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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