Download Medium Term Debt Strategy

Government of Tonga
Medium Term Debt Strategy
2015/16 - 2017/18
Prepared by
Debt Management Section
Ministry of Finance & National Planning
December 2015
Medium Term Debt Strategy (2015-2017)
Table of Contents
Acronyms and Abbreviations……………………..……..................................…………………......4.
Foreword……………………………………………….........................................................………………5.
Executive Summary…………………………………................................................……………..........7.
1. Introduction..........................................................................................................................................8.
2. Objectives for Debt Management….............….............................................….…...…………......8.
3. Scope for debt strategy………..........................................................................................................8.
4. Current Debt Portfolio......................................................................................................................9.
4.1
Profile of existing Debt.......................................................................................................9.
4.2
Outstanding debt and composition............................................................................10.
5. Historical Context of Debt Portfolio..…................................................................………….....11.
5.1
Change in size and composition...................................................................................11.
5.2
Management of Guarantees and On-lending to PE's...........................................12.
6. Analysis of Funding Sources........................................................................................................13.
6.1
Financial Characteristics of Existing Debt...............................................................15.
7. Baseline Projections........................................................................................................................16.
7.1
Fiscal........................................................................................................................................16.
7.2
Monetary................................................................................................................................17.
7.3
Other longer terms structural adjustments............................................................18.
8. Risk Scenario Testing......................................................................................................................19.
8.1
Cost and Risk Characteristics of Existing Debt......................................................19.
8.2
Analysis of Cost and Risk Indicators..........................................................................20.
8.2.1 Exchange Rate Risk.............................................................................................21.
8.2.2 Refinancing Risk...................................................................................................22.
8.2.3 Interest Rate Risk................................................................................................23.
8.2.4 Liquidity and Repayment Risk.......................................................................24.
8.2.5 Creditor Concentration Risk...........................................................................25.
8.2.6 Credit Risk of on-lent and guaranteed loans............................................25.
8.3
Other Risks in Managing the Portfolio......................................................................25.
8.3.1 Operational Risk...................................................................................................25.
8.3.2 Strategic Risk.........................................................................................................25.
8.3.3 Financial Risk........................................................................................................26.
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Medium Term Debt Strategy (2015-2017)
9. Recommended Strategies and desired composition of debt..........................................26.
LIST OF TABLES
TABLE 1
GOT Target FY 2014/15 ……………………………………………………………….………7.
TABLE 2
Disbursed Outstanding Debt as at 30 June 2015………….……..…………………..9.
TABLE 3
Government Bonds as at 30 June 2015………………….………………….…………10.
TABLE 4
Creditors Cost and Risk Indicators as at June 2015……………………………….14.
TABLE 5
Summary of financing sources as at 30 June 2015..………………………………15.
TABLE 6
Cost and Risk Characteristics of the Existing Debt Portfolio as at
30 June 2015…………………………………..…………..……………………….…………..…20.
TABLE 7
Alternative Borrowing Strategies….………………..………………….………………..27.
LIST OF CHARTS
CHART 1
Total Public Disbursed Outstanding Debt, FY 2007/08-2029/30..………......9.
CHART 2
External Debt Stock by Creditor Category as at 30 June 2010 & 2015.…..10.
CHART 3
External Debt Stock by Currency Composition as at
30 June 2009 & 2014…….….………………………………………………………...……….10.
CHART 4
Domestic Debt by Holder as at 30 June 2010 & 2015…..………………………..10.
CHART 5
Total Public Debt Outstanding to Nominal GDP, FY 2004/05-2014/15....11.
CHART 6
Creditor Composition of External Debt as at 30 June, 2010 & 2015............11.
CHART 7
Currency Composition of External Debt as at 30 June, 2010 & 2015…..….12.
CHART 8
Total Public Debt Service in ratio to Revenue & Expenditure,
FY 2006/07-2015/16..……………………………………….……………………………….12.
CHART 9
Monthly Pattern of Debt Repayments as at FY 2013/14 & 2014/15..........12.
CHART 10
Contingent Liabilities to Nominal GDP, FY 2005/06-2014/15..….…...….....13.
CHART 11
External Total Debt Service, Government vs On-lent loans, FY 2014/15..13.
CHART 12
GoT Debt by Residency of Creditor as at 30 June, 2010 & 2015...………......15.
CHART 13
Total Public Debt Outstanding by Economic Sector as at 30 June 2015….16.
CHART 14
Tonga's Economic Performance relative to PICs...…………………………………16.
CHART 15
Domestic Budget Performance…………………...…………………………………….....17.
CHART 16
Nominal Debt as % of GDP…..…………………...……...……………………………….....20.
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Medium Term Debt Strategy (2015-2017)
CHART 17
Net Present Value External Debt as % of GDP……………………………………....21.
CHART 18
Net Present Value of External Debt as % of Exports & Remittances,
FY 2003/04-2012/13……………………………..…………………………………..……...21.
CHART 19
Total Debt Service as % of Revenue, FY 2003/04-2012/13.…...……...….....21.
CHART 20
Total Debt Service as % of Exports & Remittances,
FY 2003/04-2012/13..………………….....…………………………………………………21.
CHART 21
Foreign Exposure (Tonga vs. the World)…………………………..…..………..…...21.
CHART 22
External Debt Outstanding by Currency, FY 2014/15-2030/31...............…22.
CHART 23
External Debt Service by Currency, FY 2014/15-2030/31..........................…22.
CHART 24
Total Public Debt - Refinancing Risk (ATM)……………………..........................…23.
CHART 25
Remaining Maturity Profile for Domestic Debt as at 30 June 2015....……..23.
CHART 26
Remaining Maturity Profile for External Debt as at 30 June 2015.….......…23.
CHART 27
Cost of Debt - Weighted Average Interest Rate…………………………….…...….24.
CHART 28
Share of fixed rate to floating rate debt as at 30 June, 2010 & 2015…...….24.
CHART 29
Total Debt Service by Currency, FY 2013/14-2029/30....………………….…..24.
CHART 30
Debt to GDP as at end 2017………………………………………....………………….…..30.
CHART 31
Present Value of Debt to GDP as at end 2017…………….....…………………..…..31.
CHART 32
Interest to GDP as at end of 2017……………………………......…………………..…..31.
ANNEX 1
Summary of recommendations specific to segments of the Government
Securities Market……….……………………………………………………… ….…………32.
ANNEX 2
Total Public Disbursed Outstanding Debt, FY 2003/04-2029/30.......….…33.
ANNEX 3
Total Public Debt Service by Currency, FY 2013/14-2029/30....………..….33.
ANNEX 4
Macro Economic Data, FY 2003/04-2015/16......………..…………………......….33.
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Medium Term Debt Strategy (2015-2017)
Acronyms and Abbreviations
ADB
ATM
ATR
AUD
BRIC
CBD
CDB
CNY
ComSec
CP
CS-DRMS
DMS
DOD
DSA
EIB
EUR
EXIM
FC
FDI
FI
FY
GBP
GDP
GFC
GFS
GoT
GSM
IDA
IFAD
IMF
JPY
MoFNP
MTDS
MTBF
NNB
NPV
NRBF
NRBT
OPEC
PDMC
PEs
PICs
PRC
REER
RFB
SDR
TA
TDB
TDS
TOP
TSDF
WB
WPAC - AUS
USD
Asian Development Bank
Average Time to Maturity
Average Time to Refixing
Australian Dollar
Brazil, Russia, India and China
Central Business District
China Development Bank
Chinese Yuan Renminbi
Commonwealth Secretariat Debt & Recording Management System
Commercial Paper
Commonwealth Secretariat
Debt Management Section
Disbursed Outstanding Debt
Debt Sustainability Analysis
European Investment Bank
Euro
Export–Import Bank of China
Foreign Currency
Foreign Direct Investment
Financial Institutions
Financial Year
Great Britain Pounds
Gross Domestic Product
Global Financial Crisis
Government Financial Statistics
Government of Tonga
Government Securities Market
International Development Association
International Fund for Agricultural Development
International Monetary Fund
Japanese Yen
Ministry of Finance and National Planning
Medium Term Debt Strategy
Medium Term Budget Framework
No New Borrowing
Net Present Value
National Retirement Benefits Fund
National Reserve Bank of Tonga
Organisation of the Petroleum Exporting Countries
Public Debt Management Committee
Public Enterprises
Pacific Island Countries
People’s Republic of China
Real Effective Exchange Rate
Retirement Fund Board
Special Drawing Rights
Technical Assistance
Tonga Development Bank
Total Debt Service
Tongan Pa’anga
Tonga Strategic Development Framework
World Bank
Westpac Australia
United States Dollar
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Medium Term Debt Strategy (2015-2017)
Foreword
In ongoing efforts by the Government of Tonga (GoT) for prudent debt management
and development of current practices going forward. This document is the first MTDS
produced by the Ministry of Finance and National Planning (MoFNP), which provides an
overall guidance for the best management of GoT’s debt in the medium term.
The GoT’s debt management objective is to maintain sovereign debt within levels that
are sustainable over time. This requires regular monitoring of debt levels against
commonly accepted debt targets or thresholds established by multilateral institutions
while also ensuring that any financing requirements are met at low cost with a minimum
degree of risk in the medium term. This general objective and approach is also reflected
in the Tonga Strategic Development Framework (TSDF) of 2010-2014 and the MoFNP’s
Corporate Plan (2014/15-2016/17).
