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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/