Overcoming Obstacles to Building Public Debt Management Capacity - - PowerPoint PPT Presentation

Ministry of Finance of the Republic of Indonesia Direcrorate General of Debt Management

World Bank Debt Management Forum, Washington, October 29, 2012

Overcoming Obstacles to Building Public Debt Management Capacity

Topic of Discussion

2

Debt Management Reform in Indonesia

Asian Financial Crisis Implied a Sudden and Substantial Increase in Debt Levels

0% 20% 40% 60% 80% 100% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1000 3000 5000 7000 9000 11000 13000

• 400

800 1,200 1,600 2,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PDN SBN DN SBN LN PLN Kurs USD-IDR [RHS] Debt to GDP ratio yr 2010-2012 lower than average ratio before economic crisis in 1997

Krisis Ekonomi thn. 1997 1990 - 1997 1998 - 2012

38,8% 24,6% 88,4% 23,2%

Debt Profile (trilliun Rupiah)

Reasons for the DMO Establishment in MoF

4

Governance and Strategy Development ;

 Legal Framework (primary legislation ) : Law 17/2003 on State Financial; Law 1/2004

• n Treasury. Special Law

24/2003 on Government Securities;  Managerial Structure. Central government debt is managed by to division that is separated and worked without standard guideline;

1999-2004

(DMU), CMGB, GBD External Loan Division

1970- 2004 DMO 2006 on ward

Relatively Weak Capacity staff

 Debt Management Strategy (2005-2009) was enacted in 2005 and need to be executed fully by two divisions;  Need for evaluation the debt management operations.

4

Reasons for the DMO Establishment in MoF

5

 Audit. Lack of capacity in external loan division in term of data base recording ( integrity and reliability) and loan storage need to be enhanced for audit purpose; DMO is needed to intensify close coordination with :

• Fiscal policy in providing accurate

debt service forecast and its scenario;

• Monetary policy in keeping the

central Bank with the information of future debt transaction and government cash flow;

5

1999- 2004

(DMU), CMGB, GBD External Loan Division

1970- 2004 DMO 2006 on ward

Relatively Weak Capacity staff

Reasons for the DMO Establishment in MoF

6

Borrowing and Related Financing Activities. Domestic Market Borrowing. DMO is needed to develop domestic bond market and broadening bond instrument in order achieve the goal of debt management strategy (2005-2009) that consists of

• ptimum portfolio management

and market development;  Support is needed for external loan division that have to resolve the classical issue of low disbursement among other creating Internal procedure document, and professional legal adviser.

6

1999- 2004

(DMU), CMGB, GBD External Loan Division

1970- 2004 DMO 2006 on ward

Relatively Weak Capacity staff

Reason for the DMO Establishment in MoF

7

Borrowing and Related Financing Activities.  Need to include Loan Guarantees on debt management strategy, clarity for

• n lending policy; and execution of

the derivatives operations.  Cash flow Forecasting and Cash Balance Management;  Need to have a reliability of cash forecasting, and the procedure to invest the idle cash in the market. Operational Risk Management;  Debt Administration and Data

• Securities. Need to strengthen a

readily accessible procedure manual for external loan concessional recording, debt service payment, and storage agreement.

7

1999- 2004

(DMU), CMGB, GBD External Loan Division

1970- 2004 DMO 2006 on ward

Relatively Weak Capacity staff

Reasons for the DMO Establishment in MoF

8

Operational Risk Management; Segregation of Duties, Staff Capacities; and Business Continuity.

• Need to have clarity in the

functionalities of the debt manager

• f the External Loan Division - act

to negotiate loan and should not service the debt;

• Need to have a monitoring for risk
• f external loan;
• Clarity for those who record and

make payment of debt service, and accounting system. Operational Risk Management;

 Need to enhance the single data base of the government debt through conversion of two data recording in the similar systems (DMFAS);  Need to enhance the Bulletin of central government debt.

8

1999- 2004

(DMU), CMGB, GBD External Loan Division

1970- 2004 DMO 2006 on ward

Relatively Weak Capacity staff

Milestone of Government Securities Management

1999 2002 2003 2004 2010 2009 2008 2007 2006

Bond Recapitulation

First Bond Issuance Budget Financing ,

Law 24/2002 1st Calendar of issuance Crisis Management Protocol Law Syariah Bond First T Bill

First Retail Bond

2005

Bond Recapitulation Reprofiling

First Global Bond (INDO-14)

First Syariah Bond

First Zero Coupon Bond

First Syariah Retail Bond

Monthly regular issuance First Global Bond with tenor 30 years

DMO Establishment

9

Milestone of Indonesia Debt Management Office

1999 Bond Recapitulation

Debt Management Unit (DMU),

10

External Loan Division

2001

Central Management Government Bond Government Bond Division

2004 1970-2004 Government Bond for Budget Financing 2006 Debt Management Office External Loan Division Government Bond (Syariah) Division Government Bond Division Middle Office Back Office

10

The Role of External Support

1999

Debt Management Unit (DMU),

11

External Loan Division

2001

Central Management Government Bond Government Bond Division

2004 1970- 2004 2006

• n

ward DMO

AusAid

• Capacity Building on :

Cost and Risk Analysis Concept;

• Debt Management Office

(DMO) Concept;

AusAid

• Concept on Foreign Aid

Law

• IT gap;
• Data Library Concept.

