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Ministry of Finance
Government Debt Management Unit
2010 Annual Report
Summery
Decline of Debt to GDP ratio
• Debt to GDP ratio is the most important parameter to measure a
country's debt burden and financial stability.
• As of the end of 2010 – Debt to GDP stands at 75% (narrow government).
• International comparison shows this is a remarkable achievement, as
most OECD countries experienced increase of Debt to GDP.
100%
82.8%
ILS Billion
800
76.4%
75.4%
77.6%
75.0%
600
60%
400
200
-
40%
538
2006
524
2007
547
2008
596
government
debt
80%
% GDP
1,000
Debt-to-GDP
ratio
608
20%
2009
2010
0%
2
Flattering international comparison
Debt to GDP Change
2009 to 2010
Public Debt to GDP
As of 2010
Spain
10%
Greece
9%
Britain
9%
U.S.
8%
Portugal
7%
Czech Republic
7%
Weighted average of OECD…
6%
Poland
5%
France
5%
European Bloc
5%
Simple averge of OECD…
5%
Germany
3%
Belgium
Korea
2%
1%
Israel ** -3%
Greece
Ireland
Belgium
Weighted average of…
Portugal
U.S.
France
European Bloc
Britian
Germany
Israel
Simple averge of OECD…
Spain
Poland
Czech Republic
Korea
129%
105%
103%
97%
93%
93%
92%
92%
81%
80%
77%
76%
72%
64%
49%
33%
-4% -2% 0% 2% 4% 6% 8% 10% 12%
•Debt to GDP ratio for countries' such as Spain, UK, Greece and
USA increased by 8%-10%.
•Israel Debt to GDP decreased by about 3%
Source: IMF estimates, Jan 2011
3
Debt interest rate decrease
• Total interest expenses relative to the debt (including National Insurance) was 4.7%
in 2010 as opposed to 5.0% in 2009. (decrease form 4.4% to 4.3% relative to GDP).
• This decreased happened even though debt portfolio increased.
• This decrease stems mainly from a drop in the interest rate, and from the decrease
in the weight of non-tradable domestic debt (designated bonds) characterized by
higher interest payments.
• A simulation carried out
5.3%
5.2%
5.0%
5.4%
4.7%
5.0%
found that if the debt-toGDP ratio had remained at
5.3%
4.6%
4%
4.4%
4.3%
a level similar to 2003 –
96.7%, the interest costs
40
Bill ILS
6%
30
2%
35.1
34.5
33.3
33.9
34.8
would have been NIS 7.3
billion higher; equivalent to
an increase of 1.8% in VAT
above the current level.
0%
20
2006
2007
2008
2009
2010
Interest expenditures
Ratio of interest expenditures to debt and National Insurance
Ratio of interest expenditures to GDP
4
Government Debt as of 31/12/2010
• Total government debt increased by 2% in 2010, to NIS 608 billion, as
opposed to NIS 596 billion at the end of 2009.
• The increase was due to:
• positive net funding of NIS 11 billion
• inflationary environment added NIS 6 billion.
• The strengthening of the shekel moderated approximately NIS 5 billion.
Total In foreign currency
105.7
Total tradable domestic
358.5
Israel Bonds
Organization - Loans of foreign
goverments and
27.7
Sovereign
various lenders issuances - 27.0
6.6
USA Guarantees
- 44.4
Miscellaneous 8.4
CPI Linked 145.4
Insurance
companies - 38.6
Pension - 97.0
Total non-tradable domestic
144.0
Unlinked 213.1
5
Stable Government Debt length
• Debt length influences financing costs as
well as Refinancing Risk.
• The ATM of total government debt was 6.3
at the end of 2010, versus 6.4 in the
Average time to Maturity
9.0
8.0
8.0
7.8
7.2
7.0
6.5
6.5
7.0
6.3
previous year.
6.4
6.0
• The slight decrease in the ATM can be
6.0
6.1
6.1
2006
2007
2008
6.9
6.3
6.3
6.1
5.0
explained by:
Domestic debt
• a decrease in the ATM in non-tradable
2009
2010
Foreign debt
Total debt
domestic debt.
Ratio of short-term debt to total
debt (rollover ratio)
• the continued trend of shortening the
length of foreign debt
• issuances with short terms to maturity.
• Additional parameters for examining the
Total
government
debt
2006
2007
2008
2009
2010
11
11
11
10
11
refinancing risk is the rollover ratio which
suffered a moderate increase in 2010.
6
Tradable issuance
Long term goal driven
6.3
ATM
• In 2010, the tradable domestic debt
Floating
Rate
15%
funding totaled NIS 61 billion, as
opposed to NIS 82 billion in 2009.
• 59% was funded through fixed
CPI Linked
26%
coupon bonds, 15% with floating-rate
Unlinked
59%
bonds and 26% through CPI-linked
bonds.
• This issuance composition is part of a
Above 10
Years, 7%
Up to one
year, 12%
long trend, expected to continue.
