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STRATEGIC RISK BENCHMARKS AS KEY TO CONTROL
RISK/EXPOSURE AND AVOIDANCE OF UNSUSTAINABLE DEBT
PORTFOLIO
9th FORUM ON AFRICAN PUBLIC DEBT MANAGEMENT AND BOND MARKETS
Presenter: Jim Matsemela, Director: Market Risk, SRM Chief Directorate, ALM Division, National Treasury | 16 June 2015
Discussion Points
•
Introduction of Risk Benchmarks
•
Current debt management objectives and strategy
•
Old and new risk benchmarks
•
Process flow of the benchmark model
•
Brief description of the Core Cost and Risk Indicators
•
Brief description – methodology on shocks
•
Performance of the debt portfolio against risk benchmarks
•
Examples of Indicators in Charts
•
Conclusion
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Defining & conceptualising Risk
Benchmarks

Revised Guidelines for Public Debt Management, IMF/WB, 2014:
o In terms of Guideline 1 – “Debt Management Objectives and Coordination”
 Strategic risk benchmarks assist in quantifying the cost and risk trade-offs
embedded in the main objective of debt management.
o As may be inferred from Guideline 4 – “Debt Management Strategy”
 Strategic risk benchmarks as comprising a set of indicators for the debt
strategy operationalises the debt management objectives.
 Benchmarks express the portfolio preference (debt structure) of
Government in terms of maturity, interest rate and currency composition.
o In terms of Guideline 5 – “Risk Management Framework”
 Risk benchmarks need to be flexible as to accommodate economic and
financial market shocks.
 This help define tolerance levels to various exposures (short versus longterm debt; variable and/or inflation-linked versus fixed rate debt; local
currency versus foreign currency debt) obviously driven by different
(market) risk factors.
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Other Notable Publications on Risk
Benchmarks

Advances in Risk Management of Government Debt, OECD, 2005:
o Strategic benchmark as a tool to control risk
 Requires government to specify its risk tolerance and portfolio preferences
regarding the trade-off between expected cost and risk.
o Optimal debt composition
 Derived through assessing the relative impact of the risk and costs of
various debt instruments on the probability of missing a well-defined
stabilization target.
o Key roles of strategic benchmark
 They provide guidance on the management of costs and risk.
 Define a framework for assessing portfolio performance in relation to cost
and risk.
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Objectives, current & medium-term Debt
Strategy

Before 1999:
• Develop the domestic market
• Promote a balanced maturity profile
 After 1999:
• Reduce cost of debt within acceptable risk limits
• Ensuring government access to domestic and international financial markets
• Diversify funding instruments
 Prior to 2008/09 (Links to the Funding Strategy):
• Annual funding strategy underpinned by risk guidelines to steer the debt
portfolio in line with old risk benchmarks
 After 2008/09 (Links to Funding Strategy & Fiscal Policy objectives):
• Debt structure (composition) - insulate annual budget from volatility in interest
expenditure caused by interest, inflation and exchange rates
• Debt structure - assist in realising government’s fiscal policy objectives of debt
sustainability and intergenerational fairness
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Old Risk Benchmarks since 2000 –
reviewed 2005/06
Risk Benchmark Indicator
Type of Benchmark
Indicator
Numeric Risk Benchmarks
(Thresholds & Ranges)
1. Fixed Rate versus
Non-Fixed Rate Debt
Interest Rate & Inflation
Risks – RANGE
70% (+-5%) - Fixed Rate
30% (-+5%) - Non-Fixed
Rate
2. Smooth Maturity Profile
Refinancing Risk – Soft
Benchmark
Cash redemption of R29
billion (2008) adjusted for 6%
inflation rate annually
3. Share of Foreign Debt as per
cent of Total Debt
Currency Risk – RANGE
20-25%
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Modified Risk Benchmarks – reviewed
2012-13
Risk Benchmark Indicators
Type of Benchmark
Indicators
Numeric Risk Benchmarks
(Thresholds & Ranges)