UNCTAD

• Debt manegement

Conference

• Ehancement of DMFAS.

SECO Switzerland

• DMFAS Ehancement

Version 6.0;

• Contingent Liability

Concept;

• Risk Cost Analysis

World Bank

• ALM

World Bank

• Diagnostic Report and

Implementation

11

The Impact of Reform

Better Governance and Strategy Development ;

 Enhancement of Debt Management Strategy formulation (2010-2014);  Easier coordination among FO, MO and BO to execute Debt Management Strategy goal and target;  More efficient and effective debt management operation and evaluation.

12

1999- 2004

(DMU), CMGB, GBD External Loan Division

1970- 2004 DMO 2006 on ward

Relatively Weak Capacity staff

The Impact of Reform

Better Operational Risk Management;

 Clear segregation of duties, among FO, MO and BO;  check and balance mechanism for those who verify and arrange payment of debt service;  Enhancement of risk monitoring and complaince;  Better recording in the External Loan Division;  More data reporting on cenrtal government debt, public sector debt, produced to several stake holder including the rating agencies.

13

1999- 2004

(DMU), CMGB, GBD External Loan Division

1970- 2004 DMO 2006 on ward

Relatively Weak Capacity staff

Lesson Learned from the Establishment of DMO

• Established risk committee to supervise market volatility and its impact on the Government

Debt market and to supervise daily operational risks of the DMO

• Established integrated debt service settlement for loans and Government securities
• Established integrated portfolio and risk management
• Developed effective communication with lenders, investors and credit rating assessors which

led an upgrade in sovereign rating to investment grade and an improvement in Country Risk Classification

• Established monitoring systems and legal framework for contingent liabilities management
• Improvement in human capital development

14

Improvement in the debt profile Better portfolio and risk management Improvement in debt data consolidation Supporting Government debt management objective of lowering down Debt/GDP ratio Generating synergy in managing debt financing to cope with market dynamics Promoting efficiency in debt management Reducing bureaucratic process in terms of financing the budget

Benefits Achievements

Attachment

15

Widening Investor Base Market Deepening Facilitating Efficient Price Discovery Mechanism Market Making

• Regular calendar of

issuance

• Product

diversification

• Methods of sale of

bonds (private placement, bookbuilding, auction)

Demand & Supply

• Transparency
• Trading platform
• Borrowing &

lending facilities,

• Repo window

Market Infrastructure

Government Bonds Market Development Strategy

ABSORPTION CAPACITY EFFICIENT PRICE / YIELD

DEEP, ACTIVE, AND LIQUID BOND MARKET

• Primary dealership

system

• Clearing & Settlement
• Market surveillance
• Bond reopening
• Tax incentive
• OMO instruments
• Secondary

reserve

• New market, e.g,

retails

16

17

Formula of Annual Financing Strategy

DEBT MANAGEMENT STRATEGY One year projection

• f market condition

One year risk limit Recent market condition

Annual Borrowing Program

Market demand assessment Instrument development Lender capacity assessment

Government Securities Issuance Composition:

• Tenor
• Currency
• Interest Rate Type

Government Securities Buyback and Debt Switch Program Loan Composition:

• Tenor
• Currency
• Interest Rate Type

Annual Hedging Strategy Bond Market Development

• Demand & Supply
• Market Infrastructure

DEBT MANAGEMENT STRATEGY One year projection

• f market condition

One year risk limit Recent market condition

Annual Borrowing Program

Market demand assessment Instrument development Lender capacity assessment

Government Securities Issuance Composition:

• Tenor
• Currency
• Interest Rate Type

Government Securities Buyback and Debt Switch Program Loan Composition:

