Download Gjaldeyrisforði

9th Forum on African
Public Debt Management
SESSION 3:
RISK MANAGEMENT, THE RESPONSIBILITIES AND NEW
CHALLENGES FACING MIDDLE OFFICES
Sturla Palsson, Director,
Treasury and Market Operations
Central Bank of Iceland
Institutional setup
• Framework for borrowing set in the budget law
presented in parliament before the fiscal year
• Debt management mandate given to Ministry of
Finance (MF) by parliament
• MF can assign the task of borrowing to the Central
Bank of Iceland (CBI)
– CBI act as funding agent for MF
– Similar setup in Denmark, Norway and many African countries
• Division of responsibilities between MF and CBI
– Agreement between FM and CBI on Treasury debt management
• Guidelines for debt issuance issued by MF
– Medium Term Debt Strategy
Allocation of responsibilities
•
Responsibility for the DM lies with the MF
–
•
Number of measures taken to prevent a conflict of interest
–
•
CBI has a relatively narrow mandate compared to other Nordic DMO´s
Debt policy vs. monetary policy
MF makes final decisions on the most important issues
–
Recommendations presented to Debt Management Committee (DMC)
•
DMO advises the MF on everything relating to the DM
•
The MO unit within the DMO prepares the necessary material and presents it the DMC
–
•
MTDS guidelines set by the MF provide the framework for the debt strategy
–
•
DMC discusses scenarios and proposals put forward by the DMO
MTDS outlines a 4 year debt strategy and is updated every year
The DMO at the CBI is responsible for ensuring that borrowing and debt management
issues are carried out in accordance with the strategy
MTDS - Debt management objectives
• To ensure that the Treasury’s financing need and
payment obligations are met at the lowest possible
long-term cost that is consistent with a prudent risk
policy;
• To ensure that the debt repayment profile accords
with the Treasury’s long-term debt service capacity
and minimizes refinancing risk;
• To maintain and encourage further development of
efficient primary and secondary markets for domestic
Treasury securities;
• To broaden the investor base and diversify funding
sources.
MTDS - Debt management guidelines
Debt portfolio structure
– Non-indexed debt 70-90%
– Indexed debt 15-30%
– Foreign debt 0-10%
Borrowing guidelines
• Repayment profile:
– The aim is to have the long-term repayment profile of
Treasury securities as smooth as possible and the individual
issuances of similar final size.
MTDS - Debt management guidelines
• Benchmark series:
– Benchmark issues will be structured so that each series is large enough to
ensure effective price formation in the secondary market. The number and
size of the series shall take account of Treasury debt. The goal is for each
series to have a final size of ISK 40-100 billion, except for two-year bonds,
whose minimum final size will be ISK 15 billion.
• Refinancing percentage:
– The ratio of Treasury redemptions in any calendar year shall not exceed
15% of GDP.
• Maturity:
– The average time to maturity of the debt portfolio shall be at least five
years.
• Deposits:
– The Treasury’s domestic deposit balance with the Central Bank of Iceland
shall average ISK 60-70 billion.
DMO Structure within CBI
• Relationship
management
• Market makers
• Investors
• Policy
• Strategy
• Reporting
• Risk management
• Processes and
controls
• Compliance
monitoring
Treasury and Mkt. Op.
Back
• Primary Issuance
• Secondary market
• Bond lending
Middle
Front
Debt Management Committee
(DMC)
• Transaction
recording
• Reconciliation
• Conformation and
settlement
• Debt servicing and
payments
• Debt data for
accounting
Accounting
DMO Structure in Nordic region
• Relationship
management
• Market makers
• Investors
• Policy
• Strategy
• Reporting
• Risk management
• Processes and
controls
• Compliance
monitoring
Treasury and Mkt. Op.
Back
• Primary Issuance
• Secondary market
• Bond lending
Middle
Front
Debt Management Committee
(DMC)
• Transaction
recording
• Reconciliation
• Conformation and
settlement
• Debt servicing and
payments
• Debt data for
accounting
Middle office tasks
Policy
Strategy
Reporting
• Outlined in MTDS
• Updated on annual
basis
• Prepared by the DMO
(MO)
• Discussed by the
DMC
• Confirmed by the MF
• Annual issuance
calendar
• Quarterly issuance
plan
• Formulated and
designed by the DMO
• Presented to DMC
• Confirmed by the FM
• New product
development
• Research
• Monthly bulletin
• Detailed picture of
government debt
• Annual risk report to
FM
• Only in Icelandic for
FM
• Regular DMC
meetings with MO
presentations
Middle office tasks
Risk
Process
Monitoring
• Parameters
defined in MTDS
• Market risk
• Refinancing risk
• Operational risk
• Modeling
• Monitored by
DMO
• Reported to DMC
• Annual/Quarterly
issuance plan
• DMO acts as
Secretariat to
DMC who advises
FM
• Compliance
• Risk limits
• Trade limits
• Collateral
management
• Primary dealer
performance
• Annual risk report
to MF
• Regular meetings
with DMC
• Debt sustainability
analysis
Required MO skills
Market experience
Issuance
Trading
Sales
Technical skills
•
•
•
•
Finance
Risk
Portfolio man.