This is the first Medium Term Debt Strategy (MTDS) that government adopts to
manage its public debt1. The strategy is a document that describes the plan that
Government intends to implement to achieve this composition. Medium-term planning
horizon of the Government is usually for 3 to 5 years.
This MTDS is in line with the approved budget for current FY 2015/16. The Budget theme
follows the National and GoT themes, of: “A More Progressive Tonga”: enhancing our
inheritance.
As referred in the Budget Statement for FY 2015/16, despite our limited financial
circumstances and other constraints, this current budget focuses on improving performance,
growth, and wellbeing, while ensuring sound fiscal conditions; these conditions are in turn an
essential requirement for our policies and priorities to be successful.
The opportunities for new prudent borrowing, resulting from recent progress in lowering our
level of debt distress from high risk to moderate risk, are being taken with care. They focus on
saving costs, driving growth, and addressing the urgent reconstruction needs as result of
recent disasters ie: cyclone Ian in the Ha’apai islands.
The GoT is mindful of the risks due to the significant level of external debt that it
currently holds, especially from the People’s Republic of China (PRC). Added to this is
GoT’s ability to maintain external debt at a sustainable level with any further financing
required from abroad over the medium term (even at concessional terms under the
budget support 50% loan-grant financing or for other priority GoT projects) and in line
with the vulnerability of the economy and exposure to exogenous shocks.
Challenges will remain, the development of prudent debt management will require
concerted efforts to constantly explore ways to mitigate the costs and risks in
Government’s debt portfolio. It may also be necessary to review the legislations and to
strengthen institutional arrangements for debt management including implementation
of other new policies, as required. This MTDS thereby provides four strategies which
1
Public debt management is the process of establishing and executing a strategy for managing the Government’s debt in order to raise the required
amount of funding, achieve its risk and cost objectives, and to meet any other public debt management goals Government may have set, such as
developing and maintaining an efficient market for Government securities.”
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Medium Term Debt Strategy (2015-2017)
could help to meet GoT’s debt objectives and to achieve a more balanced composition of
public debt.
In conclusion, I would like to emphasise GoT’s commitment to promoting transparency
and accountability in public financial management. The publication of this inaugural
MTDS (2015-2017 will be reviewed annually in line with fiscal and macro development,
It will provide a critical tool for informed policy decisions by all stakeholders with the
intention to improve the debt burden and other fiscal vulnerabilities and also the
relations with external and domestic financiers including development partners.
_______________________________________
‘Aisake Valu Eke
Minister for Finance & National Planning
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Medium Term Debt Strategy (2015-2017)
Executive Summary
The MTDS (2015-2017) is the first formal documentation of GoT’s strategy for
management of debt. Prior to this policy, strategies have been on an ad hoc basis with
approvals sought from His Majesty’s Cabinet as required. GoT has been borrowing
externally and domestically for many decades. Following impact of the Global Financial
Crisis (GFC) and the rapid escalation in Tonga debt for major infrastructural projects
from PRC, that Tonga’s debt position has become more worrying. In 2007 Tonga was
graded by the International Monetary Fund (IMF) at a high risk of debt distress.
However, since mid 2013, due to improvement in economic policy reform to a ‘medium
policy level’, Tonga has been upgraded to a moderate risk level. This provides a
considerable revision of the debt sustainability thresholds and gives the GoT more scope
for prudent borrowing going forward. A review was necessary to enable the revised
financing of budget support from the World Bank (WB) and other donors of 50% loan
and grant also for other priority external financing requirements by the GoT.
In regards to prior GoT’s sustainability targets, while taking note of the low formal
export base and inclusion of remittances as significant flows to the economy, revised
debt sustainability ratios by IMF-WB are shown in Table 1:
Table 1 : IMF – GOT Target FY 2014/15
Prior IMF
Particulars
threshold
NPV of External debt as:
% of GDP
% of GDP (& remittances)
% of exports
% of exports (& remittances)
% of revenue
Total Debt Service as:
% of exports
% of exports (& remittances)
% of revenue
Prior GoT
threshold
Revised IMF-GoT
threshold
Current Level
(FY 2014/15)
30
26
100
90
200
40
100
200
40
36
150
120
250
47
35
233
99
220
15
12
18
18
25
20
16
20
15
6
14
Following the upgrade of Tonga to a moderate risk level, the MoFNP continues to be
cautious and to closely monitor GoT’s debt sustainability level in line with the
recommended targets. During this initial MTDS period, practical options must be
identified for GoT to implement in order to keep its future financing requirements at
prudent levels and a minimum degree of cost and risk as a high priority. However, as
the preferred option, that GoT will continue to exhaust all possible financing
requirements from the grant pool fund as available from our development partners. As
feasible, there is also option for domestic financing by issue of GoT securities and
MoFNP is working with donors, such as Commonwealth Secretariat (ComSec), and the
National Reserve Bank of Tonga (NRBT) for the required development of this area.
Strategic advice for the Minister of Finance on advancement of GoT’s MTDS, for
consideration of any borrowings required to finance possible budget deficits (GFS
definition) and to improve the performance of the debt portfolio will be provided by the
Public Debt Management Committee (PDMC). This committee is chaired by the
Secretary for Finance and National Planning which comprises of senior officials from
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Medium Term Debt Strategy (2015-2017)
MoFNP and NRBT but due to other priorities have delayed PDMC responsibilities. This
final document draws on the valued advices of the WB which has informed the final
design of the MTDS for GoT with valued contributions by others working with MoFNP.
1. Introduction
1.
The MTDS is a high priority of the GoT, with the prior classification by the IMF-WB
of Tonga for high risk of debt distress - now upgraded to a moderate risk of debt
distress.
2.
GoT has recognised the need to have a formal and explicit MTDS in place to ensure
improved debt management as part of a stronger MTBF to ensure GoT finances are
placed on a more sustainable footing.
3.
The MTDS provides directions and benchmarks for managing the GoT’s debt
portfolio. This will lead to the ‘preferred debt composition’, i.e. the preferred costrisk trade-off, taking into account constraints posed by the economic and
market environment.
4.
This MTDS is an outcome of recommendations made by the recent MTDS Mission
by WB to DMS, MoFNP during 5 to 12 August 2014.
2. Objectives for Debt Management
5.
The main objectives are:

To help MoFNP to manage GoT’s financing requirements are met at the lowest
cost in the medium to long-term consistent with a prudent degree of risk.

To monitor that the GoT maintains sovereign debt within levels that are
sustainable over time; where such levels are regularly monitored against
commonly accepted debt targets or thresholds suggested by multilateral
institutions and taking into account the unique aspects of the Tongan economy,
namely the low formal export base and the large remittance flows.
3. Scope for debt strategy
6.
This MTDS covers the GoT’s debt portfolio which includes external debt, domestic
debt, and contingent liabilities of on-lent debt and guaranteed debt with the public
and other enterprises.
7.
External debt is defined as debt denominated in currencies other than TOP while
domestic debt is defined as debt denominated in TOP.
8.
In line with international reporting requirements, GoT will consider review in
future for current reporting of domestic debt (as may be required) to include the
outstanding liability for transfer value under the old pension scheme for civil
servants to the current scheme.
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Medium Term Debt Strategy (2015-2017)
9.
Although the focus of the MTDS is on actual direct liabilities of the GoT, contingent
liabilities (whether explicit or implicit) may have an important bearing on the
sustainability of debt and robustness of this strategy. Consequently, GoT has
decided that it is prudent to consider the potential risk that contingent exposures
could materialise under specific scenarios and thus may need to be addressed in
the future.
4. Current Debt Portfolio
4.1 Profile of existing debt
10.
The total volume of outstanding debt as at 30 June 2015 as shown in Table 2 is
estimated at $422.6m, with an additional T$52.4m of contingent liabilities. This
contingent liability consists of T$0.01m of loan guarantee at Tonga Development
Bank (TDB), $51.1m on-lent loans due to the GoT from various public and other
enterprises and $1.2m due to the Government from private sectors under
Agriculture and Fisheries Market Fund. The existing debt portfolio is composed of
90% external debt and 10% domestic debt. The majority of external debt comes
from bilateral creditors (68%), dominated by the EXIM at 66% (T$250.3 m) and
the ADB at 16% (T$61.4m). Domestic debt is predominantly held by Financial
Institutions (FI) at 47% ($19.2m), Retirement Fund Board (RFB) at 36% ($15m)
and Companies at 6% ($2.4m).
Table 2: Disbursed Outstanding Debt as at 30 June 2015 (TOPm)
Domestic Debt
GoT Bonds
Total Domestic Debt
External Debt
Multilateral Creditors
Bilateral Creditors
Total External Debt
Total Public Debt Outstanding
Contingent Liabilities
Guaranteed Debt
On-lent Debt
Government Fund
Total Contingent Liabilities
11.
Amount
41.0
41.0
122.8
258.8
381.6
422.6
0.01
51.1
1.2
52.4
Chart 1 below shows the actual and estimated position of total public DOD over
the maturity period for the Chinese loans (excluding any fluctuation of FC rates). It
shows a steady increase since FY 2007/08 as result of the disbursements on
Central Business District (CBD) and Roads loans. However, there is a downward
trend from FY 2018/19 going forward mainly as result of the projected principal
repayments beginning for both these loans. Domestic debt is based on the current
bond maturity structure at June 2015 and proposed rollover at a minimum of
6 years.
