Managing Emerging Market Public Debt in a Crisis: Has this time - PowerPoint PPT Presentation

Managing Emerging Market Public Debt in a Crisis: Has this time been different? Phillip Anderson Acting Director Banking and Debt Management

Agenda 1. EMs before the crisis:  Macroeconomic fundamentals  Debt management 2. Impact of the global financial crisis 3. Debt managers’ response to the crisis 4. Lessons learnt 2

Healthier fiscal balances opened space for countercyclical policies Primary Balance (% of GDP) 10.0 EAP ECA MNA LAC SSA 8.0 6.0 4.0 2.0 % 0.0 -2.0 -4.0 -6.0 -8.0 Source: World Bank LDB Working Database 3

…and contributed to a downward trend in debt/GDP ratios Central Government Debt (% of GDP) 100.0 ECA EAP LAC MNA SAR SSA 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 Source: Central Government Debt from World Bank LDB Working Database; GDP from World Bank WDI 4

Credibility of monetary policy increased… Average CPI Inflation (annual % change) 30.0 EAP ECA MNA LAC SAR SSA 25.0 20.0 15.0 % 10.0 5.0 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 5 Source: IMF IFS

…and allowed a sustained easing of policy rates Selected Policy Rates (%) Brazil 18 China 16 Egypt 14 Hungary 12 India 10 % Indonesia 8 Malaysia 6 4 Mexico 2 Nigeria 0 Poland South Africa Turkey Source: Bloomberg LP, Datastream 6

Economic growth was stronger this time  Emerging market economies grew faster than developed countries Real GDP Growth (%) 9.0 8.0 7.0 GEMX 24 6.0 5.0 4.0 3.0 High Income OECD 2.0 1.0 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: World Bank WDI Note: High Income OECD is based on World Bank classification, excluding Czech Republic, Hungary, South Korea and Slovak Republic 7

Healthier external accounts helped reduce vulnerability to shocks External Debt (% of Exports of Goods and Services) 200.0 EAP ECA MNA LAC SAR SSA 180.0 160.0 140.0 120.0 100.0 % 80.0 60.0 40.0 20.0 0.0 Source: World Bank WDI 8

Stronger fundamentals facilitated the transformation of public debt portfolios  Increase in the share of the domestic debt  Extension of the maturity of the domestic debt:  Supported by increased credibility of monetary policy  Diversification of the investor base: – Expansion of the local investor base especially non-bank financial institutions – Increased interest by foreign investors  The aim of the portfolio shifts was to reduce the exposure of EMs to exogenous shocks and changes in market sentiment. 9

There was a significant reduction in FX risk…  Currency composition of government debt portfolios moved dramatically in favor of local currency Ratio of external to domestic debt 3.0 Emerging Markets ECA LAC EAP 2.5 2.0 1.5 1.0 0.5 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Note: USD-linked domestic debt reallocated to external. Source: JP Morgan EM Debt and Fiscal Indicators (2009) and BIS Financial Stability and local currency bond markets (2008) 10

…and net foreign currency debt was significantly reduced (1) Gross external debt vs. Int. Reserves (no China) 2001 340 58 FX Reserves FX debt Net FX debt to GDP (right axis) 290 48 240 38 190 USD billion 28 140 (%) 18 90 8 40 -2 -10 -60 -12 India Indonesia Malaysia Philippines Thailand Hungary Poland Russia South Africa Turkey Brazil Chile Colombia Mexico Peru 11 Source: JP Morgan EM Debt and Fiscal Indicators (2009)

…and net foreign currency debt was significantly reduced (2) Gross external debt vs. Int. Reserves (no China) 2009 FX Reserves FX debt Net FX debt to GDP (right axis) 500 50 300 30 USD billion (%) 100 10 -100 -10 -300 -30 -500 -50 Hungary India Indonesia Malaysia Philippines Thailand Poland Russia South Africa Turkey Brazil Chile Colombia Mexico Peru 12 Source: JP Morgan EM Debt and Fiscal Indicators (2009)

Exposure to refinancing and interest rate risks was also reduced (1)  There was a contraction in the ratio of floating rate to fixed rate bonds Floating to fixed rate debt (excluding Brazil) 9.00 Emerging Markets ECA LAC EAP 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 13 Source: JP Morgan EM Debt and Fiscal Indicators (2009) and BIS Financial Stability and local currency bond markets (2008)

