IMF Develops new Risk Measurement Framework for Public Debt

• Author: Carlos Medeiros, Michael Papaioannou, and Marcos Souto
• Position: IMF Monetary and Capital Markets Department
• Pages: 21

Page 21

Responding to the need to better assess the risks involved in managing bonded public debt, the IMF has recently developed practical tools for use by both country authorities and IMF economists to measure such risks.

The new Risk Measures framework can be used to analyze the soundness of a country's public debt management, while providing a method to determine a sustainable public debt strategy and a consistency check for macroeconomic policies.

Establishing a sound debt strategy, in the context of strong monetary and fiscal policies, can help immunize a country against sudden, adverse market changes and financial turmoil.

Public debt managers need to consider a number of factors to manage public debt effectively, including the degree of market, credit, and liquidity risks; the level, maturity, and composition of debt; the availability of information on the debt portfolio; potential costs associated with the debt management strategy; and the coordination of debt management with fiscal and monetary goals.

By considering these factors, public debt managers can become more aware of the impact of changes in financial and economic circumstances on their debt obligations and be in a better position to develop policy responses quickly.

Measuring the risks of public debt is therefore a critical first step in managing the debt. A key benefit from this step is the reduction of vulnerabilities, including to international financial shocks. Smaller and emerging market countries are more vulnerable because their economies are less diversified, have a smaller base of domestic financial savings and less developed financial systems, and are more susceptible to financial contagion.

The new Excel-based Risk Measures templates provide an operational framework for evaluating risks of bonded public debt and for managing these risks through debt management operations. The framework also offers the possibility to...