• Issuance focused on 3,5 and 10 years,
a long trend expected to remain as
10 Years,
40%
3 Years,
28%
well.`
5 Years,
12%
7
Liquidity Management Auctions Efficient Sophisticated Instrument
Buy-Backs Auctions
•Extensive use of liquidity
Bond Purchased
Quantity Purchased (NIS)
Total linked bonds
4,551
Total non-linked bonds
823
•During Buy-Back auctions the
Total floating bonds
3570
GDMU pays cash in exchange
Total
8,944
management tools during 2010
as pervious years.
for short bonds.
Early redemptions via Switch and Buy-Backs
Balance at beginning of year
Redemptions via switch and reverse auctions
Percentage of opening balance
•During Switch auctions the
GDMU transfers long maturity
bonds in exchange for short
bonds.
•Main goals:
1.Efficient liquidity
management.
14,000
12,000
10,000
8,000
38%
45%
40%
36%
35%
32%
30%
25%
24%
20%
6,000
4,000
15%
13%
10%
9%
2.Reducing refinancing risk.
3.Interest rate saving.
2,000
5%
2%
CPI linked Gilon 2304 Gilon 2303 Galil 5426
06/10
1%
Galil 5424 Shahar 2680 Galil 5423 Shahar 2667
8
0%
Domestic Trading Volume
• 2010 was a very good year in every
3,000
segment of trade, including in the
2,500
• Daily average trade volume in 2010 were
2,000
Million ILS
government bond segment.
1,500
1,000
approximately NIS 2.5 billion as compared
OTC
MTS
Tase
Total
500
to approximately NIS 3.4 billion in 2009.
0
• The decline is explained by the fact that
investors preferred to increase
2,000
investment in less solid segments that
OTC
government segment.
• Breakdown of turnovers by trading
Million ILS
produced excess rerun over the
MTS
Tase
1,500
1,000
platform:
• TASE – 81% of trading
• MTS – 11% of trading.
• OTC – 8% of trading
500
0
Q1
Q2
Q3
Q4
9
10 year Bond Yields Historically low
• As the second half of 2009 yields declined most of 2010.
• 10 year bond yield fell to an historic low, registering 4.20% on September 1st, 2010.
• 2010 can be divided to two periods:
• January–October: Yields declined due to low global yields and economic improvement.
• November- December: Increase of yield led mainly by an increase in global yields.
• Throughout 2010 trade yields were highly correlated with US government bonds.
• It should also be noted that Israel’s bonds traded with narrower of the yield spreads during most of the
year :100 bp as opposed to 160 bp for the 10 year bond.
5.5
5.25
%
5
4.75
4.5
4.25
4
10
Domestic Debt –
Continued decrease in the weight of non-tradable
• In the course of 2010, there was an additional increase in the proportion of
tradable debt within domestic debt, and the proportion of non-tradable debt
continues to contract.
• The component of tradable debt reached 71% at the end of 2010, whereas
the component of non-tradable debt fell to 29%.
• This trend is a result of a long term policy where less non-tradable bonds
are issued, mainly to the pension funds..
Domestic Debt
80
65
64
71
70
67
60
40
36
Tradable
35
33
30
29
Non-Tradable
20
0
2006
2007
2008
2009
2010
11
Tradable Domestic Debt –
Continued decrease in the weight of CPI linked debt
•The proportion of CPI-linked debt out of total tradable domestic debt fell to 41% in
2010 (43% in 2009).
•The decrease in the linked segment is in accordance with long-term goals for
decreasing the exposure to the index and increasing the shekel segment.
•In January 2010, the last balance of dollar-linked bonds (“Gilboa”) were redeemed at
an amount of NIS 300 million.
Domestic Debt
60
50
43
47
51
58
55
45
42
59
58
42
40
41
58
42
59
57
43
41
20
0
2002
2003
2004
2005
CPI linked
2006
Nominal
2007
2008
2009
2010
Dollar linked
12
Average Series Size and Number
• In recent years the debt
Average series size
management policy in is to restrict
the number of government bond
series in circulation while
increasing their size.
• This policy contributes to increase
the tradability and liquidity of
Number of Tradable Series
bonds and thus assists in lowering
the costs of funding.
• Average series size rose to
NIS 10.9 billion at the end of 2010,
while series number declined to 32.
13
Domestic Debt Holdings
• Pension funds:
• Pension funds holding in 2010 amounted to 13.3% as compared to 12.3% in the previous year.
• This increase is consistent with the recent trend of decrease in designated bond issuance.
• Foreign investors
• Foreign investors holdings rose and stood at 3.0% as compared to 2.7% at the end of 2009 (not
including MAKAM holdings).
• Internationally – this is very low.
• Public’s holdings:
• Public’s holdings at the end of 2010 stood at 23.8% as opposed to 26.4% at the end of 2009.
• This decrease is consistent in view of the decline that began in 2009 and stands in contrast to the
positive trend of recent years.
• Bank of Israel:
• Bank of Israel in the holding stood at 5.1% compared to 5.5% in the previous year.
• This proportion stems from the program for the purchase put into operation in 2009.