• Tenor
• Currency
• Interest Rate Type

Annual Hedging Strategy Bond Market Development

• Demand & Supply
• Market Infrastructure

4 6 8 10 12 1Y2Y3Y4Y5Y6Y7Y8Y9Y 10Y 15Y 20Y 30Y

28 S ep '12 Des '11 Des '10 Des '09 Des '08

Tenor 28-Sep-12 Des '11 Des '10 Des '09 Des '08 1Y 4,76 4,35 5,36 6,72 10,36 2Y 5,15 4,92 5,82 7,61 11,22 3Y 5,33 5,22 6,27 8,23 11,45 4Y 5,49 5,24 6,34 8,75 11,67 5Y 5,54 5,35 6,78 8,80 11,70 6Y 5,69 5,45 6,96 9,06 11,77 7Y 5,78 5,83 7,16 9,24 11,82 10Y 5,98 5,96 7,57 10,04 11,86 15Y 6,34 6,56 8,78 10,64 11,92 20Y 6,72 7,02 9,24 10,72 11,91 30Y 6,53 7,26 9,68 10,97 12,17

Declining cost of fund of Domestic Government Securities reflects increasing market confidence as a response

• f prudent fiscal policy and

debt management.

[ % ]

Domestic Government Debt Securities Yield Curve

[ % ]

2 4 6 8 10 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

31-Dec-08 31-Dec-09 31-Dec-10 30-Dec-11 28-Sep-12

31-Dec-08 31-Dec-09 31-Dec-10 30-Dec-11 28-Sep-12 2 Y 2,707 1,453 3 Y 2,991 1,79 4 Y 2,55 3,079 5 Y 8,642 4,188 3,169 3,374 2,044 6 Y 9,057 4,387 3,608 3,515 2,263 7 Y 9,925 4,886 3,931 3,899 2,589 8 Y 5,107 4,146 3,955 2,788 9 Y 9,385 5,255 4,468 2,997 20 Y 4,486 25 Y 9,662 6,731 5,954 5,044 4,444 30 Y 9,321 6,806 6,065 5,201 4,402

Indonesian Global Bond Yield Curve

100 200 300 400 500 600 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S 2007 2008 2009 2010 2011 2012

[ Frekuensi] / [Frequency] [ Triliun Rupiah] / [IDR Trillion]

Volume Rata-Rata Volume per Tahun (Average Daily Volume per Year) Frekuensi (Frequency) - RHS

Positive trend on average daily trading activity shows increasing market liquidity

Average Daily Trading of Domestic Gov’t. Securities

• 5.00%

10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 50.00% 100 200 300 400 500 600 700 800 900

Jan'07 May'07 Sep'07 Jan '08 May'08 Sep'08 Jan'09 May'09 Sep'09 Jan'10 May'10 Sep'10 Jan'11 May'11 Sep'11 Jan'12 May'12 28-Sep-12

Rp Triliun / IDR trillion

NON-BANK BANK % Asing thd. Total/Foreign to Total - RHS

Notes: Non-Bank including Government institution

 More diversified investor base which demonstrated by increasing

• wnership from non-bank, foreign and retail investor.

 Increasing offshore ownership indicates better market confidence.

Government Debt Securities Ownership

December-10 December-11 January-12 May-12 June-12 July-12 August-12 28-Sep-12 Total 195.755 222.857 235.971 224.502 224.422 234.556 233.155 242.887 >5 131.232 140.762 145.759 142.470 150.943 157.951 164.624 169.691 >2-5 35.511 37.400 39.582 41.124 38.632 45.097 42.903 44.907 >1-2 9.077 18.252 19.606 15.596 11.026 10.561 6.264 3.549 0-1 19.935 26.443 31.024 25.311 23.821 20.946 19.363 24.740 50.000 100.000 150.000 200.000 250.000 [Rp miliar] / [IDR billion]

67,34% 4,50% 8.93% 19,23% 70,61% 2,69% 8,30% 18,40%

Long end Government Debt Securities dominates foreign holding which reached by 69,86% as of September 28, 2012

Foreign Ownership of Dom. Gov’t. Securities by Tenor

S&P Fitch Moody's R&I JCRA CRC 1999 CCC+ B- B3 B-

• 6

2000 B- B- B3 B-

• 6

2001 CCC B- B3 B-

• 6

2002 CCC+ B B3 B- B 6 2003 B B+ B2 B- B 6 2004 B+ B+ B2 B- B+ 6 2005 B+ BB- B2 BB- B+ 5 2006 BB- BB- B1 BB- BB- 5 2007 BB- BB- Ba3 BB+ BB- 5 2008 BB- BB Ba3 BB+ BB- 5 2009 BB- BB Ba2 BB+ BB+ 5 2010 BB BB+ Ba2 BB+ BBB- 4 2011 BB+ BBB- Ba1 BB+ BBB- 4 2012 BB+ BBB- Baa3 BB+ BBB- 3 Year Rating

• n March 30, 2012, OECD

upgraded CRC of Indonesia from classification 4 to 3

• n January 18, 2012, Moody's

upgraded Indonesia's Credit Rating from Ba1 to Baa3 Indonesia Rating Performance 1999 - 2012

