Bangladesh: Debt Risk Management and Use of MTDS Toolkit

Iqbal Abdullah Harun Deputy Secretary

16-18 March, 2011 Phuket, Thailand

Outline
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Macroeconomic Performance and Outlook Debt Profile Debt Management Strategy and Reform Events Risk Assessment Results Using MTDS Toolkit

Macroeconomic Performance and Outlook

Macroeconomic Performances
Average GDP growth rate

was 6% during 1990-2010

Significant change in the

GDP structure took place during 1990-2010 period and service increased during 2005-2010 period; share of industry sector increased while share of agriculture sector declined
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Contribution of industry

Medium Term Macroeconomic Outlook

Indicators GDP Growth (%) Gross Investment ( as % of GDP) Private Public Indicators TOTAL FINANCING NET FOREIGN FINANCING Gross Borrowing Grants Amortization DOMESTIC FINANCING Banking System Non-Bank 6.2 24.2 19.3 5.0 Actual FY08 FY09 5.7 24.4 19.7 4.7 Actual FY08 5.1 1.6 1.9 0.4 0.8 3.5 3.0 0.5 FY09 3.9 0.8 1.2 0.4 0.8 3.1 2.2 0.9 Prov. FY10 6.0 24.4 19.7 4.7 Prov. FY10 4.5 2.0 2.1 0.5 0.7 2.5 1.3 1.3 FY11 5.2 2.2 2.2 0.6 0.7 3.0 2.0 1.0 FY12 4.9 2.4 2.3 0.7 0.7 2.5 1.8 0.8 FY11 6.7 26.4 21.0 5.4 FY12 7.2 28.3 22.3 6.0 Projection FY13 7.6 29.9 23.4 6.5 Projection FY13 4.8 2.3 2.3 0.7 0.7 2.5 1.7 0.8 FY14 4.7 2.2 2.2 0.7 0.7 2.5 1.7 0.8 FY15 4.6 2.2 2.2 0.7 0.7 2.4 1.7 0.7
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FY14 8.0 31.5 24.6 6.9

FY15 8.0 32.0 24.9 7.1

Resource Gap and Financing Requirements

Resource gap up to 2014-15
Total: US$ 35.1 billion Public sector: US$ 13.7 billion

Flow and additional requirement for public sector during FY12-FY14

Expected to receive : US$ 3 billion Additional requirement : US$10.6 billion

Additional Financing Need During FY12-14

Average US$ 2.1 billion to finance its public investment May have to resort to semi-consessional or commercial term borrowing
FY11 A B Public Investment Required Expected Financing (ECF/PRSC) 0.9 0.0 0.9 FY12 1.8 1.0 0.8 FY13 2.7 1.0 1.7 FY14 3.8 1.0 2.8 FY15 4.5 0.0 4.5
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(A-B) Semi-concessional/Commercial loan

Debt Profile

Outstanding Debt- End FY10

Amount
US$ billion DOMESTIC DEBT Marketable T-Bills T-Bonds Non-Marketable Special Bonds Central Bank Loans Retail Debt EXTERNAL DEBT Multilateral Bilateral TOTAL 18.8 7.6 1.4 5.2 11.2 1.0 2.7 8.5 19.2 16.7 2.5 38.0

Share
% of Total 49% 20% 4% 14% 29% 3% 7% 22% 51% 44% 7% 100%

Debt
as % of GDP 19.6% 7.9% 1.4% 5.4% 11.7% 1.0% 2.8% 8.9% 20.0% 17.4% 2.6% 39.6%
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Redemption Profile-End FY10

Interest Rate Structure and Contribution

Rate of interest for external

concessional ranges from 0.75% to 1.25% ranges from 3.3% to 11.04% (3-5 years maturity)

Rate of interest for retail debt

Rate of interest for marketable T-

bond ranges from 8% to 10.5% (5-20 years maturity)

Interest expenditure rose to 13.5%

of total expenditure in FY10 from 5.2% in FY97 interest cost is 9:1

Domestic interest vs external

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Debt: Currency Composition-End 2010

USD 23% BDT 48% EUR 19% JPY 10%

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Debt Management Strategy and Reform Events

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Debt Management Strategy

No Formal Debt Strategy but there is an implicit strategy

Implicit strategy of maximizing external concessional borrowing and financing the gap from domestic sources (retail and market) while gradually reducing trend of debt to GDP ratio; The sequence of importance of the implicit debt management strategy is to:
Continue and expand external concessional official borrowing Borrowing from retail sources Borrowing from market sources

The only discretionary variable is the composition of marketable domestic debt (T-Bills and T-Bonds) Implicit strategy is cheaper than recourse to commercial external debt or domestic debt and less risky
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Initial Reforms: 2005-2007

Organized efforts started in Mid-2005 through a series of reforms A separate unit was established that concentrated mainly on separating debt management from cash management Reform coincided with the growth of domestic debt as percentage of GDP To ensure coordination, the Cash and Debt Management Committee was formed Assessment of DM strengths and weaknesses was constrained by lack of technical capacity but was essential for planning further reforms
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2nd Round Reform: 2008 to 2009

DeMPA was done in 2008

Firsthand status report on DeM Helped identify risk areas Helped formulate reform priorities and plans Identified issues for reforms Introduced the usefulness of the toolkit Trained Debt managers (basic) Developed data sharing format enabling cost-risk monitoring Bangladesh did its own Risk Assessment with technical support from WB and the IMF Results were presented to the Policy Level Management
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MTDS Toolkit was introduced in 2008