1. Share of debt maturing
within a year (including
T-bills)
Interest Rate (Rollover)
Risk - LIMIT
15%
2. Share of debt maturing
in 5 years (FIBs & ILBs)
Refinancing Risk - LIMIT
25%
3. ATM* - Fixed Rate Bonds (FRBs)
+ T-bills
Refinancing Risk RANGE
10-14 years
4. ATM* - Inflation Linked Bonds
(ILBs)
Refinancing Risk RANGE
14-17 years
5. Share of ILBs as per cent of
domestic debt
Inflation Risk - RANGE
20-25%
6. Share of Foreign Debt as per
cent of Total Debt
Currency Risk - LIMIT
15%
*ATM refers to average term to maturity and please note that the smooth maturity profile is retained throughout as a soft benchmark for refinancing risk
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Structure of the Planned Model
OUTPUTS
Benchmark (sensitivity) Indicators
•
INPUTS
•
•
•
•
Cash-flows
o Primary Balance
o Interest payments
o Redemption payments
Financial (market) variables
Fiscal variables
Macro variables
PROCESS
•
•
•
Strategies
Shocks/Stress
o Market Variables
o Macro/Fiscal
Allocations
•
•
•
•
Share of ST debt maturing in 12 months Limit
Share of LT debt maturing in 5 years - Limit
Share of Inflation-linked debt to domestic debt
- Range
Average Time to Maturity
o Fixed rate debt (incl. T-bills) - Range
o Inflation linked debt - Range
Gross foreign debt as % of total government
debt – Limit
Cost Indicators
•
•
•
•
Debt to GDP
Debt Service-cost to GDP
Debt Service-cost to Revenue
Debt Service Cost to Expenditure
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Core Cost Indicators – not benchmarks
• There are Cost indicators which seek to measure the ratio of the debt stock in
relation to a macro-economic variable of interest, e.g. GDP and
• Cost indicators which measure the ratio of the Cost of servicing the stock of
debt (flow variable) to a macro economic variable e.g. Revenue or
Expenditure.
The following 4 Cost Indicators were defined/selected:
•
•
•
•
Debt/GDP
Debt service cost/GDP
Debt service cost/Revenue
Debt service cost/ Expenditure
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Core Cost Indicators & drivers
Debt/GDP
•
•
•
It’s a widely used debt sustainability
indicator or measure.
Both changes in the stock of debt and
changes in the GDP figure affect the
ratio of Debt to GDP.
In the model, this cost indicator was
affected by changes in both stock
variables, namely GDP as projected by
Fiscal policy and the stock of debt
which is a function of the borrowing
requirement, revaluations on the CPI
indexed debt and redemptions during a
particular fiscal year.
Cost/Revenue
• This cost measure is used to indicate
how the cost of servicing the stock of
debt fares to the cash inflow received
or collected by the government.
• The key drivers are the coupon rates
of individual bonds, the outstanding
stock of debt per individual
bond/instrument and from the
Revenue side, the amount of tax
collected
by
the
government.
Therefore, the tax base of the
government which market risk has
no influence over is a crucial factor to
this indicator.
• In the model, we were able to
administer shocks or stress Revenue
by a parameter which measures
volatility(standard
deviation)10
calculated from historical data.
Core Cost Indicators & drivers
Debt service cost/GDP
• The GDP figure during a particular
fiscal year is a driver of this
measure.
• The outstanding stock of debt in a
particular bond is also a driver,
therefore, future allocations into the
different funding instruments do
affect the debt servicing flow.
• In our model, we did not shock GDP,
as we saw no element of
randomness in it although this can
easily be accommodated.
Debt service cost/Expenditure
• This cost indicator seeks to reflect
the proportion of debt service cost to
the government’s overall
expenditure.
• In the model, expenditure is
incorporated as given by Fiscal
policy and no shocks or stresses
were administered thereon.
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Core Risk Indicators – New benchmarks
Average term to Maturity(ATM)
• The stock of debt, outstanding
amounts per individual instrument and
allocations into funding instruments
are sources and drivers of the Average
term to maturity.
