formulation and implementation of annual debt management ... · strategy implementation 2006...

Formulation and Implementationof Annual Debt Management Strategies in Turkey

M. CoşkunM. Coşkun CANGÖZ CANGÖZ

Acting Director General of Public Finance Acting Director General of Public Finance

Turkish TreasuryTurkish Treasury

1

Annual Financing Program(Billion YTL) 2006 Prog

I. Total Debt Service 168,4

Principal 126,2

Interest 42,2

Domestic Debt Service 144,5

Principal 108,8

Interest 35,7

External Debt Service 23,8

Principal 17,4

Interest 6,4

II. Financing Items 168,4

Non-Debt Resources 40,2

Primary Surplus 30,2

Privatization 7,0

Collections from On-lent Loans 3,1

Change in Bank Account 0,0

Total Borrowing 128,1

External Borrowing 16,7

Domestic Borrowing 111,4

Memo Item:

Roll-over ratio for Domestic Borrowing 77,1%

2

Principles and Constraints

Regulation on the Principles and Procedures of Coordination and Execution of Debt

and Risk Management

(Published in the Official Gazette dated September 1, 2002 and no. 24863)

Principles

Article 4- The execution of public debt and risk management shall be based on the

following principles:

a) To follow a sustainable, transparent and accountable debt management policy

that conforms to monetary and fiscal policies, in line with macroeconomic

equilibriums,

b) To address financing requirements with the lowest possible cost in the

medium and long term, taking into account the risk level determined according

to domestic and international market conditions.

3

Annual Financing Program(Billion YTL)

I. Total Debt Service

Principal

Interest

II. Financing Items

Non-Debt Resources

Primary Surplus

Privatization

Collections from On-lent Loans

Change in Bank Account

Total Borrowing

External Borrowing

Domestic Borrowing

Memo Item:

Roll-over ratio for Domestic Borrowing

Sustainability

Fiscal Policy

Macroeconomic and political performance

Monetary policy

Debt Management Policy

Market sentiment

Lowest Possible Cost

Accountability & TransparencyPrudent Risk Level

4

Policy ObjectivesMonetary Policy

-Price Stability

- Financial Stability Reports

- Analysis of macroeconomic and fiscal policies

- Monitoring financial markets

- Caring the Payment System

- Credit facility by open market operations

- Credit facility for extraordinary situations

Fiscal Policy

- Efficient use of public funds for the provision of social goods and services

- Budget Document

- Tax and transfer policies

- Deficit financing

-Setting the major macroeconomic targets

Debt Management Policy

- Meeting the Financing Requirement

- Minimum cost with a prudent level of risk

- Deepening the market

- Widening the investor base

- Setting a medium & long term financial horizon

- Benchmark securities

5

Strategy Formulation

Change in Interest Rates

Contingent LiabilitiesLoan GuaranteesPerformance GuaranteesBanking Sector Guarantees

Market Appetite / Demand

Economic and Financial Conditions

Legal Conditions

Bank DepositFinancial Assets

On-Lent LoansUndertaken Guarantees

External DebtDomestic Debt

Change in FX Rates

Fiscal Risk

6

Aims to identify probable limits within which the costs of debt may fluctuate (the degree of market risk) for a given strategy.

Serves as a tool for comparison of alternative borrowing strategies in terms of expected costs and risks.

Strategy Formulation... (cont.)Strategy Formulation... (cont.)

Cost at Risk – C@R

7

Simplicity (clear communication of the medium/long-term objectives of debt management)

Applicability (should fit the market environment)

Robustness (should not rely on too strict assumptions)

Credibility (should have a good track record of performance)


8

Cost of any borrowing strategies

under the base scenario


Deterministic Simulation Model

Risk Scenario

Risk

Base Scenario

Time

Cost

Risk: Cost differences between the alternative scenarios and the base scenario

Borrowing Strategies Module

Measurement of the costs of borrowing strategies under alternative scenarios including the base scenario.

Cost

Base Scenario

Time

9

Efficient Frontier


Cost

Risk

9

5

6

8

7

1310

1

23

4

16

1512

11

14

1718

2221

20

19

RelativeCost at Risk

ExpectedCost

Absolute Cost at Risk

Cost at Risk

10

58.8

J02

M M J S N J03

M M J S N J 04

M M J S N J 05

M M J S N J 06

M

8.6

13.216.4

18.923.3

9.4

2001 2002 2003 2004 2005 2006 (1)

16.4

12.79.4

4.7

0.9

(0.7)

2001 2002 2003 2004 2005 2006(1) (2)

6.3 6.9 6.5 6.5

4.2

5.5

2001 2002 2003 2004 2005 2006P


Public Sector Primary Balance (% of GNP) Public Sector Borrowing Requirement (% of GNP)

Debt Service- Interest Expenditures / GNP Central Bank Reserves (Billion USD)(%)

(%)

(1) Estimation of realization by end of year(2) Program

(1) Program.

