Download Notyfikacja prospektów emisyjnych zgodne z Dyrektywą 2003/71/EC

MACRO-PRUDENTIAL
ANALYSIS
IN
PUBLIC SECTOR
- the example of sub-national government
Slawomir Solarz, City of Warsaw Debt and Financial Policy Department
TAIEX expert mission to the National Bank of Ukraine
Kiev, January 28, 2011
1
OVERVIEW
Introduction - positioning public sector in the economy and financial system
I. Financial risks in public sector
II. Analytical tools for financial stability
assessment
III. Credit ratings in public sector
IV. Safeguards of public sector financial stability
Conclusions
2
Definitional and Classification
Issues
• How do we define; public sector, local
government, administration, public company
• Public entities roles of; regulator,
supervisor,service provider, business
counterpart, market participant, borrower
• Public sector and financial stability; too much
or too little government?
3
Measuring Public Sector Role in
the Economy
•
•
•
•
•
Public spending/GDP – 40-60 %
Public debt/GDP – 30-70%
Public investments/total inv. – 20-50%
Problems with pricing, subsidies, transfers
Additional indicators; employment, health
care and education, services
4
Debt by country, 2008
as % of GDP
Sectoral Debt Composition, 2008
Public sector
459
Nonfinancial business
380
Households
342
308
188
290
298
Financial institutions
52
47
60
274
73
114
101
136
96
78
110
101
69
66
81
67
85
96
40
75
81
77
76
Spain
France
Italy
Germany
113
108
56
Japan
62
44
USA
UK
SOURCE: Haver Analytics; McKinsey Global Institute
5
Macro-level Disturbances - can
they affect Public Sector?
•
•
•
•
•
•
•
•
•
•
Fall in real GDP (GDP growth)
Substantial swings in inflation
Large capital outflows
Mounting liabilities
Rising real interest rates
Declining assets and reserves
Fall in equity and real estate prices
Exchange rate volatility
Weak business environment
Changes in competitive position
6
External Elements of Public Sector’s
Financial Risk
•
•
•
•
Contractual prices (+)
Interest rate (+)
Exchange rate
(-)
Costs of public services and utilities (sticky wages,
indexation)
(-)
• Collection rates
(-)
7
Internal Elements of Public Sector’s
Financial Risk
•
•
•
•
•
•
Intergovernmental transfers
CIT
(-)
PIT
(-)
Equalization tax
(-)
Social support expenditure
Investments (+)
(-)
(-)
8
Data Produced by Local
Governments
• Annual budgets
- revenue side
-expenditure side
-deficit financing
• Multiyear financial forecasts
• Debt policy statements
• Asset management reports
9
Sources of Information
• In order to be able to assess correctly the present and future
financial situation of local governements, the analyst needs to
examine closely the information contained in the annual budgets
and multi-year financial forecasts
• Second source of information is regional auditing office and ad
hoc reports produced by independent evaluators in connections
with big infrastructural projects
• Commerical banks with exposure to a municipality have to
minitor its situation like in case of any other borrower (this
source of information may be restricted)
• Ratings – a valuable source of publicly available information
(presented in a more detailed way in the next section)
10
Prudential Indicators to Look at
• Issuance of guarantees: they can only be used to cover
borrowing of public companies or to certain limits
• Charging of assets: public assets mortgaged/pledged for
borrowing of their owner
• Instances of risk decentralisation: liabilities of no self- supporting
municipal companies need to be included in overall risk of the
entity
• Use of derivatives: they can only be used for hedging purposes
• Stability of political structures
• Business environment: no stable govt in a weak economy
11
Signaling Role of Debt Related
Indicators
• Debt limits: debt can not exceed a certain percentage of current
or total revenues
• Debt service limits: debt servicing can not exceed a certain
percentage of current or total revenues
• Restrictions on redemption or maturities: bullet repayments or
zero coupon bonds are not allowed, Short term debt restricted
• Restrictions on currency: debt can not be raised in foreign
currency
• Debt cannot exceed certain parameters: stress testing
12
13
Rating Scales
14
Warsaw Credit Ratings
•
•
•
•
Moody’s
Since 2007 (intl scale)
A2
Stable
•
•
•
•
Fitch
Since 2009 (local scale)
AAA (pol)
Stable
•
A2 issue rating for EMTN listed
in Luxemburg
•
AAA(pol) for all outstanding
PLN bond issues
15
16
Ukrainian Municipal Ratings
source:Ukrainian Credit-Rating Agency
Financial Risk Mitigation on
Local Government Level
•
•
•
•
•
The role of external auditing - RIO
Maastricht criteria (50/55/60 debt levels)
Financial engineering (???)
Quantitative prudential limits
Organizational structure – municipal companies
control
18
Maastricht Criteria
1) Inflation of no more than 1.5 percentage points above the
average rate of the three EU member states with the lowest
inflation over the previous year.
2) National budget deficit at or below 3 percent of gross
domestic product (GDP).
3) National public debt not exceeding 60 percent of gross
domestic product.
4) Long-term interest rates should be no more than two percentage
points above the rate in the three EU countries with the lowest
inflation over the previous year.
5) The national currency in the ERM 2 exchange rate mechanism
for 2 years.
19
Prudential Limits at Work(1)
source: Fitch Ratings
Debt to Revenue
Limit
Debt servicing
Limit
Bullet repayments
allowed
Derivatives
allowed
France
No
No
Yes
Yes
Germany
No
No
Yes
Yes
Italy
No
15% current revenue
No
No longer
Poland
60% of total revenue
15% of total
revenues
Yes
No
Portugal
30% of own
revenues & PIT
share
No
Yes
Yes
Romania
No
30% of own
revenues, inc PIT
share
Yes
Yes
Russia
100% of total
revenue
15% of expenditure
Yes
No
Spain
125% current
revenue
25% current revenue
Yes
Yes
Turkey
150% consolidated
revenues
No
Yes
Yes
20
Prudential Limits at Work(2)
L/T debt can only be
used for capex
Limits on
Guarantees
Foreign Currency
debt allowed
Temporary freeze
on debt increase
in force
France
Yes
Yes
Yes
No
Germany
Yes
No
Yes
No
Italy
Yes
Yes
No
Freeze on cities
and provinces
Poland
Yes
Yes-included in
total debt
Yes
No
Portugal
Yes
Yes
Yes
No
Romania
Yes
Yes
Yes
No
Russia
No
No
No
No
Spain
Yes
No
No
Debt increase
frozen
Turkey
Yes
No
Yes
No
21
Are Prudential Limits a Useful
Financial Stability Safeguards?
• Problems with definitions (revenue,
investment, amount)
• Accounting tricks can make prudential limits
difficult to enforce
• Issue of legal execution
• Fungibility of money
• Impact of external political decisions
22
Conclusions
• Macro-prudential analysis of municipal sector can
rely on public data, its results also disclosed to the
public (ratings)
• Regional governments’ financial stability factors
interrelated with national ones and with financial
system stability
• Municipalities more prudent than central government
(in Poland)
• Problems with financial stability are quick to come,
fixing takes longer
23
Thank you for your attention!
[email protected]
24