Managing currency composition under an ALM framework WB Sovereign - - PowerPoint PPT Presentation

Managing currency composition under an ALM framework

• Ms. Fatos Koc

Head of Market Risk Management Department Turkish Treasury

WB Sovereign Debt Management Forum Washington DC December 4, 2014

2

Outline

• Notes from the country experiences
• Turkey
• South Africa
• Final remarks

3

Notes from Country Experiences

4

 A practical SALM approach is adopted by Turkish

Treasury

 Financial assets and liabilities in the mandate of Turkish

Treasury are considered in designing borrowing strategies

 Treasury cash reserve  Treasury receivables  central government debt stock  contingent liabilities (Treasury guarantees)

Country Experiences: Turkey

5

Implications of SALM for currency choice

• Reducing the share of FX denominated debt has been the

main priority to minimize exchange rate risk

 No longer issuing FX denominated security in local markets since 2010  The share of FX borrowing in total has been reduced to 10 per cent in 2014 from 33 per cent in 2002

• Treasury does not make use of derivatives to change it’s

portfolio composition

• Debt sensitivity analyses are regularly conducted and

reported to the high level Debt Management Comittee

• FX composition is guided considering the correlation

between local currency and major foreign currencies

Country Experiences: Turkey

Country Experiences: Turkey

41,9 53,7 58,5 62,4 62,8 68,7 66,2 70,9 73,3 70,4 72,7 68,8 67,7 58,1 46,3 41,5 37,6 37,2 31,3 33,8 29,1 26,7 29,6 27,3 31,2 32,3

25 50 75 100

TL Foreign Exchange

Currency Composition of Central Government Gross Debt (%)

Source: Undersecretariat of Treasury

Country Experiences: Turkey

26,2 31,3 30 31,3 27,6 26,2 29,9 28,1 21,6 20,3 17,6 16,3 16,3 35,4 23,9 19,1 10,4 6,5

• 3,3
• 5
• 4
• 5

25,3 3,3 2,9 2,7 0,7 0,9

11,3 12,2 12,6 17 28,9 32,5 28,2 29,5 34.0 41,7 49,1 55,2 61,5 22,3

• 10

10 20 30 40 50 60 70 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q1 2014 Q2

TL FX Denominated/Indexed

Public Net Debt Stock (% of GDP)

 The Asset and Liability Management Division is a unit

within the National Treasury responsible for managing government’s annual funding programme in a manner that ensures

 prudent cash management  an optimal portfolio of debt

 It also promotes and enforces prudent financial

management of state-owned entities through financial analysis and oversight

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Country Experiences: South Africa

Implications of SALM for currency choice

 Minimizing foreign currency debt to manage external

vulnerabilities is one of the important goals

 Debt management has contributed to broader policy

• bjectives, including reversing the country’s foreign

exchange reserves from a negative net position to current levels of about US$50 billion

 Medium term FX risk benchmark -previously between 20

and 25 per cent of the total debt portfolio- set at 15 per cent in 2014

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Country Experiences: South Africa

10

Country Experiences: South Africa

Currency Composition of Government Gross Debt (%)

81.1 85.8 86.2 87.3 85.1 83.3 84.5 87.6 90.1 90.2 90.9 90.7 18.9 14.2 13.8 12.7 14.9 16.7 15.5 12.4 9.9 9.8 9.1 9.3 20 40 60 80 100 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 P

Foreign Debt Domestic Debt

Source: National Treasury, Budget Review, 2014

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Country Experiences: South Africa

Government Net Debt Stock (% of GDP)

Source: National Treasury, Budget Review, 2014 32.9 28.5 29 27.7 25 21.6 18.6 18.7 24.4 28.4 31.5 35.6 38 7.8 6.2 5 4.8 4.1 4.5 4.6 4.2 3 1.4 1.7 1.4 1.7 10 20 30 40 50 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 P

Net domestic debt Net foreign debt

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Final Remarks

Final Remarks

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 Mismatches in financial characteristics of sovereign assets and

liabilities imply in principle more vulnerability to financial risks as well as less efficient performance in terms of net worth of the balance sheet

 Given the governments' limited ability to generate foreign currency

revenues, an unexpected depreciation of the exchange rate deteriorates the government’s fiscal position due to amplified debt service

 In terms of currency risk, SALM approach adopted by DMOs can

contribute to



management of the macroeconomic risks of uncoordinated monetary and debt management policies and



building a more resilient sovereign balance sheet to currency fluctuations

Final Remarks

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Key challenges of adopting SALM approach in currency risk management:

 Coordination and communication with the central bank

 Foreign reserve management is usually done by the central bank

that operates independently from fiscal policy. This situation can make successful cooperation on risk management more difficult since the objectives are quite different

 Institutional capacity

• The risk analysis of the balance sheet calls for specialist staff and

an advanced technical capacity

• Also, operating active hedging instruments such as currency

swaps entails specific legal and IT system arrangement

Final Remarks

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 New institutional arrangements may be founded in order to

address communication and governance challenges

• i.e. certain departments, coordinating committees

 Exchange rate risk on government debt and foreign reserves can

be managed jointly without a specific need for modelling

 Reducing the outright exposure with passive hedging or active

hedging instruments depends on several factors including risk management unit’s capacity, institutional choices and development of financial markets

 The composition of the FX debt portfolio can be set either by

considering the composition of foreign exchange reserves or based on the correlation with the local currency