government securities market Washington, Sovereign Debt Management - - PowerPoint PPT Presentation

ROMANIA Development of local government securities market

Washington, Sovereign Debt Management Forum, 2014

General Government Debt / GDP Q2 2014, %

Source: Ministry of Public Finance - Public Debt Bulletin - annex "Government Debt according to EU Methodology”

General Government Debt / GDP, %

Source: Ministry of Public Finance Note: Data based on outstanding debt at end of August 2014 according to national legislation  Romania’s debt-to-GDP ratio remains one of the lowest in the EU and

CEE regions

 General government debt was 39,7% of GDP at end September 2014

and is forecasted to stay below 40% of GDP in the medium term

 As of 30 Sept 2014, average remaining maturities of government

securities were:

 Total public debt - 4.9 years  RON papers

• 2.9 years

 Eurobonds - 7.1 years

Romania’s Public Debt Remains Moderate Relative to GDP

Public Government Debt Service Projection, RON bn

Source: Eurostat – release 23 October 2014, Government Debt 2

14,6% 16,8% 19,0% 20,6% 20,7% 15,3% 17,4% 18,3% 17,3% 19,0% 29,9% 34,2% 37,3% 37,9% 39,7% 2010 2011 2012 2013 sep..14

Domestic government debt (% of GDP) External government debt (% to GDP)

10,5% 23,1% 41,1% 38,5% 38,8% 44,2% 45,3% 78,3% 82,6% 87,0% Estonia Luxembourg Latvia Romania Sweden Chech Republic Denmark Slovenia Austria EU 28

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By Interest Type By Currency

Source: Ministry of Public Finance Note: Calculations based on national legislation

By Type of Initial Maturities, RON bn

Public Government Debt Profile as of September 2014

64,1 67,8 43,4 29,5 18,7 118,4 142,6 183,4 222,6 235,2 2010 2011 2012 2013 sep..14

Short term Medium and long term T-bills 4,0% Bonds 40,2% Eurobonds 23,1% Loans 29,3% Loans from surplus of State Treasury account 3,4% RON 42.6% USD 9.4% EUR 46.5% SDR 0.6% Other 0.9% Under 1 year; 7,40% 1 to 5 years; 34,30% Over 5 years; 58,30%

By Instrument Public Government Debt By Initial Maturity

Fixed; 81,5% Variable; 18,5%

Romanian Credit Has Strong Market Performance

5-year USD CDS Dynamics, bps EMU Convergence Criterion – 10-year Bond Yields, % Bid Yields of Romanian EUR Eurobonds, %

Source: Bloomberg Source: Bloomberg Source: Eurostat

4,0 5,0 6,0 7,0 8,0 9,0 10,0 ian.10 iul.10 ian.11 iul.11 ian.12 iul.12 ian.13 iul.13 ian.14 iul.14

 Romanian yields have shown resilience to the Russia-Ukraine conflict  Confirmation in 2014 by all three rating agencies of investment grade

status with stable outlook

 Spread compression and improving international ratings underline the

the ongoing convergence of Romania towards EU countries

 The historically low yield environment has allowed Romania to extend

its average debt duration at advantageous cost

 Established credit curves out to 10 years in EUR and 30 years in USD 4 Time Period High: 9.05% (Jan 2010) Time Period Low: 4.16% (Jul 2014)

50 150 250 350 450 550 650 750 Jan12 Apr12 Jul12 Oct12 Jan13 Apr13 Jul13 Oct13 Jan14 Apr14 Jul14 Oct14 Bulgaria Romania Hungary Latvia

Milestones for the Development of the Government Securities Market: Looking Back

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 2008 - First debt management strategy – explicit objective – developing the government securities

market

 Starting with 2008 - Introduction of benchmark bonds (now 27 outstanding bonds across different

maturities – up to 12 years remaining maturity)

 2009 - Implementation of the private pension system (pillar II and III) – developing the domestic

institutional investor base

 2009 – Financial and economic crisis hit Romanian economy – the road from hell to heaven – from

2009 domestic funding policy based on short term T-bills issuance (edging up to Lombard rate of 14,25%) to the 2013-2014 liquid benchmark bonds of medium-long-term maturity 2011-2012

 2010 – Building up a hard currency buffer in the treasury (to cover 4 months of gross funding needs)

– buying protection while preserving flexibility

 2011-2012 - New regulation to support increased competitiveness among PDs – new set of appraisal

criteria focusing on PDs performance on the primary and secondary market (underwriting commitment of 2% of the total volume of government securities in the primary market auction and 3% including the amounts acquired for clients, incentives: non-competitive auctions, favorable treatment for bond issuances on the foreign markets)

 2013 - Inclusion of Romanian benchmark bonds in international indices (JP Morgan and Barclays)

followed by sharp increase in the non-residents appetite to our domestic government bond market (May 2013 – non-resident increased to 25% of the total outstanding volume of government securities)

 May 2014 – regaining the full investment grade status from all rating agencies (the last in line – S&P’s

upgrade)

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• Total outstanding local (end of September 2014) government

securities Ron 112.2 bn (equiv. EUR 24.9bn) - o/w: RON 96.97 bn and RON 15.22 bn (EUR).