Chart 1: Total Public Disbursed Outstanding Debt2, FY 2007/08–2028/29 (TOPm)
2
Excludes future fluctuations of FC rates
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Medium Term Debt Strategy (2015-2017)
TOP(m)
450.0
400.0
350.0
300.0
250.0
200.0
150.0
100.0
50.0
0.0
07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 22/23 23/24 24/25 25/26 26/27 27/28 28/29
External
12.
Domestic
FY
At end June 2015, loans from bilateral and multilateral sources account for
$381.6m of the total external portfolio. During the 5 years period from 2010, there
has been a significant change, where the official bilateral creditors account for the
majority of GoT’s external debt at 67.8% mainly comprising of the 2 big loans
from EXIM.
Chart 2: External Debt Outstanding by Creditor Category (%) as at 30 June, 2010 & 2015
June 2010
June 2015
67.8%
40.7%
59.2%
Multilateral
32.2%
0.1%
Bilateral
Commercial
Multilateral
Bilateral
4.2 Outstanding debt and composition
13.
At end June 2015, CNY debt accounted bilateral loans being the largest share of
the external portfolio at 67.8% followed by SDR with 32.2% (with breakdown by
its currency component of USD accounting for 13.5%, Euro (EUR) for 12.0%, Great
Britain Pounds (GBP) for 3.6% and Japanese Yen (JPY) for (3.0%). The currency
composition of external debt has changed visibly over five years. At end June
2015, the CNY composition increase by 27% from end June 2010.
Chart 3: External Debt Outstanding by Currency Composition (%) as at 30 June, 2010 & 2015
June 2010
40.4%
June 2015
67.8%
0.1%
24.5%
12.9%
22.2%
CNY
14.
USD
0.7% 5.5% 6.6%
GBP
JPY
NZD
EUR
CNY
3.2%
3.9%
AUD
0.1%
14.3%
USD
GBP
JPY
EUR
At end June 2015, Domestic debt is recorded at $41.0m, for GoT bonds issued. The
main holdings are by FI, RFB and Companies. The main change during the 5 year
period was an decrease of holdings by FI of over 20%.
Chart 4: Domestic Debt by Holder (%) as at 30 June, 2010 & 2015
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Medium Term Debt Strategy (2015-2017)
June 2010
June 2015 55.7%
82.7%
15.1%
1.9%
9.8% 4.2%1.4%
Financial Institutions (FI)
FI Staff Retirement Fund
Companies
15.
0.8%
Retirement Fund Board
Individuals
Financial Institutions
Retirement Fund Board
Individuals
2.0%
25.5%
FI Staff Retirement Fund
Companies
The primary domestic securities market is currently made up of GoT Bonds (fixed
coupon) with main holdings taken up by the local FIs. GoT mainly issues bonds
with a maturity of 6 years. Table 2 shows the volume on issue for each term.
Issuance is authorised and capped operationally by the Minister of Finance while
the NRBT is Registrar for issuance of the domestic bonds. The prospectus is
published on the NRBT website, local newspapers and on the radio. The issuance
is on a roll over basis, with maturing Bonds being financed by the new issues.
Table 3: GoT Bonds as at 30 June 2015 (TOPm)
Amount
19.2
21.8
41.0
Maturity
5 years
6 years
Total
5. Historical Context of Debt Portfolio
5.1
Change in size and composition
16.
Over the 10 year period, external debt has increased significantly since
FY 2008/09 when the drawdown on the CBD loan from EXIM began in September
2008 and followed by the Roads loan in March 2010. Domestic debt has remained
relatively unchanged.
17.
In Chart 5, the trend of debt to GDP shows a decrease from FY 2005/06 resulting
from a stable level of DOD while GDP grew. The ratio increase from FY 2007/08,
despite GDP growth remaining positive for most of the period to 2012/13, DOD
expanded more rapidly, However, by end June 2015, as result of full drawdown
for both the loans from EXIM, although GDP growth slowed, the ratio increased.
Chart 5: Total Public Debt Outstanding to Nominal GDP % (TOPm), FY 2005/06-2014/15
T$m
500.00
55.0%
400.00
50.0%
45.0%
300.00
40.0%
200.00
35.0%
100.00
30.0%
0.00
25.0%
05/06
18.
06/07
07/08
External
08/09
09/10
10/11
Domestic
11/12
12/13
TPD to GDP
13/14
14/15 FY's
Over the last 10 years, there has been a significant change in the main external
creditors and the currency components. Prior to June 2010, the ADB was GoT’s
main external creditor and the SDR accounted for the main borrowing currency.
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Medium Term Debt Strategy (2015-2017)
The significant change in the position since June 2010 is due to drawdown for the
CBD and Roads loans from EXIM denominated in CNY.
19.
At end June 2010, EXIM accounted for the main creditors at 37.3% and increased
to 65.6% at end June 2015. Tonga’s main three creditors in order of rank are EXIM
(65.6%), ADB (16.1%) and IDA (WB) (13.7%).
Chart 6: Creditor Composition of External Debt (%) as at 30 June, 2010 & 2015
June 2010
June 2015
2.3%2.2%
34.6%
37.3%
13.7%
65.6%
0.1%
16.1%
0.3%
3.1%
4.5%
ADB
20.
EIB
19.4%
IDA
IFAD
BOC
EXIM
ADB
EIB
IDA
IFAD
BOC
EXIM
WPAC - AUST
The currency composition of debt has changed markedly over the five year period.
At end June 2010, the USD currency comprised 29.7% of loan portfolio followed
by CNY at 28.6%. At end Jun 2015, the CNY accounts for over 65.6% of external
debt, compared to just 29%.
Chart 7: Currency Composition of External Debt (%) as at 30 June, 2010 & 2015
June 2015
65.6%
June 2010
27.0%
28.6%
6.7%
12.9%
8.0%
CNY
21.
USD
3.2%
3.9%
29.7%
GBP
JPY
EUR
CNY
AUD
0.1%
14.3%
USD
GBP
JPY
EUR
Chart 8 shows the trend of debt servicing payments during the 10 year period and
in comparison to ratio of revenues and expenditures. It shows a fluctuating trend
in the prior 5 years period and a steady increase in FY 2014/15.
Chart 8: Total Public Debt Service in ratio to Revenue and Expenditure % (TOPm), FY 2006/07–2015/16
25.0
20.0%
20.0
15.0%
15.0
10.0%
10.0
5.0%
5.0
0.0
0.0%
06/07
07/08
External
22.
08/09
09/10
Domestic
10/11
11/12
12/13
TDS to Revenue
13/14
14/15
15/16
TDS to Expenditure
As shown in Chart 9, the repayment profile exhibits periodicity, with peak
repayment volumes in March, September for external repayments to EXIM and
also June and October to ADB. For domestic repayments, peaks are in August and
June. There is a risk that in a period of low GoT cash balances, there will be
insufficient funds set aside to make debt repayments during these months; hence
the objective of holding sufficient cash balances.
Chart 9: Monthly Pattern of Debt Repayments (TOPm) as at FY 2013/14 & 2014/15
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Medium Term Debt Strategy (2015-2017)
T$m
8.0
6.0
4.0
2.0
0.0
Jul
Aug
Sep
Oct
Nov
13/14
Dec
Jan
Feb
Mar
Apr
14/15
May
Jun
5.2 Management of Guarantees and On-lending to PE’s
23.
Chart 10 below shows the contingent debt position over the last 10 years and in
comparison to GDP. Performance shows a general decreasing trend during the
earlier years and an increasing trend in the later years due mainly to the on-lent
loans for CBD project. However, by June 2015 there is a decrease due to end of a
number of guaranteed loans.
Chart 10: Contingent Liabilities to Nominal GDP % (TOPm), FY 2005/06–2014/15
80.0
10.0%
8.0%
60.0
6.0%
40.0
4.0%
20.0
2.0%
0.0
0.0%
05/06
06/07
07/08
08/09
On-lent Loans
09/10
10/11
Loan Guarantees
11/12
12/13
13/14
14/15
Contingent Liabilities to GDP
24.
At end June 2015 outstanding guarantees are estimated at T$0.01m or 0.001% of
GDP. Total on-lent loans as at end June 2015 due to the GoT from various public
and other enterprises is estimated at $62.5m (at 7.5% of GDP and 18.6% of total
external loans).
25.
In reference to comparison of the external debt service by GoT and the repayment
of on-lent loans in Chart 11, there is a clearly a mismatch between monthly flows
of the payments both in the amount and frequency.
26.
The external TDS by GoT was estimated at $13.4m with high peaks during
September and March for the loans to EXIM as compared to $0.8m from on-lent
borrowers mainly during July 2014 to June 2015.
Chart 11: External Total debt service - GoT vs On-lent Loans (TOPm), FY 2014/15
4.00
3.00
2.00
1.00
0.00
Jul-14
Aug-14
Sep-14
Oct-14 Nov-14
External
Dec-14
Jan-15
Feb-15
Onlent
Mar-15
Apr-15 May-15
Jun-15
13
Medium Term Debt Strategy (2015-2017)
6.
