Budget shows deficit as economy slows Central Government Borrowing - - PowerPoint PPT Presentation

Budget shows deficit as economy slows

Central Government Borrowing – Forecast and Analysis 2020:1

Investor meeting at Swedbank 18 February 2020

Swedish economy continues to grow slowly Budget deficit for both 2020 and 2021 Plan for increased bond borrowing unchanged

Stabilisation since last time but also a new risk

• Stabilisation and turnaround in

global economy during the autumn

• Swedish developments also in line

with previous forecast

• New risk: the corona virus

Sources: ISM, Markit and Swedbank

40 45 50 55 60 65 2017 2018 2019 2020 USA Euro area Germany United Kingdom Sweden Index Purchasing Managers' Index, manufacturing

Lower volatility in GDP growth

The Great Moderation – back again after the financial crisis

Note: Volatility is a five-year rolling standard deviation of an unweighted average of the countries’ GDP growth, measured as yearly percentage change Sources: OECD Economic Outlook and Debt Office

1 2 3 4 1975 1980 1985 1990 1995 2000 2005 2010 2015

GDP volatility in the G7 countries

Standard deviations

Swedish economy continues to grow slowly

• Weak growth on the whole,

some recovery next year

• Unemployment to rise as the

business cycle weakens

• Small revisions to forecasts

Sources: Statistics Sweden and the Debt Office

1 2 3 2017 2018 2019 2020 2021 This forecast Previous forecast Yearly percentage change GDP growth

Withdrawals from tax accounts also weigh on budget

Note: 12-month moving average Source: The Swedish Tax Agency and the Debt Office

Expected net outflow of SEK 10 billion in 2020 and SEK 15 billion in 2021

10 20 30 40 50 60 70 80 90 2013 2014 2015 2016 2017 2018 2019 2020 Companies Private individuals

Amount in tax accounts

SEK billion

Budget deficit both this year and next

• Weaker business cycle makes a

mark, but the turnaround is reinforced by temporary factors

• Somewhat smaller deficit

compared with previous forecast

• Capital investments in tax

accounts add to uncertainty

• 40
• 20

20 40 60 80 100 120 2017 2018 2019 2020 2021 Outcome This forecast Previous forecast SEK billion Central government budget balance

Debt Office acts within a given framework

Central government funding requirement (budget deficit + redemptions) Objective to minimize long-term cost of debt and consider risks Debt Office strategies and borrowing policy Government guidelines for debt management

Higher borrowing requirement after four-year decline

Source: the Debt Office

• 150

150 300 450 600 2014 2015 2016 2017 2018 2019 2020 2021 Net borrowing req. Redemptions Other Total borrowing req. SEK billion

New forecast causes no change in issuance plan

Issuance volume of nominal bonds to increase gradually

Source: The Debt Office Note: Excludes on-lending to the Riksbank

• exkl. lån för Riksbanken

100 200 300 2014 2015 2016 2017 2018 2019 2020 2021 Nominal government bonds Inflation-linked bonds T-bills Foreign Currency Bonds SEK billion

Green bond to complement regular issuance

Process for green bond

• One issue in 2020
• Proceeds linked to defined

green budget expenditures

• Preparations under way –

framework, selection of expenditures etc.

• Selection of green expenditures

sets scope for size of issuance

• Volume shall also be compliant

with the objective for central government debt management

• 1. Evaluation

and selection

• f expenditures
• 2. Issuance
• 3. Reporting

• 150
• 125
• 100
• 75
• 50
• 25

25 50 75 2016 2017 2018 2019 2020 2021 2022 Monthly cash balance Yearly average Balance in liquidity management, SEK billion

Temporary increase in T-bills to meet redemptions

Lowest debt as share of GDP since the 1970s

Source: The Debt Office and Statistics Sweden

10 20 30 40 50 60 70 80 90 100 200 400 600 800 1 000 1 200 1 400 1 600 1 800 2 000 Central govt. debt Maastricht debt Central govt. debt, % Maastricht debt, % SEK billion Per cent of GDP

Strained liquidity in the government bond market

Assessment of market liquidity Turnover ratio, nominal government bonds

Assessment of liquidity in terms of volume, grades from 1 to 5 Source: Kantar Sifo Prospera

1 2 3 4 5 Domestic investors Interantional investors Primary dealers Grade 0% 20% 40% 60% 80% 100% 0% 1% 2% 3% 4% 5% 2012 2014 2016 2018 2020 Riksbank's holdings (RA) Turnover ratio (LA) Ratio excl. Riksbank's holdings (LA) Turnover ratio Fraction

Average daily turnover over the past 60 trading days in relation to the average outstanding stock during that period. Source: Riksbank, the Debt Office

New conditions for debt management

• Surplus target and low level of central government debt
• Regulations affecting the fixed-income market
• Effects of low-rate environment and QE
• Sustainability aspects
• Tax account being used for capital investments

The new world is already having an effect

• Necessary to prioritize between funding instruments
• Issuance volumes reached a minimum level in 2018
• Outright auctions instead of switches when introducing a new bond
• Green bond in 2020
• Need for flexibility within liquidity management
• In- or outflows from tax accounts
• Variation in repo volumes
• Longer periods of cash surplus