Professional Documents
Culture Documents
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The Motivation for MTDS
New borrowing opportunities ⇒ new risks
More choices ⇒ greater complexity
MTDS aims to provide coherent framework to
fully assess relevant costs and risks
Guide choice on composition between:
Concessional / quasi-concessional / commercial
Currency composition
Etc.
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Context
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More specifically:
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An integrated (8) step process…
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Debt Management Integrated in
Macroeconomic Framework and Market
Constraints
Cost/Risk
Analysis
Debt Management
Strategy Development
Consistency/ Demand
Constraints constraints
Market
Information on development
Macroeconomic cost and risk Financing Sources/
initiatives
Framework/Debt Market Environment
Sustainability
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8-step approach
Step 1 Step 2
Identify Identify cost &
objectives & risk of existing
scope debt
Step 4 Step 3
Identify baseline
projections & Identify potential
risks – fiscal, funding sources
monetary &
market
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8-step approach
Step 5 Step 6
Identify cost risk
Review key trade-off for
structural alternative debt
factors management
strategies
Step 8 Step 7
Review
Recommend implications for
MTDS for macroeconomic
approval policies &
market
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Analyzing cost in the MTDS
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(1): What is cost
Tension between nominal and real
Budget is formulated in nominal terms
Costs are real: inflation reduces the amount of goods and services that
need to be forgone to service debt
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(2): What drives cost
Real interest and exchange rate drive long-term cost:
Real exchange rate (ep/p*)trend varies significantly:
“Asian tiger” has LT real implying cheap FX funding
Bangladesh suffered 10 years of about 2 percent real depreciation
Exchange rate overshooting: models can tell what equilibrium “real”
exchange rate is:
Debt of Argentina, a “closed” economy with relatively large import deficit,
tripled to 200% of GDP in one year (2002).
Real interest rate trend:
Currently low real rates. If investment demand returns this will reverse.
Debt market improvement, fiscal consolidation can reduce real interest rates
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(3): Approaches to identifying
cost/risk trade offs in the MTDS
Review cost/risk characteristics of each instruments (step 2)
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(4): Simulation Tool
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(5): Insurance/Costing of Roll-
over risk
Cost of roll-over risk and mitigation can be costed to
make it comparable:
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Enabling Framework
Implementation will also highlight weaknesses in
enabling framework
Debt recording
Comprehensive? Is data sharing set up well?
Legal framework
Clear debt management objective?
Institutional arrangements
Appropriate coordination mechanisms
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Implementing the MTDS
Separate process from strategy formulation
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Benefits
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Benefits of MTDS
Objective and systematic approach
Prompts the addressing of all key issues
Enables underlying assumptions to be challenged
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Benefits of MTDS
Prompts a better understanding of costs and
improves evaluation of cost-risk tradeoff
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