2001 2002 2003 2004 2005 2006Interest Expenditures 41.1 51.9 58.6 56.5 45.7 46.3

(Billion YTL)

(1)

Fundamentals

11


74.174.2

67.4

63.0

52.8

25.925.8

32.6

37.0

47.2

Total YTL Portfolio Total Forex Portfolio

2002 2003 2004 2005 2006(1)

13

16

19

22

03.01.05 23.02.05 13.04.05 02.06.05 21.07.05 09.09.05 28.10.05 20.12.05 13.02.06 03.04.06 23.05.06 11.07.06

(%)

0

1000

2000

3000

Mio

YT

L

Volume Interest Rate

V

Secondary Market Portfolio Preference of Financial Sector

Liquidity in the Market Investor Base

(1) As of March 31, 2006Porfolio refers to deposits, repos, government bonds, investment funds

Market Structure

8,2

13,212,712,0 11,4 10,5 11,0

0

50

100

150

200

250

300

2004 2005 M 06 N 06 M 06 H 06 T 06

(%)

Mio

YTL

0,02,04,06,08,010,012,014,0

Domestic Debt Stock Foreign Investors-1.500.000

-1.000.000

-500.000

0

500.000

1.000.000

1.500.000

2.000.000

2.500.000

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

12


The fulfillment of financing requirements at the lowest possible cost in the medium and long term in accordance with the levels of risk determined in consideration of domestic and external market conditions and cost factors.

Strategic Benchmarks

Raise funds mainly in TRL by issuing zero coupon and couponed bonds

Use fixed rate instruments as the major source of borrowing and limit issuance of Floating Rate Notes

Increase the average maturity of domestic borrowing, considering the market conditions, by using 5 year-bonds

Have a strong cash reserve in Central Bank

Full redemption of FX indexed local government bonds

Max. 80 % roll-over of FX denominated local government bonds

13

Strategy Implementation

2006 Borrowing Strategy

Improve the predictability by announcing monthly auction calendar

Introduction of benchmark borrowing

Increase the liquidity of the securities by reducing the number of issuances and re-openings

Monthly issuance of YTL denominated fixed and floating rate semi-annual couponed securities

Introduce buy-back auctions

Introduce inflation indexed bonds

Close coordination with market participants and primary dealers

14

10

15

20

25

30

35

40

J 05

F M A M J J A S O N D J06

F M A M J J A

8

10

12

14

16

18

20

22

J 05

F M A M J J A S O N D J06

F M A M J J A

Strategy Implementation… (cont.)

Interest Rates on Issuance (%) Maturity on Issuance (Month)

Balance of Treasury AccountComposition of Domestic Borrowing

60%

80%

100%

120%

140%

160%

180%

Jan Feb Mar Apr May Jun Jul Aug

Deposit / Monthly Debt Service

Deposit / Monthly Domestic Debt Service1,310,1Float

0,00,8Fixed

1,310,9FX Borrowing

31,018,8Float

67,770,3Fixed

98,789,1TRL Borrowing

100100Total Borrowing

32,328,9Floating Rate

67,771,1Fixed Rate

100100Total Borrowing

Jan – Jul ‘06Jan – Jul ‘05%

15


31.12.2002

35.0

40.0

45.0

50.0

55.0

60.0

Days

Inte

rest

Rat

e (%

)

31.12.2003

20.0

22.0

24.0

26.0

28.0

30.0

Days

Inte

rest

Rat

e (%

)

31.12.2004

0.0

5.0

10.0

15.0

20.0

25.0

Days

Inte

rest

Rat

e (%

)

30.12.2005

12.0

12.5

13.0

13.5

14.0

14.5

15.0

Days

Inte

rest

Rat

e (%

)

Yield Curve Construction

16

YTL64%

FX16%

FX Indexed20%

YTL FX FX Indexed


2001 2006 July

YTL FX FX Indexed

YTL 85%

FX 14%

FX Indexed 1%

Domestic Debt Stock by Instruments

17

4138,239,833,435

14,325,230,5

4555,4

90,4

55,363,4

70,378,4

TL Foreign Exchange

2001 2002 2003 2004 2005


Public Net Debt Stock / GNP (%)

