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Managing Emerging Market Public
Debt in a Crisis:
Has this time been different?
Anderson Caputo Silva
Senior Debt Specialist
World Bank / IFC Securities Markets Group
Agenda
1. Developing Government Bond Markets: Rationale
2. Impact of the Crisis
3. Development Agenda Going Forward
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1. Developing Government Bond Markets: Rationale
Government Bond Markets: Key Impacts
Public Sector
 Allows smooth implementation
of different fiscal cycles
 Reduces macroeconomic
vulnerabilities and the cost of
funding
Enhances the impact of debt
management policies
 Key for effective monetary
policy
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Broader Financial Sector
 Creates market-based pricing
and pricing benchmarks for
broader types of non-government
instruments
 Provides essential
infrastructure for the development
of non-government instruments
Key for financial sector
development and enhancing costeffective access to finance
Agenda
1. Developing Government Bond Markets: Rationale
2. Impact of the Crisis
3. Development Agenda Going Forward
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2. Impact of the Crisis: Overview
■ EMs before the crisis:

Macroeconomic fundamentals

Debt management
■ Impact of the global financial crisis
■ Debt managers’ response to the crisis
■ Lessons learnt
This section is based on a draft paper “Public Debt Management in Emerging Market
Economies: Has This Time Been Different” by Phillip Anderson , Anderson Caputo Silva and
Antonio Velandia. The usual disclaimers apply.
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Macroeconomic fundamentals were stronger this time…

Fiscal policy: healthier fiscal balances opened
space for countercyclical policies

Monetary policy: increased credibility from steady
inflation rates at historically low levels
CPI Inflation
(Average annual % change)
Overall Budget balance
(as a % of GDP)
30
4%
25
2%
20
0%
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-2%
15
-4%
10
-6%
5
-8%
-
SSA
MENA
2008
LAC
EAP
EAP
Buoyant growth: together with sounder fiscal
policy, contributed to a downward trend in
Debt/GDP ratios.

Improvements in EMs external accounts provided
solid foundations to reduce vulnerability to shocks
and reversals in capital flows.
GDP growth
(%)
9
8
7
6
5
4
3
2
1
-
ECA
2007
MENA
2006
SSA
2005
LAC
2004

ECA
2003
SAR
SAR
2002
-12%
2001
2000
-10%
Current Account Balance
(US$ bn)
8.27
60
40
GEMX 24
6.23
3.41
-
2.32
High income
OECD
1.11
20
0.64
(20)
2000
2001
2002
2003
2004
2005
2006
2007
2008
(40)
2000
2001
2002
2003
2004
2005
2006
2007
2008
Note: High income OECD is based on World bank classification,
excluding Czech Republic, Hungary, Korea (South) and Slovak
Republic.
Source: World bank-WDI .
(60)
Asia without China
ECA
LAC
SSA/MENA
(80)
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…and facilitated the transformation of government
debt portfolios
 Increase in the share of the domestic debt
 Extension of the maturity of the domestic debt:
 Supported by increased credibility of monetary policy
 Diversification of the investor base:
• Expansion of the local investor base especially non-bank financial
institutions (pension funds and insurance companies)
• Increased interest by foreign investors supported by ample global
liquidity and significant risk appetite for local-currency long-term
fixed-rate instruments.
 The aim of the portfolio shifts was to reduce the
exposure of EMs to exogenous shocks and
changes in market sentiment.
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As a result there was a significant reduction in FX risk…
 Net foreign currency
evolved positively
 Currency composition of the govt
debt portfolio moved dramatically in
favor of local currency
debt
External Debt to FX Reserves
(As a %)
Ratio of external to domestic debt
500
300
250
400
257.77
200
(%)
300
150
100
200
50
78.25
49.77
57.55
100
19.52
0
2000
2000
2001
2002
2003
2004
2005
Asia
ECA
LAC
SSA/MENA
Note: Based on 24 GEMLOC countries.
Source: World bank-WDI (external debt); IMF-IFS (reserves).
2006
2007
2001
Emerging Markets
2002
2003
2004
Emerging Europe
2005
2006
Asia
2007
2008
2009
Latin America
Note: USD-linked domestic debt reallocated to external.
Source: JP Morgan
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…and also in refinancing and interest rate risks
 There was a contraction in the ratio of floating rate to
fixed rate bonds and also an extension in the average life
Floating to fixed debt in %
(excluding Brazil)
Average Life
(number of years)
900
800
700
600
500
400
300
200
100
0
-100
2000
2001
2002
Emerging Markets
2003
2004
2005
Emerging Europe
2006
2007
Latin America
2008
2009
Asia
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
9.36
6.70
5.30
3.98
4.01
3.11
2.43
1.34
2000
2001
2002
Emerging Markets
2003
Asia
2004
2005
2006
Emerging Europe
2007
2008
2009
Latin America
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The global financial crisis had a dramatic impact
on funding conditions…