Exposure to refinancing and interest rate risks was also reduced (2)  There was an extension in the average life Average Life 10.0 Emerging Markets EAP ECA LAC 9.0 8.0 7.0 Years 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 14 Source: JP Morgan EM Debt and Fiscal Indicators (2009) and BIS Financial Stability and local currency bond markets (2008)

The global financial crisis had a dramatic impact on funding conditions…  Funding conditions in international capital markets deteriorated, with generalized spikes in EM Credit Default Swaps (CDS) and in Emerging Market bond Index (EMBI) spreads EMBI Global Sovereign Spread Index 1,200 SSA ECA LAC MNA EAP 1,000 800 600 400 200 - 2-Jan-08 2-Feb-08 2-Mar-08 2-Apr-08 2-May-08 2-Jun-08 2-Jul-08 2-Aug-08 2-Sep-08 2-Oct-08 2-Nov-08 2-Dec-08 2-Jan-09 2-Feb-09 2-Mar-09 2-Apr-09 2-May-09 2-Jun-09 2-Jul-09 2-Aug-09 2-Sep-09 2-Oct-09 2-Nov-09 2-Dec-09 2-Jan-10 2-Feb-10 2-Mar-10 2-Apr-10 2-May-10 2-Jun-10 2-Jul-10 2-Aug-10 2-Sep-10 2-Oct-10 15 Source: Bloomberg LP, Datastream

EMs experienced significant capital outflows  This increased the challenge to debt managers, especially in countries still dependent on external funding. Quarterly Portfolio Flows (% of GDP) 4.0 EAP ECA LAC MNA SAR SSA 3.0 2.0 1.0 0.0 -1.0 % -2.0 -3.0 -4.0 -5.0 -6.0 16 Source: Portfolio flows from IMF IFS; GDP from World Bank WDI

Capital outflows were particularly strong in fixed income markets Net Bond Fund Flows (% of GDP) 0.2 0.0 -0.2 -0.4 % -0.6 -0.8 -1.0 EAP ECA LAC MNA SAR SSA -1.2 17 Source: Emerging Portfolio Funds Research Note: Flows by country; as a % of GDP SAR excludes Sri Lanka; MNA excludes Morocco; SSA excludes Kenya

EM external debt issuance stalled for months … then rebounded strongly  This was the consequence of increased risk aversion and higher borrowing costs. Issuance Volume and Number of Deals 25 25 Total EM Volume (excluding China) Total number of deals (right axis) 20 20 15 15 USD billion 10 10 5 5 0 0 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 Source: Dealogic System Note: Global Market public issuances , Emerging Market countries, excluding China 18

The impact of the crisis on local currency bond yields was mixed Selected Generic 10-Year Government Bond Yield (1 Sep, 2008 = 100) 180 160 140 120 100 80 60 40 20 Brazil Chile China Hungary India Indonesia Mexico Peru US UK 0 19 Source: Bloomberg LP, Datastream

Debt managers responded with a range of actions 1. Delay borrowing or use sources other than regular market instruments 2. Adjusting market borrowing to changed demand 3. Implementation of liability management operations 20

Most countries reduced or delayed borrowing from regular market sources…  Using cash reserves  Government bond purchases by central banks  Stepped up borrowing from multilaterals:  MDB financing increased significantly (w/available headroom)  IMF resources  WB contingent credit lines  Start/expansion of retail debt programs. Issuance of new products:  Indonesia : Expanded retail market; Introduced a Sharia-compliant market instrument  Hungary : 3-year CPI linker for retail market  Turkey : Revenue-indexed bonds and CPI linkers for wholesale market 21

…and the majority revised market borrowing to reflect composition of demand  Suspension of international issuance  Reductions in LX bond auctions:  Virtual halt in LX market for medium- and long-term paper  Dramatic reduction in issuance of fixed rate paper  Mixed impact and response across countries  Issuance concentrated in the shortest tenors and floaters:  Increased volume of T-Bill issuance, some dramatically  Two of the worst hit relied on short-term and floaters for 8 months 22

…and buybacks and switches were used as liability management tools  Buybacks alleviated sell-off pressure, enhanced liquidity and improved pricing of liquid instruments:  Hungary : $2.5 bn buyback program permitted resumption of bond auctions  Mexico : Buyback of medium-/long-term securities enhanced instrument liquidity  Indonesia : Buybacks/switches of short-term debt provided price references  Switches stabilized market, consolidated debt into large benchmarks and reduced refinancing risk (e.g. Brazil, Indonesia and South Africa)  Revision of formal targets:  Some included a higher share for FX debt  Brazil reviewed its quarterly targets for the portfolio composition  Those with broader directional targets operated within existing mandates 23