• Since 2011 yield curve moved gradually downwardly while the

maturities were extended supported by the complementarity of the non-residents’ demand on the long-end of the curve

• As of September 2014 the domestic debt market continued

being dominated by commercial banks that held 53.1 % in total

• utstanding government securities; next in importance were the

non-residents with holdings that amounted to 19.4%, while pension funds` holdings reached 10.2%. Distribution by investor type (end of September 2014) Government securities issued between January 1 – October 31, 2014 (initial maturity)

Commercial banks 53,10% Pension funds 10,20% Others 36,70%

6M T-bills 10% 1Y T-bills 21% 3 Y bonds 10% 4 Y bonds 3% 5 Y bonds 18% 7 Y bonds 3% 10 Y bonds 33% 15 Y bonds 2%

Macroeconomic fundamentals supported rapid market developments and a smooth implementation of

the debt management strategy

Macroeconomic fundamentals supported rapid market developments and a smooth implementation

• f the debt management strategy

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23.114,33 20.685,23 20.494,31 15.292,41 14.679,47 12.387,40 11.849,80 10.738,21 19.684,78 10.215,90 5000 10000 15000 20000 25000

mln.

T-bills in mn RON Benchmark bonds in mn RON Benchmark bonds in mn EUR

Most tradable government securities in the last 6 months

JPM Index

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 Setting basis for a liquid, transparent, secure and efficient debt market through:  Enhancing the primary auction system developed by NBR (electronic transfer of the bids) – in place starting with March 1st, 2014; ;  Establish electronic trading platform (ETP)* – additional benefits for government securities - price discovery, monitoring and compliance by PDs with price quoting obligation for the selected bonds => enhance market liquidity;  Primary dealer agreement and PD Code – consolidate provisions governing the PD status in one single contractual arrangement (duties, responsibilities and privileges regarding the primary and secondary government securities market);  Liability management operations and a more active cash management* (buy backs, bond exchanges, repos) in order to manage the refinancing risk, repurchase of low and illiquid issuances distorting the yield curve and build greater liquidity for new bonds (on-the-run) – legal and operational framework as well as technical infrastructure, envisaged for 2015;  Creating the framework for financial derivatives (IRS and CCY swaps) for hedging purposes  Moving to an active cash management (short-term T-bills and reverse repo) while fine tuning the forecasting function;  Gradual lowering of the face value of the bonds in order to reach out a more diversified investor base (retail investors).

Milestones for the Development of the Government Securities Market: Looking Forward

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Debt Management Strategy 2014 - 2016

Debt Management Targets

Parameters(1) Levels as of September 2014 Levels as of Dec 31, 2013 Indicative targeted min / max ranges (2014- 2016)

• Share of domestic currency debt, % of total

40.6 39.8 35 – 50

• Share of EUR debt out of total foreign-currency denominated debt, %

80.9 83.0 75 – 90

• Debt maturing in one year, % of total

18.0 19.0 10 – 20

• Local currency debt maturing in one year, % of total

24.0 33.0 25 – 35

• ATM for total debt, years

4.9 4.4 4.5 – 6.5

• ATM for local currency debt, years

3.0 2.7 2.5 – 4.5

• Debt re-fixing in one year, % of total

25.0 26.0 20 – 30

• Local currency debt re-fixing in one year, % of total

24.0 31.0 25 – 35

• ATR for total debt, years

4.9 4.3 4 – 6

• ATR for local currency debt, years

3.0 2.7 2.5 – 4.5 Currency Risk Refinancing Risk Interest Rate Risk

Source: Ministry of Public Finance. (1) Exclusive of loans of the State Treasury related to the General Current Account

Strategic Guidelines During 2014-2016

 Favoring a net financing in local currency to develop the domestic debt market and mitigate foreign currency exposure  Pursuing a smooth redemption profile  Mitigating refinancing risk by maintenance of a foreign currency buffer  Controlling the exposure to interest rate risk  Maintaining presence in the euro and access to the US dollar market or to other foreign currency markets on an opportunistic basis  Selecting the longest possible maturities, considering also extension costs  Gradually reducing the issuance of domestic government securities in EUR  Financing of the foreign currency debt will be mainly in EUR  Continuation of the partnership with the IFIs

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Ministry of Public Finance

Department of Treasury and Public Debt Stefan Nanu – General Director, stefan.nanu@mfinante.ro