Debt Management Strategy 2015 Roundtable on Treasury Markets and - - PowerPoint PPT Presentation

Debt Management Strategy

2015 Roundtable on Treasury Markets and Debt Management

November 2015

• 1. Public Debt Management Strategy

2

Direct

(intertemporal funding at an adequate cost-risk trade off)

Cost Risk (refinancing, exchange

rate, interest rate)

Permanent access to several funding sources

Ability to withstand a wide range of stress scenarios

Indirect

(strategic role of the yield curve – externalities)

Promote the development of the local and foreign debt markets Yield curve as a benchmark for

• ther issuers

Develop a liquid yield curve Short and long term instruments

1 2 3 4

Funding terms and conditions

Option to issue

1 2 3 4

Two Main Objectives

3

To cope with the 2008-2009 crisis fiscal and monetary policies provided unprecedented stimulus to support aggregate demand. Significant portfolio adjustment towards emerging markets (push and pull factors). Emerging markets have been strongly influenced by US interest rates and changes in global risk appetite. Low and uneven growth among regions will continue to induce FX volatility. Global conditions and lower growth in China have put pressure in commodity prices and some emerging markets.

1 2 3 4 5

• 2. Global Financial Markets Conditions

• 3. Debt Management Challenges and Opportunities

4

 Strategic role of the yield curve for aggregate demand management (externalities)  Links between monetary policy and public debt policies

• Risk free vs. risky debt (spreads pricing/ratings)
• Role of the central bank and firewalls

 Public debt sustainability (stress testing, etc.)  Local (national) currency debt Macroeconomic Dynamics Regular business-cycle

(incentives well aligned: separability principle)

Crisis/crash

(incentives may differ) vs

5

Increasing role of foreign investors

• Diversification of the investor base
• Improved price dynamics
• Increased tail-risks (liquidity buffers are needed)

Key role of global benchmarks Increased correlation in investors’ risk appetite Regulatory challenges (derivatives, capital ratios, etc.) Buy and hold investors Market-makers

Global Portfolio Reallocation (pull-push factors) Liquidity

• 3. Debt Management Challenges and Opportunities

2009 2010 2011 2012 2013 2014 2015

4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 2.5% 3.5% 4.5% 5.5% 6.5%

Expected Cost Cost at Risk (95%) 6

Source: SHCP.

Local Debt Risk-Cost Trade Off

• 4. Issuance Strategy

External Debt Risk-Cost Trade Off

2009 2010 2011 2012 2013 2014 2015

4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0%

Expected Cost Cost at Risk (95%)

Total Debt Risk-Cost Trade Off

2009 2010 2011 2012 2013 2014 2015

5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 2.70% 3.70% 4.70% 5.70% 6.70%

Expected Cost Cost at Risk (95%)

Mexico’s debt management strategy takes into account the trade-off between expected cost and risk to optimize its debt portfolio.

7

Financial Cost (% of GDP)

Source: SHCP.

Gross Financing Needs (% of GDP)

e/ Estimated

• 4. Issuance Strategy

The Federal Government has sought to reduce costs and lower portfolio risks through an adequate mix of currencies, debt instruments and maturities.

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e

8

Source: SHCP.

Average Maturity of External Government Debt

(years)

Government Debt Breakdown by Currency*

(%) 97.0 72.3 6.5 2.7 17.3 0.3 3.9 10 20 30 40 50 60 70 80 90 100 2006 2015 USD Yen Euro GBP

* Considers only market debt.

22.0 13.4 0.00 5.00 10.00 15.00 20.00 25.00 06-I 06-III 07-I 07-III 08-I 08-III 09-I 09-III 10-I 10-III 11-I 11-III 12-I 12-III 13-I 13-III 14-I 14-III 15-I 15-III With UMS 100yr Without UMS 100yr**

**Excludes UMS, EUR, USD and GBP 100 year bonds.

4.1. External Markets Strategy

Diversify funding sources and extend average maturity

9

Source: SHCP.