Analysis of Funding Sources
Reconstruction spending is a near-term priority, while in the medium term, GoT will aim
to gradually reduce the debt-to-GDP ratio. Tonga continues to be exposed to natural
disasters, as well as the priority development needs, which requires careful
management of fiscal space.
27.
In reference to the Budget Statement 2014/15, as learnt over recent years, there
is no scope for further fiscal expansion from large external loans. Fiscal expansion
beyond the capacity of domestic revenue must be funded by increases in budget
support and external aid, issuance of domestic bonds that mobilizes excess
domestic liquidity, with some prudent external borrowing for viable projects, on
highly concessional terms also for financing required for budget support under
the revised 50:50 loan-grant mix.
28.
For financing of the budget gap for the various initiatives taken by GoT in efforts
to stimulate the economy. During 2014/15, half of the financing requirements
will be sourced from highly concessional external borrowing from WB for budget
support (loan portion) also for the reconstruction project in Ha’apai. The balance
will be sourced domestically by issue of GoT bonds to the public at an average of 6
years at 3% per annum. For the 2 outer years, similar financing methods will also
be taken. GoT proposes to seek only grant funding for hosting of the South Pacific
Games in 2019, by Tonga. However, should a cost overrun result where debt
financing will be required, it could return Tonga to a high risk of debt distress.
29.
During this 3 year period of the MTDS, GoT does not project to undertake any
external borrowing under commercial terms but only on concessional terms. On
other financing options as explored in this MTDS it includes ‘existing’ sources and
also ‘potential’ sources that GoT can consider to seek financing from.
Table 4 provides information on related Creditors and briefly includes some cost and
risk indicators on the various types of financing.
Table 4: Creditors Cost and Risk Indicators
Multilateral
Creditors
Cost indicators
Risk Indicators:
Existing:
Highly
IDA, ADB, IFAD, EIB
Concessional
Potential:
Japan
Highly
Concessional
Very low interest rates
Very low interest rates
Fixed Interest rates
Long amortization profile
Foreign currency, risk mitigated
by the long amortization profile
Fixed Interest rates
Long amortization profile
Foreign currency, risk mitigated
by the long amortization profile
Bilateral
Existing:
China
Potential:
Semi-concessional low interest rates
Rep. of Korea
Focusing on rural development and ICT
India
Focusing on agricultural projects
Foreign currency indicators
Fixed interest rates
Depending on the source of
financing
Depending on the source of
financing
14
Medium Term Debt Strategy (2015-2017)
Creditors
Cost indicators
Risk Indicators:
Theme Funds
Potential:
Climate Change Funds Grants/Loans
depending on the source of financing
Domestic
Bonds
30.
31.
Market - will reflect market
development
Depends on tenors achieved, may be
some refixing, indexation creates other
risk exposures
Under non-traditional sources of financing, such as Climate Change ‘theme funds’,
that the WB manages 6 climate change funds, which could provide important
amounts of financing for member countries.
For consideration in future periods, some semi or concessional financing may also
be available from other sources such as Brazil, Russia, India, China, South Africa
(BRICS), and from the Organisation of the Petroleum Exporting Counties (OPEC).
6.1
32.
Domestic
Financial Characteristics of Existing Debt
During the last 5 years, there has been an increase in the external portfolio of
$134.1m mainly due to the loan disbursements from EXIM.
Chart 12: Government Debt by Residency of Creditor (%) as at 30 June, 2010 & 2015
June 2010
June 2015
91.1%
90.3%
External
8.9%
Domestic
9.7%
External
Domestic
33.
The terms of the current loans from multi-lateral institutions are generally with
maturity of 40 years at 10 years grace period and 30 years repayment at fixed
interest rate of 0.75-1.5% per annum.
34.
However, there is some debate on concessionality of the loans from bi-lateral
institutions in PRC based on use of different discount rates. That it is not within
the recommended 35% grant element for developing countries such as Tonga.
The terms of the current loans are at maturity of 20 years with grace period
deferred by 5 years resulting in 10 years grace and 10 years repayment at fixed
interest rate of 2% per annum and other loan fees.
35.
For domestic debt, the current terms of GoT bond issues are mainly at 5 years at
fixed interest rate of 3.1%-6.5%. In prior years temporary financing was taken
through overdraft facilities at local commercial banks at market rates, while
Treasury Bonds were also issued at 3-6 months duration. Interest income on GoT
securities is tax exempt.
36.
As referred earlier, the bi-lateral creditors remain the major source of external
financing (EXIM) and followed by multi-lateral creditors (ADB and IDA) and fixed
coupon bonds account for the only domestic financing source.
37.
At end June 2015, financing sources as tabulated in Table 5 below: Total of 44
loans being 28 external loans (mainly from bi-lateral sources) and 16 domestic
bonds (fixed coupon bonds). These loans from ADB (13 loans), WB (6 loans), PRC
15
Medium Term Debt Strategy (2015-2017)
for loans from EXIM and CDB (4 loans), IFAD (3 loans), EIB (2 loans), WPAC
Australia (1 loan) and domestic bonds.
Table 5: Summary of financing sources as at 30 June 2014
Creditor
No. of loans
Range of years
IN rate (%)
13
1977-2002
1.0-1.5
ADB
7
1987-2005
0.75
WB
4
2008-2010
2.0-2.5
PRC
3
1983-1993
1.0
IFAD
1
1979
1.0
EIB
16
2009-2020
3.1- 6
Bonds
44
Total
38.
Total (TOPm)
61.4
52.4
258.8
8.7
0.3
41.0
422.6
With reference to how the external and domestic financing was used for
development of respective sectors of the economy, as in Chart 13.
Chart 13: Total Public Disbursed Outstanding Debt by Economic Sector (%) as at 30 June 2015
23.16%
0.05%
Agriculture
1.13%
Economic & social development
7.90%
Education & training
Energy (electricity)
2.69%
3.77%
Finance & Insurance
Fishing
4.03%
9.20%
2.46%
0.03%
2.73%
3.22%
0.97%
5.85%
Health & Social welfare
Housing & Urban development
Industrial development
Infrastructure development
Multi-sector
Roads & Bridges
Telecommunications
Tourism & Hotel industry
32.81%
39.
Budget Financing
In line with best practice and to maintain transparency and predictability of GoT’s
domestic bond issuance, that MoFNP will consider in future to also publish some
of the details on its website:
7. Baseline Projections
Chart 14 shows Tonga’s performance over the related 10 year period. In general, Tonga
has not done well.
Chart 14: Tonga’s Economic Performance relative to PICs
16
Medium Term Debt Strategy (2015-2017)
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
-35.0
1.0
-0.8
3.9
3.2
-0.4
-0.5
-18.1
-24.3
-23.9
-29.8
(%)
Tonga (2000-2007)
Tonga (2010-2013)
Tonga (2014-2019)
7.1 Fiscal
40.
GoT fiscal policy is its primary tool to improve income distribution through both
its revenue and spending policies. Fiscal policy are designed to support
macroeconomic stability, correct market failures and provide public goods with
particular emphasis on inclusiveness, in particular elderly welfare, special needs of
vulnerable groups and disable, access to free and improved health care, and free
basic primary education and subsidised post secondary education.
41.
The GoT’s recurrent budget shows the significant contribution of budget support
relative to domestic revenue of T$19.3m. The share of staff costs compared to
operating expenditure continue to account for over 50%. The small cash surplus
in 2013/14 and estimated larger surplus in 2014/15 (arising from deferral of
the EXIM Bank loan repayments) will contribute to GoT cash balances.
These related infos are shown in Chart 16.
Chart 15: Domestic Budget Performance
250
200
150
100
Accumulated Bank Deposit
Accumulated Overdraft
Total Domestic Receipts (w/o BS)
Receipts + Budget Support
Total Recurrent Payments
Available Payments w/o debt service
Total budget support
Required Bank Balance 2 months
50
0
42.
The main principles to be followed (with support of specific policies):
17
Medium Term Debt Strategy (2015-2017)
 improving estimation of funding ceilings based on realistic assessments of
revenue raising capacity, budget support and development assistance, and where
appropriate prudent borrowing;
 more careful assessing and managing of appropriate levels of public debt and
cash reserves required to create fiscal space to respond to shocks and
unforeseen events;
 improving budget allocation across sectors by better analysis, prioritization and
discussions to better align funding allocations to Ministry corporate plans based
on the TSDF and overall available funding;
 improving quality of expenditure by ensuring commitments are properly costed
and funded, restricting ad hoc funding additions during the year, improved
financial management and reporting, linked to reporting on progress against
corporate plan indicators.
7.2
43.
Monetary
The roles of monetary policy include (with support of specific policies):
 ensuring sound financial institutions (encourage strong and viable banking);
 maintaining adequate foreign reserves (at least 3 months cover of imports);
 protecting external balance (balance of payments and currency convertibility);
 supporting price stability (low inflation);
 facilitating growth of the domestic economy.
44.
Both GoT and the NRBT recognise the very limited options for expansionary
monetary policy and domestically funded fiscal expansion in a small open
economy. Prudent and coordinated decisions between both policies are critical.