MTDS based Risk Assessment done-2010

3rd Round of Reform: 2010-2014

Cost and Risk Assessment through MTDS could set the base for formulating formal Medium Term Debt Strategy Additional financing requirement for pursuing the high growth and investment-targeted MTMF also supported MTDS formulation Project-based structured Debt Management reform programme is ongoing Working group has been formed to submit Draft MTDS by April 2011
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Risk Assessment Results Using MTDS Toolkit

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Cost and Risk Elements of Existing Debt

External
Cost of Debt Refinancing Risk Interest Rate Risk Weighted Average IR (%) ATM (Years) Debt Maturing in 1 year ATR (Years) Debt Re-fixing in 1 Year Share of Fixed Rate Debt Exchange Rate Risk FX Debt as % to Total Debt 1.50% 16.91 1.60% 16.75 4.40% 97.10% 52.36%

Domestic
10.40% 5.07 15.80% 5.07 15.80% 95.20%

Total
5.71% 13.67 5.46% 13.56 7.54% 96.56%

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Strategies Considered
Strategy
S1 (Current) S2

External : Domestic
40:60 40:60

Main Characteristics
External: All concessional Domestic: Half in NSD External: 20% Concessional 10% Non-concessional bilateral 10% International bond Domestic: Same as S1 External: 40% Concessional 5% Non-concessional bilateral 5% International bond Domestic: 25% market 25% NSD External: All concessional Domestic: 20% NSD, 40% 5-year Market
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S3

50:50

S4

40:60

Baseline Pricing Assumptions and Shocks Considered

Baseline Scenario Exchange Rate Interest Rate
External Domestic
US Yield Curve + 4.5% Credit Risk Premium Existing Yield Curve 3% Parallel Shift 5% Parallel Shift Nominal Depriciation of 3% p.a. ( 1 % Real Appreciation )

Shock Scenario
One off Depriciation of 15% in FY12

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Cost and Risk Measure: Debt/GDP Ratio

S1 Baseline FX Shock IR Shock Max 38.09 39.59 39.65 1.56 S2 38.49 40.01 40.19 1.70 S3 38.11 39.58 39.56 1.47 S4 38.06 39.57 39.63 1.57

Analysis considered the cost and risk consequences of the 4 alternative strategies under the baseline and shock scenarios

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Cost and Risk Measure: Interest Expenditure/GDP Ratio

S1 Baseline FX Shock IR Shock Maximum Deviation 1.98 2.01 2.61 0.64 S2 2.16 2.19 2.87 0.71 S3 1.95 1.98 2.54 S4 1.97 .00 2.62

0.59 0.64

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Cost and Risk Measure: NPV of Debt/GDP Ratio

S1 Baseline FX Shock IR Shock Maximum Deviation 31.0 26.5 34.3 3.2 S2 33.8 29.1 37.8 3.9 S3 31.1 S4 31.1

26.3 26.7 34.0 34.4 2.9 3.3

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Cost and Risk Measure: Interest + FX Capital Loss to GDP Ratio

3.20 3.16 3.12

Interest+Capital Loss to GDP As at end FY14/15

S2

S1 Baseline FX Shock IR Shock 2.99 2.01 3.63 0.64

S2 3.18 2.19

S3 2.97 1.98

S4 2.99 2.00 3.64

Cost

3.08 3.04 3.00 2.96 2.92 0.20 0.40 0.60 0.80 Risk S3 S1 S4

3.89 3.56 0.71

Maximum Deviation

0.59 0.64

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Other Cost and Risk Indicators: As at End FY10 and FY15

Risk Indicators Nominal debt as % of GDP Cost of debt (%) Refinancing risk ATM (years) Debt maturing in 1yr (%) Interest rate risk ATR (years) Debt refixing in 1yr (%) Fixed rate debt as % of total FX risk FX debt as % of total * 1 year debt is treated as floating rate debt FY09/10 As at end FY14/15 Strategy I Strategy II Strategy III Strategy IV 38.6 38.1 38.5 38.1 38.1 5.7 5.8 6.3 5.7 5.8 13.67 15.7 13.7 15.6 15.5 5.46 8.7 9.2 7.2 8.5 13.56 23.8 18.3 23.3 23.5 7.54 22.7 35.2 26.3 22.2 96.56 87.7 83.1 87.7 87.8 52.36 55.7 55.6 59.8 55.2

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Redemption Profile Under Alternative Strategies

Strategy I
700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 Redemption profile as at end FY2014/15 Domestic External 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0

Strategy II
Redemption profile as at end FY2014/15 Domestic External

2016

2019

2022

2025

2028

2031

2034

2037

2040

2043

2046

2049

2052

2055

2016

2019

2022

2025

2028

2031

2034

2037

2040

2043

2046

2049 2049

2052 2052

Strategy III
700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 Redemption profile as at end FY2014/15 Domestic External 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0

Strategy IV
Redemption profile as at end FY2014/15 Domestic External

2016

2019

2034

2037

2040

2043

2046

2049

2052

2055

2016

2019

2022

2025

2028

2031

2022

2025

2028

2031

2034

2037

2040

2043

2046

2055

2055

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Conclusions
Bangladesh has made remarkable progress in DeM during the last 5 years With a sustainable level of debt and provisions for mandatory debt repayment, DeM practices are following a prudent path Assessment of performance through DeMPA, assessment of cost risk through MTDS toolkit and the decision to formulate MTDS are significant achievements And, well-orchestrated medium-term reform plan can only better the debt and fiscal management
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Thank You

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