1 2
0.5
1
-1.3%
1 2
Bond spread External Financing Requirement
Annual Change in Short-Term Public
Debt
Public Debt in Foreign Currency
(in basis points) 4/ (in percent of GDP) 5/ (in percent of total) (in percent of total)
15
45 29%
1 2
Public Debt Held by Non-Residents
(in percent of total)
Revised DSA for MACs MAC DSA: Key Outputs
Example Public DSA Risk Assessment
Real Interest Rate Shock
External Financing
Requirements
Real GDP Growth Shock
Heat Map
Evolution of Predictive Densities of Gross Nominal Public Debt(in percent of GDP)
Debt profile 3/
Gross financing needs 2/
Debt level 1/ Real GDP Growth Shock
Primary Balance Shock
Change in the Share of Short-
Term Debt
Foreign Currency
Debt
Public Debt Held by Non-
Residents
Primary Balance Shock
Real Interest Rate Shock
Exchange Rate Shock
Contingent Liability Shock
Exchange Rate Shock
Contingent Liability shock
Market Perception
0
20
40
60
80
100
120
140
160
2012 2013 2014 2015 2016 2017 2018 2019
10th-25th 25th-75th 75th-90thPercentiles:Baseline
Symmetric Distribution
0
20
40
60
80
100
120
140
160
2012 2013 2014 2015 2016 2017 2018 2019
Restricted (Asymmetric) Distribution
no restriction on the growth rate shockno restriction on the interest rate shock0 is the max positive pb shock (percent GDP)no restriction on the exchange rate shock
Restrictions on upside shocks:
Revised DSA for MACs LIC External DSA
Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2023. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a Exports shock
0
5
10
15
20
25
30
35
40
2013 2018 2023 2028 2033
Baseline Most extreme shock 1/ Threshold Historical scenario
f.Debt service-to-revenue ratio
-15
-5
5
15
25
35
45
-3
-2
-1
0
1
2
3
4
5
6
7
2013 2018 2023 2028 2033
Rate of Debt Accumulation Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale)
a. Debt Accumulation
0
10
20
30
40
50
60
70
2013 2018 2023 2028 2033
b.PV of debt-to GDP ratio
0
50
100
150
200
250
2013 2018 2023 2028 2033
c.PV of debt-to-exports ratio
0
50
100
150
200
250
300
2013 2018 2023 2028 2033
d.PV of debt-to-revenue ratio
0
5
10
15
20
25
30
35
40
2013 2018 2023 2028 2033
e.Debt service-to-exports ratio
Revised DSA for MACs
For most LICs, debt portfolio management is “passive” as debt
managers have less influence over the design of the debt portfolio composition than in MACs
But changing financing landscape and more market access is
highlighting the relevance of debt portfolio risks Improving public debt management capacity in LICs remains a
priority The Joint IMF/WB Debt Management Facility (DMF II) will make
important contributions in this regard
DSA for LICs: Times are a changing for some
II. Contingent Liability Risks
Revised DSA for MACs
Risks from contingent liabilities should inform both fiscal and
debt management policies and strategies Analysis of the risks posed by CLs has become important for
the assessment of public debt sustainability Assessment of banking sector CL is now an integral part of the
MAC DSA But depending on country circumstances, other types of
contingent liability risks may be also relevant
Contingent Liability (CL) Risks in DSAs
Revised DSA for MACs Contingent Liability (CL) Risks in MAC DSAs
Revised DSA for MACs
In LICs large public investments needs cannot all be financed
by public debt without jeopardizing debt sustainability Public private partnership (PPP) arrangements offer burden
sharing with the private sector, but also exposes public sector to fiscal risks
Contingent Liability (CL) Risks in LICs
III. DSAs in Fund-Supported Programs
Revised DSA for MACs
In Fund programs debt conditionality is generally expected
when a country has significant debt vulnerabilities For countries using the LIC DSF, debt vulnerabilities is
informed by the assessed risk of external debt distress or, where relevant, by the assessed overall risk of debt distress
For countries using the MAC DSA debt vulnerabilities is assessed by the set of standard indicators in the MAC DSA
DSAs in Fund-Supported Programs
Useful Links on IMF’s Website
Guidance Note on DSA for Market-Access Countries:
http://www.imf.org/external/np/pp/eng/2013/050913.pdf Guidance Note on the Joint Bank-Fund Debt Sustainability
Framework for Low-Income Countries: http://www.imf.org/external/np/pp/eng/2013/110513.pdf
IMF’s online DSAx course: http://www.imf.org/external/mmedia/view.aspx?vid=3335115563001
https://www.edx.org/course/debt-sustainability-analysis-imfx-dsax#.VH3WC4UhAyp
Thank you