The use of analytical tools to determine debt

management strategies National Treasury

Asset and Liability Management Division | 27 June 2013

Outline

• Core elements in designing debt management strategies

• South Africa’s analytical tools

• Public debt analytical tools

2

Core elements in designing debt

management strategies

3

Key steps in formulating a debt management

strategy

• Identify objectives for debt management and scope of the MTDS

• Identify cost and risk of the existing debt

• Identify potential funding sources

• Identify baseline projections and risks for key policy areas – fiscal,

monetary and market

• Review key longer-term structural factors and determine implications for

MTDS

• Identify the cost-risk trade-offs for alternative strategies, and rank their

performance

• Review implications of preferred strategy with fiscal and monetary policy

authorities, and for market conditions

• Submit recommendation and secure agreement on MTDS from decision

makers

4

Source: Developing a MTDS – Guidance Note for Country Authorities (World Bank, IMF, 2009)

Debt strategy and annual borrowing plan

Annual

Borrowing

Plan

Medium-term Debt

Management Strategy

Govt.

Budget

Govt. Cash

Flow Forecast

Market Conditions

& Demand Factors

Regular & Stable

Issuance Calendar

Benchmark

Bond Policy or

New Issuance

Macro-economic

coordination

Buyback/Switches

Other LM Opns

Cost-Risk

Consistency

Borrowing Mix

Integration of

Cash & Debt

Management

Risk Mitigation

Debt Market

Development

5

South Africa’s analytical tools

6

Macro-

economic

forecast

Model

Risk

benchmark

Funding strategy

Cash flows

Funding instruments

Budget deficit

Gross borrowing

requirement

Output

Extraordinary

receipts/

payments

Scenarios Risk

benchmarks Volume of debt

Debt service costs

Debt and debt-service cost forecasting model

Redemptions

7

Switches

(Exchanges)/

buy-backs

Current

portfolio

Management of refinancing risk

8

0

50

100

150

200

250

300

350

400

450

2013/2

014

2014/2

015

2015/2

016

2016/2

017

2017/2

018

2018/2

019

2019/2

020

2020/2

021

2021/2

022

2022/2

023

2023/2

024

2024/2

025

2025/2

026

2026/2

027

2027/2

028

2028/2

029

2029/2

030

2030/2

031

2031/2

032

2032/2

033

2033/2

034

2034/2

035

2035/2

036

2036/2

037

2037/2

038

2038/2

039

2039/2

040

2040/2

041

2041/2

042

2042/2

043

2043/2

044

2044/2

045

2045/2

046

2046/2

047

2047/2

048

2048/2

049

2049/2

050

2050/2

051

2051/2

052

R b

illi

on

FRB ILB Zeros Foreign T-Bills Smoothning (R39bn) 6%

9

3-year monthly forecast

Quality of cash management and forecasting is

important

Year 1 Year 2 Year 3

90-day daily forecasts (or longer if needed)

Lo

ng

-te

rm

Sh

ort

-te

rm

1 2 3 4 5 6 7 8 9 11 12 1 2 3 4 5 6 7 8 9 11 12 1 2 3 4 5 6 7 8 9 11 12

Year 1

1 2 3 4 5 6 7 8 9 11 12

Months

Months Months Months

1 - 90

Days

Rolling into year two

Current day firm forecasts (11:00 and 15:00)

3-year annual forecast

Current year rolling monthly forecast

Total net government debt

10

15

20

25

30

35

40

45

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,00020

00/0

1

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

2013

/14

2014

/15

2015

/16

R b

illi

on

Gross loan debt

Net loan debt

Total net debt as % of GDP (Right axis)

Per

cen

t o

f G

DP

Government debt-service costs to peak in 2013/14

11

2

3

4

4

5

6

7

8

9

10

11

12

13

14

15

16

1720

03/0

4

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

2013

/14

2014

/15

Per cent of revenue

Per cent of expediture

Per cent of GDP (right axis)

Per

cen

t o

f re

ven

ue

and

exp

end

itu

re

Per

cen

t o

f G

DP

12

9.2%

Domestic Foreign

64.9%

35.1%

Fixed rate Non-fixed rate

Composition of the debt portfolio – 31 March 2013

90.8%

Managing contingency liabilities

13

RiskCalc

• Moody’s KMV analytical tool is used to determine the probability of default

by state-owned companies

• Models used indicators such as: profitability, leverage, debt coverage,

liquidity

• The model is used to managed the national government’s guarantee

exposure

CreditEdge

• The model is used to determine the National Treasury’s credit risk

exposure for investing surplus cash

• Model includes business and financial risk indicators

Net debt, provision and contingent liabilities

14

0

10

20

30

40

50

60

2006

/07

2007

/08

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

2013

/14

2014

/15

2015

/16

Per

cen

t o

f G

DP

Net debt Provisions Contingent liabilities Tolerance benchmark Net debt + Provisions + Contingent liabilities

Public Debt Analytical Tools

15

Available analytical tools

• Only few developing countries have a formal debt analytical tool

• Mostly build in-house

• MTDS “Toolkit” - IMF-World Bank

• DMFAS - UNCTAD

• Horizon - Commonwealth Secretariat

• Commercial software (CreditEdge/RiskCalc)

16

17

Analytical framework of Horizon: An overview

Source: Commonwealth Secretariat

Benefits of using Horizon by National Treasury

• Improving the formulation of our debt management strategy through an

explicit, transparent and audit trails on cost-risk analysis

• Use the yield curve across the term structure for better forecasting of cash

flows on future borrowings and valuation of debt

• Have the formulation and implementation of debt strategy in the same

system and framework for continuity and consistency

• Better integration of cash and debt management

• Improve portfolio analysis through more risk indicators

• Improve analytical reporting on debt management

• Improved monitoring of annual borrowing plan

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Thank You

19