4.1. External Markets Strategy

Maturity extension objectives: lower refinancing risk, increases diversification, broadens the investor base and helps differentiate from other issuers.

UMS Yield Curve (%)

UMS 2026 UMS 2046 UMS 2110 UMS 2024 UMS 2045 UMS 2115

0.0 1.0 2.0 3.0 4.0 5.0 6.0 5 10 15 20 25 Duration USD EUR

New investors in USD and EUR 100-year issuances* (million)

1,843 1,500 45.8% 54.2% 30.7% 69.3%

* Order book compared to immediately prior 10 and 30 year bond issuances in each currency.

USD 100 YEAR EUR 100 YEAR Investors in previous 10 and 30 year bonds New Investor Base 45.8% 54.2% 30.7% 69.3%

10

Source: SHCP.

Average Maturity of Local Government Debt

(years)

4.2. Local Markets Strategy

The relative importance of short-term and floating rate notes has diminished and duration has been increased (between 7-8 years since 2011).

8.0

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 06-I 06-IV 07-III 08-II 09-I 09-IV 10-III 11-II 12-I 12-IV 13-III 14-II 15-I 45.2 54.8 9.9 25.1 22.0 14.1 22.9 5.9 10 20 30 40 50 60 70 80 90 100 2006 2015

Fixed Rate Bonds Inflation Linked Bonds Cetes Floating Rate Notes

Composition of Local Government Debt

(%)

Mexico’s Yield Performance

(USD and Peso) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 ene.-08 jul.-08 ene.-09 jul.-09 ene.-10 jul.-10 ene.-11 jul.-11 ene.-12 jul.-12 ene.-13 jul.-13 ene.-14 jul.-14 ene.-15 jul.-15

10 yr UST 10 yr UMS 10 yr Mbono

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M Bonds Yield Evolution 2008-2015 (%)

Source: SHCP.

24oct08 24oct08 24oct08 24oct08 24oct08 9may13 9may13 9may13 2may13 2may13 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 3 year 5 year 10 year 20 year 30 year Average Actual

4.2. Local Markets Strategy

Local debt markets have coped well with complex and challenging external conditions in the last years.

The box limits are the 75th and 25th percentile.

5,000 10,000 15,000 20,000 25,000 30,000 35,000 3 year 5 year 10 year 20 year 30 year Average 4Q-15

Quarterly Issued Amounts of M Bonds 2008-2015 (million pesos)

Max Min Max Min

12

Source: SHCP.

4.3. Stress Tests

Foreign holdings of local securities have been resilient to volatility episodes.

4 5 6 7 8 9 10 11 12 8 10 12 14 16 18 2007 2008 2009 2010 2011 2012 2013 2014 2015 Yield Exchange Rate Exchange Rate Yield

Financial Crisis

• ct08-dec09

European Crisis mar11-jun12 Tapering jun13-dec13 Current aug14-sep15

Exchange Rate (USD-MXN) and 10yr M Bond

• 1.000
• 0.800
• 0.600
• 0.400
• 0.200

0.000 0.200 0.400 0.600 0.800 1.000

10% 20% 30% 40% 50% 60% 2007 2008 2009 2010 2011 2012 2013 2014 2015

% of total M Bonds outstanding

Financial Crisis European Crisis Tapering Current

M Bond Foreign Holdings

• 5. Final Remarks

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Debt Management Strategy

 A sound debt management strategy is a key element of strong macroeconomic fundamentals  Importance of flexibility in debt issuance programs (consider market conditions - local and external risk appetite)  Debt Managers should maintain a wide range of options regarding funding alternatives (option to issue)  Diversify the investor base (look for less correlated investors)  Consider the strategic role of the yield curve:

• Aggregate demand tool
• First building block in any funding in national currency (corporates and

households)  Importance to be perceived as a regular and predictable issuer in local currency funding  Consider flexible issuance and hedging strategies (timing) in markets where you are not a price setter (funding vs exposure)