Significant capital outflows
from most EMs increased
the challenge to debt
managers,
especially
in
countries still dependent on
external funding.
700
0.2%
600
0.0%
EM Sovereign volume
(USD million)
3/31/09
2/28/09
1/31/09
12/31/08
11/30/08
9/30/08
10/31/08
8/31/08
7/31/08
6/30/08
20
15,000
15
EAP
SAR
SSA
ECA
Total EM Volume
Total no. of deals
Quarterly Portfolio Flows
(% of GDP)
1200
1000
800
600
400
200
0
4/23/09
3/12/09
EMBI MENA
4/2/09
2/19/09
1/29/09
12/18/08
1/8/09
EMBI LAC
11/27/08
10/16/08
11/6/08
EMBI ECA
9/25/08
8/14/08
9/4/08
7/24/08
6/12/08
7/3/08
5/22/08
5/1/08
EMBI Asia
EMBI SSA
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2010 Q1
2009 Q4
2009 Q3
2009 Q2
2009 Q1
2008 Q4
2008 Q3
2008 Q2
2008 Q1
2007 Q4
2007 Q3
0
2007 Q2
0
2007 Q1
-0.8%
2006 Q3
-0.6%
2006 Q1
10
LAC
EMBI Global Sovereign Spread Index
May 08-Apr 09
20,000
5
-1.2%
SSA
25
5,000
-1.0%
4/1/09
LAC
3/1/09
2/1/09
1/1/09
12/1/08
11/1/08
10/1/08
9/1/08
8/1/08
7/1/08
6/1/08
ECA
5/31/08
0
4/30/08
100
3/31/08
200
25,000
10,000
-0.4%
300
2/29/08
-0.2%
400
1/31/08
500
Asia
EM
external
debt
issuance
stalled
for
months
as
a
consequence
of
increased risk aversion
and higher borrowing
costs.
Bond Funds Flows
(% of GDP)
800
5/1/08
* Excludes: India, Sri Lanka, Morocco, Nigeria, Costa Rica,
Romania and Uruguay
5-yr CDS spread May 08-Apr 09
(Average of Gemloc* countries)

2006 Q4
Funding
conditions
in
international capital markets
deteriorated, with generalized
spikes in EM Credit Default
Swaps (CDS) and in Emerging
Market bond Index (EMBI)
spreads.
2006 Q2