Debt Service- Interest Expenditures / GNP

(%)

8.6

13.216.4

18.923.3

9.4

2001 2002 2003 2004 2005 2006 (1)

18


(%)

55.8 58.146.3 41.5 37.6

34.2 26.4

29.428.5 31.8

10.015.5 30.0

30.0 30.6

FX Denom / FX Indexed TL Floating TL Fixed

2001 2002 2003 2004 2005

Increasing Endurance for Vulnerabilities

19


Elasticity

BASED ON STOCK COMPOSITION

IN 2002 BASED ON STOCK COMPOSITION

IN 2005

CHANGE IN DEBT

STOCK / GNP CHANGE IN DEBT

STOCK / GNP

10 % Real Depreciation/ Appreciation of TRL

+ / - 4.7 Per cent + / - 1.5 Per cent

300 bps Increase / Decrease in Real Interest Rates of TRL Borrowing

+ / - 1.0 Per cent + / - 1.2 Per cent

1 % Increase / Decrease in GNP Growth

+ / - 0,8 Per cent + / - 0,6 Per cent

1 % Increase / Decrease in Primary Surplus

+ / - 1.0 Per cent + / - 1.0 Per cent

20

Strategy Revision

13

16

19

22

03.01.05 23.02.05 13.04.05 02.06.05 21.07.05 09.09.05 28.10.05 20.12.05 13.02.06 03.04.06 23.05.06 11.07.06

(%)

100000

110000

120000

130000

140000

150000

160000

170000

180000

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep

-05

Nov

-05

Jan-

06

Mar

-06

May

-06

Jul-0

6

Central Bank Interest Rates (%) TRL/$ Rates

EMBI + IndexFED Rates

100

150

200

250

300

350

400

450

A04

O05

Ş05

M05

N05

M05

H05

T05

A05

E05

E05

E05

K05

A05

O06

Ş06

M06

N06

M06

H06

T06

(bp)

EMBI+ EMBI+ Türkiye

-

1,0

2,0

3,0

4,0

5,0

6,0

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep

-03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep

-04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep

-05

Nov

-05

Jan-

06

Mar

-06

May

-06

Jul-0

6

%

21

Strategy Revision

Continue announcement of monthly auction calendar

Reduce maturity

Shorten the maturity of 5-year floating rate semi-annual coupon securities

Suspend monthly issuance of 5-year YTL denominated fixed semi-annual coupon securities

Increase the number of zero coupon bonds up to one year maturity

Reduce roll over ratio

Introduce domestic bond exchange auctions

Postpone Introduction of inflation indexed bonds

Increase coordination with market participants and primary dealers

Introduce PD expectations survey

Change tax regime of government borrowing instruments

22

Guarantee Limit

Limit for On-lent loans

Risk Account - A reserve for unexpected payments

Guarantee Fee

On-lent Fee

Partial Guarantee

Managing Fiscal RisksManaging Fiscal Risks

23

Credit Risk Model

Quantitative spreadsheet models where the behaviors of guaranteed institutions are simulated under different macroeconomic conditions

Credit Scoring Model

Model that forecasts default one period ahead through a linear weighted combination of observable explanatory variables

Managing Fiscal RisksManaging Fiscal Risks … … (cont.)(cont.)

24

EL ML

Liability

Possible Loss, x

Prob

abil

ity

of L

oss

99% MPL

EL: Expected (Average) Loss

MPL: Maximum Probable Loss

ML: Maximum Loss

1

ELportfolio=ΣELiMPLportfolio≠ΣMPLiMPLCi<=MPLi


25

Year

Year Year

Year

NetIncome

Debt Payment

Reserves

Loss Distribution

Recovery Distribution

Macro Scenarios

PortfolioModule

ElectricityModel

. . .Model

MunicipalityModel

Expected LossMax Probable Loss

$27$156

GDP

Inflation

Exchange Rates

Credit Risk Model


26

Statistical Tests Z-score equation

Risk Account

Financial Ratios Probability of DefaultCompany Default Information

Expected Loss Guarantee Fee

Past CollectionPerformance

Credit Scoring model


27

Comprehensive Debt Management Approach

Prudent Macroeconomic Policies and Strong Fundamentals

TransparencyAccountability

Foreseeable Debt Management Policies

Broader Investor Base

Increased Financial Stability

Increased Market Confidence

Improved Borrowing Conditions

Strong Debt Management Capacity

28

Thank You

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