Total
• ‫למועד פדיונן‬
‫בהתאם להודעת בנק ישראל איגרות חוב אלו יוחזקו עד‬.
registere
Bank of Foreign Insurance
Pension Provident and Mutual
Year d capital
Banks
Public
Israel investors companies
funds
study funds
funds
(NIS
billions)
2006
265.1
1.2
4.7
9.7
18.1
10.7
24.1
12.4
19.2
2007
273.4
1.0
4.5
8.7
18.3
10.8
18.1
14.0
24.5
2008
316.8
0.8
2.2
10.1
14.5
12.6
20.2
11.3
28.2
2009
367.5
5.5
2.7
9.3
12.9
12.3
17.9
13.0
26.4
2010
387.4
5.1
3.0
9.7
13.0
13.3
18.8
13.2
23.8
14
Non-tradable issuance decline Part of a long term policy
• Non-tradable domestic issuance totaled NIS 8.9 billion in 2010.
• This issuance was carried out through the following instruments:
• NIS 4.8 billion designated non-tradable bonds for pension funds (“Arad”), negative net
issuance of NIS 4.1 billion.
• NIS 3.6 billion designated non-tradable bonds for insurance companies (“Chetz”), positive
net issuance of NIS 4.1 billion.
• NIS 519 million emissions managed by the Ministry of Finance and compulsory loans
managed by the Bank of Israel, negative net issuance of 252 million.
12.00
10.00
Chetz
Arad and Miron
8.00
Others
6.00
4.00
2.00
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
15
Foreign Currency Debt –
Variety of instruments testifies Israel’s strength
• At the end of 2010, the government’s foreign-currency debt stood at NIS 105.7 billion (USD 30
billion), comprising 17% of total debt. 2010 foreign currency issuance:
• Sovereign issuance
• performed in March 2010 amounting to an unprecedented Euro 1.5 billion.
• yield spread of 130 bp over the German swap curve / 149.2 bp over German government.
• Private Issuance
• In April 2010, a 2 year, USD 200 million, private issuance to a large institutional investor was
carried out at floating dollar interest of 0.5% + LIBOR.
• In addition the issuance included a swap transaction, and through it the government
converted its obligation from foreign currency to shekels at a fixed shekel interest.
• The above-mentioned course, permitted the government to achieve a shekel yield lower by
Foeign
government
and other
loans, 1.9
0.3% than parallel government bond.
• Israel Bonds Organization
USA
Guarantees
12.5
• In 2010 the organization raised USD 1.255 billion.
Bonds org.,
7.8
Sovereign
issuances, 7.6
16
Activity in DerivativesAdvanced risk management
• Government's current debt portfolio is characterized by a high proportion of US Dollars.
• The GDMU carries out hedging transactions; short-term dollar-shekel forward transactions,
and long-term swap transactions.
• These hedging transactions enable the reduction of market risks but expose the Unit to credit
risks, particularly counter-party risk.
• Managing the credit risks is carried out as part of the ISDA shelf agreements and CSA’s.
• In accordance with the Credit Support Annex (CSA) appendix, a margin call is carried out
according to the fair value of the transaction (MTM) and the threshold set forth in the
agreement.
Composition of foreign-currency debt by currency :
Foreign-currency debt without hedging
Foreign-currency debt with hedging
USD
84%
Other
2%
Euro
14%
USD
74%
Other
ILS
2%
5%
Euro
19%
17
Israel Bonds OrganizationCheap and anti-cyclical instrument
In 2010, the Israel Bonds Organization
raised USD 1.255 billion.
•
This amount is 25% higher than the
annual funding target of USD 1 billion.
•
Total net funding through the Israel
Bonds Organization in 2010 stood at
negative USD 698.7 million.
•
This is the seventh consecutive year
Issuance and Redemptions
Issuance
Redumptions
Net Issuance
2500
2000
1500
1000
500
0
-500
-1000
-1500
Issuance costs and spreads above Treasuries
that the Organization has raised less
than the amount of its redemptions, in
2.5%
accordance with the policy to reduce
2.0%
• Since November 2010, a decision was
made to increase the spreads.
• Still - Issuance cost via this instrument
are low.
60
50
40
1.5%
30
%
foreign-currency debt.
Average spread (right axe)
JUBILEE 3
TB 3
JUBILEE 2/ MACCABEE 2
1.0%
20
0.5%
10
0.0%
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
18
BP
•
Rating agencies stability
• In 2010, only S&P report was published, this agency rated Israel with an A
Stable rating.
• In 2009, the other published the credit rating of the State of Israel :
• Moody’s: A1 Stable.
• Fitch: A Stable
Rating
Agency
Moody's
Standard
& Poor's
Fitch
Term
Domestic
Bonds
Outlook
Foreign
Bonds
Rating
Rating
Long term
A1
A1
Short
term
-
Long term
AA-
Short
term
Long term
A-1+
A+
F1
Stable
P1
A
Stable
Stable
A-1
A
-
Latest Rating Change
The rating outlook was
upgraded in April 2008
to "Stable"
The rating outlook was
downgraded in October
2008 from "Positive" to
"Stable"
The rating outlook was
upgraded in February
2008 to "Stable"
19