Imprudent policies can quickly generate a macroeconomic and fiscal crisis which
would set progress back, in all areas, for many years. Macroeconomic stability
will thus remain the corner stone of the collaboration between fiscal and
monetary policy.
45.
The NRBT already is following as relax a monetary policy as prudence would
allow. The banking system is still working off the high level of non-performing
loans from the last attempt to boost lending beyond prudent levels. Bank lending
to business continues to decline, though less rapidly, while lending to households
(which includes some commercial activity) is growing. Monetary policy will work
to mitigate against a future building up in the level of non-performing loans while
encouraging lending for commercially viable investments.
46.
The rate of the core inflation, which excludes food and energy prices, increased
by 5.6% over the year to February. Inflation is projected to be around 2.5% in June,
before falling to 0% at the end of 2015.
47.
Interest rates have fallen by between 36 and 71 basis points since the end of the
last financial year. Bank loan rates have fallen by more, because the composition of
lending has shifted towards lower-risk lending products (lending rates low by
standards of past periods). Deposit rates are little changed. NRBT sees little room
18
Medium Term Debt Strategy (2015-2017)
for lending rates to fall much further despite increased competition in
banking services.
48. Total bank lending balances grew by 8.9% over the year to February 2014. The
growth was all to households with a continued, but slower, decline to
businesses NRBT anticipates a further growth in lending of 10% over the current
year and 2015 which will support the anticipated improvements in GDP growth.
Key challenges for Tonga:
There are several downside risks to the baseline
macroeconomic outlook. These include the risk of not securing sufficient grant financing for
the hosting of the South Pacific Games; remittances and tourism not increasing as robustly as
expected; the Government not being able to control the wage bill combined with a tax reform
not resulting in the expected revenue increases. These risks are likely to dampen growth
prospects, put downward pressure on the exchange rate, and lead to a rise in domestic and/or
external borrowing needs.
Continuation of financial difficulties in the main origin countries of remittances from Tongans
abroad and main sources of tourists (New Zealand and Australia) would negatively affect the
expected economic growth rate. Furthermore, any delays in implementing revenue reform and
reducing the wage bill weight in government expenditures could exert further pressure to
resort to additional borrowing.
7.3
Other longer term structural adjustments
The TSDF, which encompasses nine priority areas, continues to guide the overall
strategic reform of GoT. In support of addressing the current debt overhang and the
requirement for fiscal consolidation and structural reform in the medium term, the TSDF
covers the following related areas beyond the MTDS.
49.
Structural Policy: Structural reforms to facilitate the functioning of credit
markets need to be implemented and with renewed vigour. GoT intends to
gradually phase out existing ad hoc tax incentives. The promotion of foreign direct
investments (FDI) should focus on business enabling structural reforms, while the
use of tax incentives should be minimised and well targeted. GoT is also
committed to further strengthening the private sector partnership to increase
competition which helps improve quality and lower prices for
customers.
Promoting FDI should focus on business enabling structural reforms, and there is
the need to strike the right balance between promoting FDI projects and protecting
revenue base.
50.
Improving the way GoT operates is key to a more efficient, effective and
affordable public service needed to deliver GoT policies and services while
ensuring fiscal stability. Major reforms are under way and these relate
to economic and social policy analysis, national and corporate planning and
budgeting, staff performance and management, improved governance and
transparency as well as other technical areas.
51.
On development of domestic debt market, especially of GoT securities, this is
an alternative financing option. Follow up technical assistance (TA) by ComSec
is being carried out by DMS of MoFNP in liaison with the NRBT. For details of
priority areas for assistance as regarding institutional arrangements, scope of
instruments and investors, this is referred in Annex 1.
19
Medium Term Debt Strategy (2015-2017)
52. GoT recognises that the medium-term prospects for Tonga, depend on the continued
implementation of its wider program of structural reforms as well as retaining a
focus on the MTDS within the wider strengthening of the MTBF to ensure GoT
finances are on a sustainable path. This will also provide policy space to allow
better response to future shocks.
8. Risk Scenario Testing
53.
There are several inherent risks in the debt portfolio. The GoT has in recent
years, noted the priority need to employ various measures to mitigate these risks
and to minimise the impact of various exogenous shocks on the portfolio. The
GoT will continue to identify and mitigate risks to the implementation of the debt
management strategy. Prudent debt management practices will be pursued over
the medium-term with a view of satisfying the mandate as outlined in the MTDS.
54.
Stress testing involves deciding on realistic problems (downside risks) that the
country might face, and looking at how they are likely to affect the country’s
future economy. GoT recognises that stress testing is an important part of a debt
sustainability analysis, where the effect of downside risks on the ability of a
country to continue to make debt repayments is examined.
8.1 Cost and Risk Characteristics of Existing Debt
Table 6 looks at position of GoT’s debt portfolio and what are the major costs and
risks and how they can be mitigated in the medium term.
Table 6: Cost and Risk Characteristics of the Existing Debt Portfolio as at 30 June
2015
Particulars
Amount (in millions of TOP)
NPV debt as % GDP
Cost of
debt
Weighted Av. IR (%)
Interest ATR (years)
Debt refixing in 1yr (% of total)
rate
risk
Fixed rate debt (% of total)
FX debt (% of total debt)
FX risk
ST FX debt (% of reserves)
55.
External debt
381.6
44.0%
Domestic debt
41.0
3.5%
Total debt
422.6
44.5%
1.3
9.3
4.3
99.9%
5.0
0.5
1.6
0.1%
2.0
8.8
5.9
100.0%
92.1%
130.8%
The total public debt to GDP ratio is estimated at 51.5%, with external debt at
46.5% and domestic debt at 5.0. At end June 2015, the debt portfolio of GoT
wasmainly comprised of external debt at 90% and domestic debt at 10%.
In comparison of Tonga’s external debt position with other countries as in Chart
17, it is under the island average but above the upper middle income level. For
domestic debt, Tonga’s position is below both the island and upper middle income
average. Given this, it supports the strategy by GoT for development of the
domestic market.
Chart 16: Nominal debt as % of GDP
20
Medium Term Debt Strategy (2015-2017)
% of GDP
120
100
80
60
40
20
0
45.80
Total debt
External debt
Domestic debt
42.30
3.60
56.
The majority of the external debt is from EXIM as denominated in CNY at 66%,
and from the ADB and IDA as denominated in SDR at 18% and 14% respectively.
57.
External debt is mainly on a concessional basis at a fixed interest rate of 0.75% to
2% per annum. With the most part to mature in more than 10 years time
at 97.8%.
Domestic debt is on a more commercial basis at a fixed coupon rate of 3.1% to
6.65% per annum. The majority of debt will mature in 1-3 years at 64.4%.
58.
8.2 Analysis of Cost and Risk Indicators
59.
Looking forward over the next 3 years, the debt sustainability position will
change as result of the revised thresholds and assuming no new borrowing, that
most of the indicators will not be breached (includes fluctuations3). However,
cautious monitoring by MoFNP of GoT’s debt sustainability level is required and
especially on any ease for future external borrowing and to coincide with
improvement in our current level of economic activity and prudent public debt
management, in order to mitigate the vulnerability to shocks.
Chart 17: NPV External Debt as % of GDP
Chart 18: NPV External Debt as % of Exps & Remittcs
200.0%
50.0%
100.0%
0.0%
0.0%
04/0505/0606/0707/0808/0909/1010/1111/1212/1313/14
04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14
NPV External Debt as % of GDP
NPV External Debt as % of exports & remittance
GoT Threshold
Chart 19: TDS as % of Revenue
Chart 20: TDS as % of Exports & Remittances
20.0%
30.0%
25.0%
15.0%
20.0%
15.0%
10.0%
10.0%
5.0%
5.0%
0.0%
0.0%
04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14
TDS as % of revenue
GoT Threshold
03/0404/0505/0606/0707/0808/0909/1010/1111/1212/13
TDS as % of exports & remittance
60. Over the last 10 years (FY 2004/05-2013/14), Chart 18 - 21 show the debt
sustainability position of the GoT’s debt portfolio (excludes fluctuations). Since FY
2007/08 when disbursements began for the EXIM loans, there has been a
significant rise in the Net Present Value (NPV) ratios and where the thresholds
3
Nominal GDP, Exports & Remittances decrease by 2%, Revenue decrease by 1%,& FC rates increase by 5%
21
Medium Term Debt Strategy (2015-2017)
were breached in the last few years. The TDS ratios have shown a fluctuating trend
but have remained well below the thresholds.
8.2.1 Exchange Rate Risk
61. Foreign exchange rate risk relates to vulnerability of the debt portfolio and the
impact on GoT’s debt servicing cost due to a depreciation of the TOP against the
currencies in which the external debt is denominated.
Chart 22 shows a comparison of related risks for Tonga’s external debt position
with other countries. Clearly, in general, Tonga is way above the average position.
Chart 21: Foreign Exposure (Tonga vs. the world)
%
100
90
80
70
60
50
40
30
20
10
0
92.30
Foreign Debt % of Total
Short-term Foreign Debt % of Reserves (RHS)
14.10
Tonga
Island average
Upper Middle
Income Average
Lower Middle
Income Average
16
14
12
10
8
6
4
2
0
Low Income
Average
62. Of the external debt, $381.6m (90%) is denominated in currencies other than the
local currency and is therefore exposed to exchange rate changes. This is
considered to be the most serious of the potential risks given the major foreign
currency, the CNY, is anticipated to appreciate against the TOP (also the SDR).