Mathematics and modeling
Public policy skills
Communication skills
IT skills
• Economics
• Public sector finance
• Budget process
•
•
•
•
•
•
•
•
Market makers
Investors
Front/Back
MF/DMC
Software
Bloomberg/Reuters
Spreadsheets
Treasury system
Rep. of Iceland treasury debt
Investors in T-bonds
Auction results
Primary Surplus: Major Step Towards Fiscal Consolidation
Gross Expenditures on the Decline(1)
Surplus Achieved in 2014 Expected to Continue
5%
40%
Forecast
% of GDP
% of GDP
Forecast
35%
3%
1%
30%
-1%
25%
-3%
20%
-5%
15%
-7%
-9%
10%
-11%
5%
-13%
0%
-15%
2009 2010 2011 2012 2013
Total balance excl. irregular items
Total balance
2014
2015
2016
2017
2018
2009
2019
– 5% of GDP in 2014
– 3.2% estimated in 2015 (due to one-offs)
 Overall surplus achieved in 2014
2011
2012
2013
2014
2015
2016
2017
2018
2019
Excluding irregular items
Continuous Growth and Improved Debt Levels
 Positive primary balance since 2012
2010
Iceland Fiscal Consolidation: A Global Comparison
% of GDP
16.0
15.0
14.7
14.2
14.0
12.0
11.3
9.6
10.0
8.5
 Accumulated surplus of over 8% of GDP expected during the forecast
period (2016-19)*
8.0
 Expenditures peaked at 34% in 2009
– Expected to reduce to 26% by 2019*
4.0
8.5
7.5
6.0
2.0
0.0
(1) Excluding irregular items.
Sources: Ministry of Finance and Economic Affairs – Medium-Term Fiscal Outlook 2015
15
Finland 1993 Denmark 1982 Sweden 1993 Iceland 2009
UK 2009
Ireland 1986
UK 1993
Latvia 2009
Government Debt Ratio on Declining Trajectory
Overview of Government Debt
ISK bn
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
-200 2007
% of GDP
Forecast
120%
100%
80%
60%
40%
20%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
0%
Gross Central Government Debt (LHS)
Net Central Government Debt (LHS)
Incremental Municipality Debt (LHS)
Gross General Government Debt (including Municipalities) to GDP (RHS)
Gross Interest Payments
ISK bn.
% of GDP
100
90
80
70
60
50
40
30
20
10
0
6%
Forecast
5%
4%
3%
2%
1%
0%
2007
2008
2009
2010
2011
2012
Interest expenditure, constant price (LHS)
2013
2014
2015
2016
2017
2018
2019
Interest expenditure % of GDP (RHS)
Source: Ministry of Finance and Economic Affairs - Medium-Term Fiscal Outlook 2015
Notes: Figures exclude loans from IMF and Norway (Central Bank is Borrower and covered within Central Bank reserve fund); and unfunded pension liabilities (ISK408 bn at year-end 2013); adjusted for impact of Nordic drawdown
16
Overview of Government Funding
Domestic Debt and Local Currency Largest Parts of Government Debt
250,000
 ISK debt represents 72% of the debt portfolio in Dec 2014
 Less need for domestic issuance due to better fiscal outcome
150,000
m. kr.
ISK mn
200,000
 Accumulated debt due to funding of fiscal deficit is ISK360bn
100,000
 Key investors in domestic securities are:
– Financial institutions (29%)
50,000
Other domestic liabilities
State guarantees taken over
Refinancing of CBI
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
0
– Foreign investors (20%)
– Pension funds (28%)
– Mutual funds (10%)
Interest Rate Composition of Debt Portfolio (Dec 2014)
Central Bank FX Reserves
ISK million
160.000
Fixed Inflationlink domestic
17%
140.000
Fixed foreign
25%
120.000
100.000
80.000
Variable foreign
3%
60.000
40.000
Fixed domestic
29%
20.000
0
2015
2016
2017
Other foreign loans
2018
2020
Bilateral loans
Source: Ministry of Finance and Economic Affairs - 2015
17
2019
2021
2022
2023
2024
Currency reserve loans
Variable
domestic
26%
Thank you!
For more information:
Central Bank: www.cb.is/
Statistics Iceland: www.statice.is/
Iceland bond market: www.bonds.is/
Ministry of Finance: www.fjr.is/
DMO: www.lanamal.is/