Indonesia Credit Rating Performance (1)

BBB-

• 1.00

2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 13.00 14.00

• 1

2 3 4 5 6 7 8 9 10 11 12 13 14

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Moody's (RHS) S&P's Fitch's S&P's Fitch's Moody's (RHS)

Ca Caa2 B3 B1 Ba2 Baa3 Baa1 C Caa3 Caa1 B2 Ba3 Ba1 Baa2 CCC- CCC+ B BB- BB+ BBB SD/DDD R/C CC CCC B- B+ BB BBB- BBB+

Investment grade

Moodys’s menaikan rating ke Ba1 per 17 Januari 2011 S&P’s menaikan rating ke BB+ per 8 April 2011 Fitch’s menaikan rating ke BBB- per 15 Desember 2011

Rekapitalisasi Perbankan Krisis ekonomi 1998 Reprofiling VR & HB, Asset-Bond Swap, & penerbitan SUN jk panjang Lelang penerbitan SUN secara reguler, program Buyback Lelang penerbitan SUN secara reguler, program Buyback, & Debt Swtiching Lelang penerbitan SUN secarareguler, program Buyback, Debt Swtiching, & diversivikasi instrumen

Investment grade Non Investment grade

S&P sempat menurunkan rating ke Selective Default namun direvisi kembali 2 hari kemudian

Non Investment grade

Moodys’s menaikan rating ke Baa3 per 18 Januari 2012

Indonesia Credit Rating Performance (2)

26.7 22.9 21.2 20.3 18.8 16.5 30.2 28.2 28.2 26.1 25.9 23.4

2007 2008 2009 2010 2011 Q2-2012

Interest Rate Risk

Variable rate ratio [%] Refixing rate [%] 16.5 17.2 13.4 12.1 10.9 11.0 46.9 52.1 47.4 46.2 45.1 44.8

2007 2008 2009 2010 2011 Q2-2012

Exchange Rate Risk

FX Debt to GDP ratio (%) FX Debt to total debt ratio (%) 10.4 10.0 9.7 9.5 9.3 9.7

2007 2008 2009 2010 2011 Q2-2012

Average Time To Maturity (ATM)-Years

Average Time to Maturity (in percentage) 6.8 6.4 7.6 7.1 8.2 8.0 19.4 18.6 20.3 20.8 22.7 22.0 30.6 31.1 33.2 34.2 34.6 33.5

2007 2008 2009 2010 2011 Q2-2012

Debt Maturing in 1, 3 and 5 Years

Maturity debt portion < 1 year (%) Maturity debt portion < 3 year (%) Maturity debt portion < 5 year (%)

Debt Risk Indicators

2007-2011

Pending Matters of DMO

26

Developing a reliable debt database (mainly Loans)

Issues Purposes

• Supporting the formulation of

annual and medium term debt management strategy

• Supporting policy of budget

financing

Remarks

• An accurate and comprehensive

loan database is still in the development process

Establishing the primary dealer system

• Managing Gov’t securities liquidity

in secondary market

Lack of incentives for primary dealers, for example prioritizing PDs members for global bonds JLM selection

Limited availability of funds for direct transactions and long & bureaucratic process to approve the transactions

• Regulations for new instruments

need to be strengthened

Conducting direct transactions through DMO dealing room

• Improving liquidity in secondary

market during market turbulence

Diversifying Gov’t securities instruments adding retail bonds and shariah compliance Gov’t securities

• Matching investors preference
• Managing portfolio
• Widening investor base
• There are some SOP for front
• ffice that overlapped with

middle office

Improving business process and SOP for loan procurement (emphasizing

• n loan negotiation)
• Maintaining good governance on

loan management

• There is a wide gap between

loan effective rate and benchmark rate

Developing benchmark rate

• Providing comparison for loan

effective rate

Challenges and Future Developments

27



Continuous staff capacity building

Challenges Institutional Development

Moving towards IT based debt

management

Development of IT systems Integrated database to support effective and reliable

database

Establish consolidated ALM System

Improving effective and efficient risk

management

Reducing impact of rising cost of

debt

 Development of hedging mechanism

Formulating derivative instruments infrastructures Continuous improvement on debt issuance and

procurement mechanisms

Developing Government securities

market

 Instruments diversification to match financing needs

and investors preference

 Development of organization capacity to support

project-based Government shariah securities

 Developing crisis management protocol  Matching calendar of issuance and cash projections to

reduce idle cash

Increasing resiliency of Government

securities management

 Development of instruments to match financing needs

and investors preference

Business process leads to

inefficiencies in loan execution

 Close coordination with related parties to improve loan

management efficiency