Chart
22:
External
Debt
Outstanding
by
Currency,
FY
2014/15-2030/31
400
300
200
100
0
13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 22/23 23/24 24/25 25/26 26/27 27/28 28/29 29/30
CNY
USD
GBP
JPY
EUR
AUD
63.
Foreign exchange movements will change both the amount of debt servicing and
the value of debt outstanding, TOP, and therefore the related debt ratios.
64.
Chart 24 below shows that the CNY accounts for the major component of debt
service at (70%) followed by USD (12%), EUR (11%) and the remaining
currencies are estimated at less than 7% (includes fluctuations).
Chart 23: External Debt Service by Currency, FY 2014/15-2029/30
22
Medium Term Debt Strategy (2015-2017)
40.0
30.0
20.0
10.0
0.0
14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 22/23 23/24 24/25 25/26 26/27 27/28 28/29 29/30
CNY
USD
GBP
JPY
EUR
AUD
65.
It is estimated that the annual external debt servicing obligations will increase in
FY 2018/19 by $10m or around 1.2% of the projected GDP.
66.
The annual external debt service will increase to over $20m and will remain at
that level over the next 13 years or so (this excludes any fluctuation of borrowing
currencies in future). This is due to reschedule of principal repayments on the
major loans from EXIM, due to start from September 2018.
8.2.2 Refinancing Risk
67.
Rollover risk is the risk that maturing debt cannot be replaced or refined, or that
the replacement debt will be more expensive.
68.
At end June2015, the proportion of domestic debt falling due within one year is
20.3% of domestic debt while 22.4% of domestic debt will mature in 1 to 2 years.
The ATM of the total debt portfolio is 8.8 years in FY 2013/14, with external and
domestic debt portfolios recording 9.3 years and 2.6 years respectively. The debt
maturing in one year is 5.9% of total public debt. For the external debt portfolio
4.3% matures in one to two years whilst about 1.6% of the domestic debt
portfolio matures in one year.
69.
In comparison of refinancing risk for Tonga with other countries,, for external
debt portion it is below the island average but above the upper middle income
level position. However, for domestic debt that Tonga is well below all the
country averages (as shown in chart 25).
Chart 24: Total Public Debt - Refinancing Risk (Average Term to Maturity)
18
16
14
12
10
8
6
4
2
0
9.70
Total debt
External debt
Domestic debt
10.30
2.50
Years
70. The GoT is aware of the refinancing risk that is inherent in the current structure of
the domestic debt portfolio, due to its shorter maturity, and therefore will pursue
the strategy to extend the maturity profile of new issues to more than 5 years with
the maturing bond in June 2015, as below. There is a great opportunity for this
strategy given the over subscription of the bond roll over during the last few years.
23
Medium Term Debt Strategy (2015-2017)
Currently, all bonds are essentially funded on a roll over basis, with new issuance
funding maturities and a nil net effect on financing.
Chart 25: Remaining Maturity Profile of Domestic Debt (TOPm) as at 30 June 2015
6 yrs
3.0
5 yrs
5.0
4 yrs
2.5
3 yrs
5.0
2 yrs
8.0
1 yr
6.0
0
1
2
3
4
5
6
7
8
9
71. At the end June 2015, the proportion of external debt with maturity of less than 10
years is estimated at 2.1% while 97.9% has more than 10 years to maturity with
the majority of repayments to be made in the distant future.
Chart 26: Remaining Maturity Profile of External Debt (TOPm) as at 30 June 2015
15+ yrs
182.6
10 - 15 yrs
146.5
5 - 10 yrs
2.9
3 - 5 yrs
4.2
1 - 2 yrs
0.2
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
8.2.3 Interest Rate Risk
72. Interest rate risk is the risk associated with interest rate changes in the
debt portfolio.
73. At end June 2015, the weighted average interest rate of external debt is estimated
at 1.6% and of domestic debt at 4.3%.
74. As shown in the chart 28, in comparison of Tonga’s position to other countries, it is
well below the related average.
Chart 27: Cost of debt – weighted average interest rate
Percent
12
10
8
6
4
2
0
1.80
Total debt
External debt
Domestic debt
4.30
1.60
75. The proportion of the instruments is mainly of fixed-rate and a minor amount of
variable-rate. During the 5 year period, there has not been much change..
Chart 28: Share of fixed rate to floating rate debt (%) as at 30 June, 2010 & 2015
24
Medium Term Debt Strategy (2015-2017)
0.1%
100%
80%
60%
40%
100.0%
100.0%
100.0%
Domestic Debt at end June
2009
Domestic Debt at end June
2014
99.9%
20%
0%
External Debt at end June 2009 External Debt at end June 2014
Fixed-rate Loans
Variable-rate Loans
8.2.4 Liquidity and Repayment Risk
76. Servicing debt is a primary concern for debt management and to ensure that the
total expenditure including debt service costs does not exceed revenue collected.
This risk can be expressed as the cost of debt repayments compared with funds
available.
77. This is a real risk for GoT especially from FY 2018/19 with the projected large
increase in external debt servicing costs. In comparison of these costs to both
revenue and expenditure it may create inability to meet all the repayments as due.
78. Chart 30 below shows the costs for debt servicing over the next 16 years, with
external debt accounting for bulk of the costs at over 73% (includes fluctuations)
Chart 29: Total Public Debt Service by Currency, FY 2013/14-2029/30
50
40
30
20
10
0
13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 22/23 23/24 24/25 25/26 26/27 27/28 28/29 29/30
CNY
USD
GBP
JPY
EUR
AUD
TOP
79. Due to the impact of this real risk, the two major loans from EXIM Bank of China
(CBD and Roads) have been rescheduled with Amendment Agreements signed in
June 2014. This debt service has now been deferred for another 5 years with
repayments (CBD) to begin in FY 2018/19 (September 2018) until maturity
(Roads) in FY 2029/30 (February 2030). However, with this temporary relief, that
it will cost more for GoT in future years. Unless, PRC will consider favourable
cancellation of a portion of this outstanding debt (if not all).
8.2.5 Creditor Concentration Risk
80. Creditor concentration risk refers to risks associated with most of the debt
portfolio being held by one or two creditors. Those who hold a large proportion of
debt could have a vested interest in the course of a country’s affairs and could
potentially have an undue influence in policy development.
81. For domestic debt, the major holders of GoT bonds are the FI at 56% and followed
by RFB at 25% and Individuals at 8%. In order to diversify the investor base, the
MoFNP will work closely with NRBT in liaison with ComSec as may be required to
explore the scope and options of instruments to offer the domestic market.
25
Medium Term Debt Strategy (2015-2017)
8.2.6 Credit Risk of on-lent and guaranteed loans
82. With the current level of outstanding on-lent loans from GoT there is implicit
exposure to default and non-payment of obligations by these entities also from
those borrowers of those loans are guaranteed. Introducing more analysis and
oversight of these transactions will reduce the overall risks embedded in the GoT’s
debt portfolio. These are not covered in detail in this initial MTDS but will be
developed as part of ongoing work by DMS (MoFNP) and for future reporting.
83. In the near term, the MoFNP will also consider review of the draft Policy
Framework for GoT in particular for contingent liability management. This
document will be formalised and for subsequent implementation with related
capacity building of staff.
8.3 Other Risks in Managing the Portfolio
8.3.1 Operational Risk:
84. The operational risks facing the DMS in Tonga stems from the small staff size and
limited capacity, which is also vulnerable to staff movements. At end June 2014,
there are only three staff and therefore MoFNP cannot take advantage of the
controls that come with separations between front, back and middle office, as is the
case with larger Sovereign Debt Management offices. The difficulty in developing
and retaining skilled staff in this area is a risk for Treasury and MoFNP, in general.
In order to address this risk, DMS staff mainly attend external trainings funded by
donors such as the ADB, ComSec, IMF-WB. Other sources of external assistance are
in-country missions to MoFNP on respective areas for development of debt
management. In the near future, DMS staff may also get an opportunity for
secondment arrangements to either regional offices or direct with donors such as
WB. There is also proposal by ComSec for re-instatement of the Regional Advisor
programme which gives closer access for user countries of the ComSec Debt and
Recording Management System (CS-DRMS) to expert advice both on policy and
technical system issues.
8.3.2 Strategic Risk
85. Strategic risk is the risk that decisions made about management of the debt
portfolio have a high opportunity cost.
86. If GoT decides not to borrow, then it could miss out on grant funding (if grant
funding for these projects is not available from other sources). If decisions to
borrow for particular projects do not match expectations, then this money could
have been better spent elsewhere on other, more beneficial projects. Money spent
on servicing debt might be better spent on providing essential services.
87. Alternatively, it is better to pay down debt (which saves the GoT future interest
payments and increases borrowing opportunities in the future) rather than
spending funds unwisely.
In view of this risk, the MoFNP as part of the annual budget preparation needs
better review and coordination to best determine for any financing that the GoT
may require and to analyse the related costs and risks for those options.
8.3.3 Financial Risk
26
Medium Term Debt Strategy (2015-2017)
88. Financial risk is the risk that the GoT’s portfolio management is so poor that it
creates a source of instability for the private sector. The risk for Tonga is that a
poorly managed debt portfolio will mean that less money is available for servicing
the country’s basic needs which could undermine development and progress
towards the MDGs.