• Because the outstanding debt stock is
calculated on the nominal amount,
interest rate factor/risk factor is a
distant or non source.
• The ATM for Linkers is further effected
by the change in the CPI growth rate
which then affects each individual
bond Index ratio and ultimately the
outstanding amount per instrument
and the overall stock of debt
• In the model, different sets of
•
allocations were explored so as to
track the response of the ATM
Share of debt maturing in 12 months
• The share of debt maturing in 12
months plays a role in managing
refinancing risk.
• Allocations
or
funding
across
different segments of the maturity
profile is one of the major sources of
this indicator.
• This indicator is further sensitive to
the stock of the T-bill portfolio as a
percentage of total debt.
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Core Risk Indicators – New benchmarks
Share of Linkers as a percentage of
Domestic debt
• The growth of the stock of ILB
component of the domestic debt
stock and the growth of other
components of the domestic debt
stock are factors which drive this
indicator.
• In the model, there is only one
redemption (2017) on the linkers
portfolio in the projection period
(2014-21).
• Therefore, the share of linkers as a
% of domestic debt is increasing
over the horizon, so is the total
domestic debt.
Foreign debt as a percentage of total
debt
• Both
the
stock
of
foreign
denominated debt and that of
domestic debt are sources of this
indicator.
• Currency risk is the source for the
stock of foreign denominated debt
whereas on the domestic debt front,
CPI inflation is the source as its
variability drives the stock of debt
(CPI inflation linked).
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Additional Cost & Risk Indicators – not
benchmarks
Additional Cost Indicators
Additional Risk Indicators
Inflation linked debt/ GDP:
• The source of this indicator is both
the monthly CPI index growth rate
which impacts the stock of inflation
linked debt and the GDP stock in a
particular fiscal year.
Fixed versus Linkers:
• In nominal terms, CPI inflation is the
key source or driver of the split
between the two components.
• In the model, the percentage of
Fixed rate debt decreases from 2015
onward due to large fixed rate bond
redemptions.
Foreign debt as a percentage of GDP:
• The source is the outstanding
amount of the foreign denominated
debt and the stock of GDP.
Fixed vs. Floating:
• In the model floating debt stock
includes both T-bills and Inflation
linked debt
• New
issuances
in
all
debt
components are key sources.
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Methodology on Shocks
• Shocks were administered on one macro variable being the
Revenue
• We calculated parameters from the change in historical
revenue figures back from 2008
• A pooled standard deviation to capture the impact of small
and large values was used as a shock
• On yields – a 2* standard deviation of the change in nominal
and real yields was used
• On inflation – a shock of 100 basis points was applied
across strategies up to fiscal year 2020/21
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Performance of Debt Portfolio against
Risk Benchmark Indicators
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Example 1: Input/Output from the cost
and risk model
Select input variable
Lower input value
Upper input value
0.00
1.00
Select output variable
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Example 2: Share of debt maturing in 5
years and share maturing in one year
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Example 3: Share of ILBs and FX Debt
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Example 4: ATMs Fixed Rate +TBs and
ATM ILBs
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Conclusion
•
•
•
•
•
•
•
Based on the analysis of risk factors driving different components of the debt
portfolio the new risk benchmarks separates inflation linked from T-bills
Due to the unique features of the inflation linked bonds in the debt portfolio,
an additional benchmark for inflation exposure (including revaluations) is
applied in South Africa.
In line with common debt/risk management practice, the share of debt
maturing in 12 months (T-bills only in South Africa) and share of debt
maturing in 5 years (Fixed Rate and Inflation Linked Debt in South Africa)
are used as part of refinancing risk.
Two Average Term to Maturity indicators, one for fixed rate debt (including
T-bills) and the second one for inflation linked bonds apply in South Africa.
The foreign debt exposure is implemented and monitored as gross foreign
debt (% Limit) of total government debt.
The current smooth maturity profile is to remain in place.
The descriptive indicators are recommended to be in place for 5 years, but
the numeric benchmarks are reviewed annually against baseline and
stressed changes in the macro, fiscal and market variables.
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THANK YOU
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