…although a more mixed pattern on local currency
bond yields
Generic Government Bond Yield Index
(1 Sep, 2008 = 100)
180
160
140
120
100
80
60
40
20
0
09/01/2008
10/01/2008
Brazil
Chile
11/01/2008
Mexico
12/01/2008
Peru
Hungary
01/01/2009
China
02/01/2009
India
Indomesia
03/01/2009
US
UK
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Debt managers responded with an array of
actions
■ Delay borrowing or use sources other than
regular market instruments
■ Adjusting market borrowing to changed
demand
■ Implementation of liability management
operations
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Most countries reduced or delayed borrowing from
regular market sources…
 …some used cash reserves
 Central banks in some countries were permitted to buy government
bonds.
 EMs debt managers also stepped up borrowing from multilaterals:
 Borrowing from MDBs increased significantly, where headroom was
available
 A number received resources from the IMF.
 A number drew down or established contingent credit lines with the
WB.
 Some EMs started/expanded retail debt programs or issued new
products:
 Indonesia expanded the retail market and introduced a Shariacompliant market instrument
 Hungary introduced a new 3-year CPI linker for the retail market.
 Turkey tried new revenue indexed bonds and CPI linkers for the
wholesale market.
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…and the majority of them revised their market borrowing
to reflect market demand…
 ….suspension of issuance in international capital markets
and/or reductions in the auctions for LX markets:
 The LX market for medium and long term paper came to a virtual halt
in some countries
 Some postponed their auctions of LX securities and relied on cash
reserves
 Others reduced dramatically the issuance of fixed rate paper
 The impact and consequent response was mixed across countries
 Concentration of the bulk of the issuance program in the
shortest tenors and floaters:
 Many countries increased the volume of T-Bill issuance, some
dramatically
 Two severely impacted countries relied basically on short-term and
floaters for 8 months.
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…and buybacks and switches were used as liability
management tools…
 Buybacks were used to alleviate sell-off pressure, enhance liquidity
and improve pricing of liquid instruments:
 Hungary launched a $2.5 bn buyback program in Q2 2009 allowing to restart
regular bond auctions.
 Mexico implemented buyback auctions of selected medium and long-term
securities, Bonos and Udibonos to enhance liquidity of these instruments.
 Indonesia conducted buybacks and switches of short term instruments providing
good price references when market liquidity was weak helping thus to stabilize
prices.
 Switches were used to stabilize the market, reduce fragmentation,
consolidate large size benchmarks and to manage refinancing risk
(e.g.: Brazil, Indonesia and South Africa)
 Revision of formal targets:
 Some reviewed their strategies including a higher share of FX debt
 Brazil reviewed its quarterly targets for the portfolio composition.
 Countries with broader directional targets could operate within existing
mandates
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Some mostly positive lessons learned…
 Sound macroeconomic policy was elemental in creating a buffer to the
crisis and placing EMs in a position for quicker recovery.
 Prudent debt management in the years before the crisis played a role in
enhancing EM resilience to the crisis. (sometimes requiring difficult
cost-risk tradeoffs)
 During the crisis, debt managers had room to maneuver and were able
to adapt quickly – absorbed some risk from the market.
 The availability and quick disbursement of multilateral funding was
critical in cases where the international capital markets were closed and
domestic investors flew to safer markets.
 Countries with larger and more developed bond markets tended to be
less affected by the crisis.
 The crisis highlighted the degree to which EMs have built their
capacity in public debt management over the last decade.
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…but a (customary) note of caution
Many uncertainties about the outlook:
 Timing and management of “exit strategies”
 Volume of government borrowing globally
 Divergent views on the strength of the recovery
Need to maintain preparedness for market
dislocations and seek opportunities to contain risk
in public debt portfolios
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Agenda
1. Developing Government Bond Markets: Rationale
2. Impact of the Crisis
3. Development Agenda Going Forward
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The crisis reinforced the rationale for debt market development.
The crisis showed:
 Government bond markets provided greater resilience to shocks (negative cycle of
international crisis – currency crisis - EM debt crisis – fiscal crisis, was attenuated).
 Government bond markets enhanced capacity for crisis response (e.g.:
implementation of counter-cyclical policies and/or absorption of higher fiscal deficits)
The crisis also enhanced the need for deeper and more liquid bond markets to:
 Consolidate achievements in the extension of the yield curve and improvements in
debt composition
 Serve as effective references for the development of non-government local currency
instruments that would reduce EMs overall vulnerability and support economic growth
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The broad agenda involves several areas
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…but a few priorities have emerged requiring close coordination
among policy-makers
Examples:
 Investor Base:
 Strategies for Development of the Investor Base (foreign and
domestic)
 Revisit investment regulations
 Price dissemination and marking to market
 Repo Markets (regulation, valuation and operational framework)
 Issuance policy and overall government debt market reforms with a
broader vision to support financial market development
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Thank you!
[email protected]
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