89. A burgeoning debt portfolio or a build-up of debt arrears might negatively
influence investor confidence, weakening private sector activity, leading to a
withdrawal of investment in the country, a decline in GDP growth and a further
increase in debt to GDP ratios. This is an extreme risk as seen recently in some
European countries.
9.
Recommended Strategies and desired composition of debt
90. The DMS has considered four main strategies as practical that GoT will explore in
the next three years and the analyses done takes into account the debt
management objectives and also the debt sustainability position under various
macro scenarios. These strategies do not exclude each other and can be
implemented at the same time. There are also other strategies available for GoT to
consider but as a priority that these main strategies to be implemented, are as
referred below.
91. These strategies include:
Strategy 1: For current practice of mainly external financing (semi and
concessional) and some domestic bond financing
To evaluate the cost and risk aspects of a continuation of current borrowing
practices for Tonga, and to use these factors to set a benchmark for examining
different approaches.
For the Baseline strategy, of implied net borrowing (or retirement of debt) over the
simulation period, 50% was assumed to be sourced from Multilateral Creditors (eg:
IDA, ADB) at highly concessional terms, and the remaining 50% from issuance of
domestic debt in maturities of 6 years (Table 7)
Table 7: Alternative Borrowing Strategies
27
Medium Term Debt Strategy (2015-2017)
In conclusion, this strategy is based on current practice of external and domestic
borrowing, that it does not best address the priority issues of foreign exchange
risk, liquidity and repayment risk, creditor concentration risk and refinancing risk.
Under the cost and risk analysis over the 3 year period as referred below in
point 109 this strategy in comparison to 2, 3 and 4, provides medium to high
risk mainly due to the foreign exchange factor and low to medium cost in
relation to GDP.
Strategy 2:
For development of domestic securities market
To examine the cost and risk aspects of taking steps to further develop the domestic
debt market, Strategy 2 highlighted an overall balance of new borrowing that tapped the
domestic market for 95%of financing requirements, and the external debt market for
5%. A domestic yield curve was established following the existing rate structure in
Tonga for the 5-6 year debt stock, and extended to cover the issuance span from 1 to 10
year maturities. Bond issuance was posited to be concentrated by almost 60% (of
domestic flows) in 5-6 year bonds—deepening the existing market, while building to an
average 30% concentration in 10-year bonds—establishing a longer term maturity in the
market; and by an average 7% at the 1-year maturity. A priority, one would anticipate
greater costs for this strategy vis-à-vis baseline, given the higher level of domestic
interest rates versus international concessional ones; but exchange rate risk would be
diminished by the higher share of domestic-currency denominated debt.
In conclusion, this strategy best addresses the priority issue of foreign exchange
risk and liquidity and repayment risk with roll over of domestic securities
on maturity.
Under the cost and risk analysis over the 3 year period as referred below in
point 109, this strategy in comparison to 1, 3 and 4, provides low risk mainly
28
Medium Term Debt Strategy (2015-2017)
due to the foreign exchange factor of external borrowing and high cost in
relation to GDP due to the interest rate factor and shorter maturity
compared to external borrowing.
Strategy 3:
For highly concessional financing
Strategies 3 and 4, in contrast to Strategy 2, examine the tradeoffs in expanding
external borrowing, in Strategy 3 by boosting the proportion of gross external
borrowing over the 2015-2022 period to 83% from 50% in the baseline, here
concentrated in concessional multilateral borrowing. Domestic debt issuance is
diminished to 17% of total financing requirements.
In conclusion, this strategy best addresses the priority issue of refinancing risk.
Under the cost and risk analysis over the 3 year period as referred below in
point 85, this strategy in comparison to 1, 2 and 4, provides medium risk
mainly due to the foreign exchange factor and lowest cost in relation to GDP
due to the interest rate factor available from multilateral sources offering
highly concessional terms.
Strategy 4:
For bilateral financing
Strategy 4 looks at an alternative approach to making use of the external market,
by borrowing from “new” bilateral creditors carrying quasi-or semi concessional
terms (almost 70% of international flows), in addition to multilaterals (at half of
baseline proportions), and a small 8% share of domestic debt. In anticipation of
results, Strategy 3 should exhibit a lower cost profile given advantageous interest
rate terms, but foreign exchange risk may be heightened. Strategy 4 may show a
low-cost/higher risk profile as well.
In conclusion, this strategy best addresses the priority issue of creditor
concentration risk.
Under the cost and risk analysis over the 3 year period as referred below in
point 85, this strategy in comparison to 1, 2 and 3, provides highest risk
mainly due to the foreign exchange factor and less concessional terms also
medium cost in relation to GDP due to the higher interest rate (from terms
offered by multilateral sources).
92. To determine the cost-risk profile of the baseline macroeconomic scenario-borrowing
strategy combination, a set of standard market shock tests are applied to the strategy in
order to assess the different vulnerabilities to exchange and interest rate fluctuations.
Three currencies were considered in the analysis: the U.S. and Australian dollars and the
Chinese Yuan.
The market shocks included:
(i)
two standard shocks to baseline exchange rates (one of 15% depreciation and
another of 30% depreciation, both in the first year of the forecast);
(ii)
two interest rates shocks (here 100 and 200 basis-point increases to domestic
interest rates were imposed), and
(iii) a combined shock, which simulates the effects of the 100 basis point interest
rate increase with a 15% exchange rate shock.
The assumptions did not include any shocks to the external debt instruments, as all but
one small loan feature fixed interest rates, and any future external loans are expected to
29
Medium Term Debt Strategy (2015-2017)
come in IDA standard terms and therefore also with fixed rates and very little chance
for future increases in rates.
Cost4 for a particular borrowing strategy is defined for example, as the calculated
ratio of debt to GDP as of the last forecast year (2022). Risk for the same strategy
is calculated as the maximum change in cost (in points of GDP) between the
“worst-case stress test” version of the borrowing strategy and that strategy
without stress simulations applied.
Cost-risk can also be examined from the interest cost of debt service perspective,
looking at the interest to GDP ratio at the end of the simulation period. The reason
for focusing on the last year of the period is that differences on a year to year basis,
especially when most of the debt is on concessional terms, do not show substantial
changes. Moreover, the purpose of the analysis is to verify whether the objectives
of the strategy are achieved at the end of the period.
93. In reference to the preferred position of GoT to improve its current debt portfolio.
The recommended strategies provided in this document consider what are some
practical options to minimise the cost and risks in particular of the external debt
and to also have a more balanced composition to the domestic debt
(i)
To summarise, the following Table refers on the position of each of the four
strategies including the combined macro scenarios applied over the 3 year
period and the related indicator of the GoT’s debt portfolio. Charts 31 – 33
highlight the results of the simulations for the four borrowing strategies
outlined under the baseline macroeconomic fiscal projections as presented in
this above. The table shows the set of risk indicators as found in the earlier
analysis of the characteristics of the current debt portfolio—this time
featuring the current profile, together with the four borrowing strategies for
FY2022. The figures present the cost –risk ‘tradeoffs’ for the four borrowing
strategies together, where Chart 30 shows the Debt to GDP ratio as a measure
of cost (y axis), and risk measured as the change in cost under the ‘worst
case’ stress test (x axis).
(ii)
All borrowing strategies result in a substantial (about 15 point) decline in
Tonga’s expected debt to GDP ratio over the 8-year span between FY2015 and
FY2022. This is due to two factors--fiscal (largely revenue enhancement)
assumptions built into the baseline macro-fiscal scenario which yields a
primary balance surplus over several years of the simulation; and the
contribution to debt reduction stemming from a cumulative four year
repayment of outstanding debt with China EXIM by 2022. If the left-hand
scale in figure 8a is examined, the range can be seen to be fairly narrow.
(iii) When comparing borrowing strategies in Chart 31, it is observed that
Strategy 3 (highly concessional borrowing) could be deemed the most
beneficial, as it focuses on concessional funding. It should be pointed out
however that availability of highly concessional funding is limited, and will
gradually reduce over time as the Tongan economy develops.
(iv) It is noted that Strategy 2 (domestic market development) carries the
highest cost among alternatives in terms of Debt to GDP, largely due to higher
4
The use of these two cost measures was discussed with the authorities. Alternative measures, such as interest cost to revenues etc.
could also be used
30
Medium Term Debt Strategy (2015-2017)
domestic interest rates (contrasted with low international rates) being
established by new bond issuance. But risk is somewhat lower for Strategy 2,
in part due to the lower foreign exchange exposure to which the other
borrowing plans are subject.
(v)
In contrast to Strategy 1 (current practices), both borrowing options 3 and 4
explore a more intensive sourcing of finance from international markets.
Strategy-3 (Multilaterals) shows lowest cost characteristics across strategies, at
28% of GDP, tied to the concessional terms of borrowing from
these institutions.
(vi) While Strategy 4 (New Bilateral Creditors) shows higher costs and risks than
the former, against the background of somewhat less concessional terms on
lending, and exposure to foreign exchange fluctuations. Both Strategies
exhibit improvements in cost vis-à-vis current practices, suggesting that
placing some emphasis (in the wake of revisions to the NNB policy) on
renewed concessional- or quasi-concessional borrowing could be more cost
effective. It should be noted that bilateral borrowing shows highest risk
characteristics of the group, once more due to foreign exchange
considerations.
94. The related macro scenarios applied to the strategies, as below:
I.
Baseline scenario of variables at June 2015 (using Budget and DSA)
The baseline macro scenario did not take into consideration the fact that,
following the upgrade in DSA risk ratings, previous amounts of grants
might not materialise, and therefore the financing gap would be larger
and new loans required.
II.
Lower revenues of 50% less grants
The first alternative grant level scenario “lower ” posits a 50% reduction
in budget support grants beginning in 2017 increasing the financing
requirement by some 20% of GDP by 2020, while experiencing a slight
increase in indicators due to higher domestic interest rates and foreign
exchange risks.
III.
Debt relief of the 2 major loans from Exim Bank of China
The second alternative scenario: “debt relief” serves to lower borrowing
requirements by almost 25% of GDP, on the assumption
T 25%
thatofaGDP
Debtttfor
Development agreement is reached with Chinese authorities.
95. Charts 31 - 33 show position of the four strategies after taking into account the cost
and risk analysis based on the various macro and fiscal scenarios applied
Chart: 30 Debt to GDP As at end of 2017
Cost (%)
43.45
S2
43.40
43.35
S1
S3
43.30
S4 Risk
43.25
3.70
3.75
3.80
3.85
3.90
3.95
4.00
4.05
4.10
4.15
4.20
31
Medium Term Debt Strategy (2015-2017)
In comparison of the four strategies under this analysis, Strategy 3 provides
the lowest cost due to the highly concessional loan terms offered by
multilateral sources such as IDA and ADB. However, Strategy 2 provides the
lowest risk due to domestic borrowing by issue of GoT securities and no
exposure to foreign exchange movements.
Chart: 31 PV of Debt to GDP as at end of 2017
Cost (%)
36.0
S2
35.0
34.0
S4
S1
33.0
S3
32.0
2.6
2.6
2.7
2.7
2.8
2.8
Risk
2.9
2.9
In comparison of the four strategies under this analysis, Strategy 3 provides
the lowest cost and risk due to the highly concessional loan terms offered by
multilateral sources such as IDA and ADB. However, Strategy 3 is exposed to
foreign exchange movements due to external borrowing.
Chart: 32 Interest to GDP as at end of 2017
Cost (%)
0.9
S2
0.9
0.8
S1
0.8
S4
S3
0.7
-
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
Risk
0.10
In comparison of the four strategies under this analysis, Strategy 3 provides
the lowest cost and risk due to the very low interest rate (less than 1%)
96. Given the analysis above and based on the lowest cost and risk between the four
strategies, Strategy 3 best addresses that requirement. However, on the priority
requirement to minimise the significant level of foreign exchange risk as result of
the high proportion of external debt at 91% (compared to 9% of domestic debt),
under this strategy GoT will continue to be vulnerable to this risk in the medium
term.
Further, with progressing of Tonga’s economy that access to highly
concessional borrowing from multilateral sources will also become limited.
97. To consider the strategy that best addresses the high risk of foreign exchange and
comparison of difference between cost and risk of the four strategies. Strategy 2
is the preferred option for GoT to implement in the medium term. Although it
provides a higher interest cost than the other strategies that it is minimal
compared to the difference in risk level due to no exposure of domestic borrowing
to foreign exchange. With gradual development of the domestic market that it
would also provide a more balanced composition of public debt with less external
debt and more domestic debt.
Annex 1: Summary of recommendations specific to certain segments of the GSM
32
Medium Term Debt Strategy (2015-2017)
MONEY MARKET DEVELOPMENT
The liquidity in the banking system to be kept on
balance over a period of time.
Recent amendment to NRBT ACT 2007 to be
reviewed to enable NRBT to conduct open market
operations using outright transactions as well repos
transactions in Government securities
Central Bank and market repo to be introduced
Short term Treasury Bills to be used for funding
temporary cash mismatches of Government in place
of overdraft facility from a commercial bank at the
commercial rate of interest.
NRBT to compile and disseminate money market
transactions to market at a regular interval.
PRIMARY MARKET
Adopt issuance policy based on Commercial Paper
(CP) type issuances
Consult market actively before announcement of
tenor, target issuance amounts and pricing.
Place a limit for issuance for each maturity year to
contain refinancing risk
Adopt and publish guidelines for issuance of
Treasury Bills and Bonds
Shift to auction process at later stage
Improve effectiveness of Cash Management by
improving forecasting of cash balance, establishing a
link between forecasted cash position and primary
issuance and adoption of a comprehensive Treasury
Single Account
INVESTORS BASE AND SECONDARY MARKET
Initiate an investor education program
Undertake feasibility study for undertaking issuance
of ‘diaspora bonds’ on a regular basis
Reinstate the authority to the NRBT to acquire and
own Government securities
Set up legal framework for Insurance business
MARKET INFRASTRUCTURE
Introduce system of dematerialisation of securities
and phase out physical form of holding securities.
Introduce a DvP based settlement of securities using
DvP I mode
Facilitate introduction of a simple system for
execution of sale and purchase of securities by
buyers and sellers
MoFNP and
NRBT
MoFNP and
NRBT
MT5
L
ST
H
NRBT
MoFNP and
NRBT
MT
MT
H
M
NRBT
LT
L
MoFNP and
NRBT
MoFNP and
NRBT
MoFNP
ST
H
ST
H
MT
M
MoFNP and
NRBT
MoFNP
MoFNP
MT
M
LT
ST
M
M
MoFNP
MT
M
MoFNP and
NRBT
MoFNP and
NRBT
MoFNP
MT
M
ST
H
MT
H
NRBT and
MoFNP
NRBT
ST
H
MT
H
NRBT
MT
H
Annex 2: Total Public Disbursed Outstanding Debt (TOPm), FY 2003/04-2029/30
5
MT: Medium-Term, ST: Short-Term, L: Low, M: Medium, H: High
33
Medium Term Debt Strategy (2015-2017)
FY’s
03/04
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
12/13
13/14
14/15
15/16
16/17
17/18
18/19
19/20
20/21
21/22
22/23
23/24
24/25
25/26
26/27
27/28
28/29
29/30
External
152.7
149.6
165.6
161.4
157.9
202.4
228.8
274.9
322.6
343.1
336.5
381.6
382.1
374.5
367.7
346.7
321.2
291.0
260.9
230.6
200.9
170.7
140.6
111.9
83.1
61.8
47.8
Domestic
31.4
28.8
27.3
25.7
22.5
22.5
29.5
29.5
29.5
29.5
29.5
41.0
56.0
56.0
56.0
56.0
56.0
56.0
56.0
56.0
56.0
56.0
56.0
56.0
56.0
56.0
56.0
Annex 3: Total Public Debt Service by Currency, FY 2013/14-2029/30
CNY
USD
GBP
JPY
EUR
14/15
6.7
2.8
0.8
0.6
2.6
15/16
6.9
2.9
0.8
0.6
2.6
16/17
6.3
2.9
0.8
0.6
2.6
17/18
5.6
2.8
0.8
0.6
2.5
18/19
19.0
2.7
0.7
0.6
2.4
19/20
23.2
2.7
0.7
0.6
2.4
20/21
27.3
2.6
0.7
0.6
2.3
21/22
26.8
2.7
0.7
0.6
2.4
22/23
26.4
2.7
0.7
0.6
2.4
23/24
25.1
2.6
0.8
0.8
2.6
24/25
24.7
2.5
0.8
0.8
2.5
25/26
24.2
2.3
0.6
0.6
2.0
26/27
23.8
2.2
0.6
0.5
2.0
27/28
23.3
2.1
0.6
0.5
1.9
28/29
16.1
2.1
0.6
0.5
1.8
29/30
9.1
2.0
0.5
0.5
1.6
Total
184.1
178.4
192.9
187.1
180.4
224.9
258.3
304.4
352.1
372.6
365.9
422.6
438.1
430.5
423.7
402.7
377.2
347.0
316.9
286.6
256.9
226.7
196.6
167.9
139.1
117.8
103.8
AUD
0.1
0.1
0.1
0.1
0.1
0.04
0.02
-
TOP
8.0
7.8
4.4
6.4
3.9
7.4
8.0
7.8
4.4
6.4
3.9
7.4
8.0
7.8
4.4
6.4
Total
13.7
14.0
13.3
12.5
25.8
29.8
33.7
33.1
32.8
31.6
32.1
31.5
29.6
29.1
28.4
20.9
Annex 4: Macro Economic Data (TOPm), FY 2003/04-2015/16
FY
03/04
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
12/13
13/14
14/15
15/16
GDP
474.8
513.3
594.6
602.9
659.3
664.3
711.4
783.4
781.5
836.1
829.5
821.3
897.2
Revenue
112.3
117.8
148.2
151.5
161.8
186.8
159.6
151.0
146.7
159.7
136.7
141.4
152.2
Remittances
202.8
202.8
186.9
202.6
202.8
175.2
157.4
146.5
112.3
113.3
110.7
114.7
118.6
Exports
83.1
77.0
81.9
65.6
93.6
95.1
83.2
100.3
103.1
154.8
149.8
153.9
158.8
34