Lessons from the Country Case Studies
| Pages | 10-30 |
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This chapter pulls together the main lessons from the 18 country case studies contained in Part II of the document plus the results of a survey of debt management practices, summarized in Table I.2, to show how many countries at different stages of economic and financial developments are developing their public debt management practices in a manner consistent with the guidelines. The aim is to highlight the different ways in which countries can improve their debt management activities by illustrating the variety of ways that the key principles contained in the guidelines have been implemented in practice. References to specific practices contained in the case studies demonstrate how the guidelines are applied; further details on individual country practices can be found in the country case studies in Part II of the document. Implications of these practices for countries seeking to improve their own debt management capabilities are also discussed. The conclusions are grouped in accordance with the six sections of the guidelines: objectives for debt management and coordination with fiscal and monetary policies, transparency and accountability for debt management activities, institutional framework governing debt management activities, debt management strategy, the framework used for managing risks, and developing and maintaining an efficient market for government securities.
The guidelines in this section address the main objectives for public debt management, the scope of debt management, and the need for coordination among debt management and monetary and fiscal policies. They encourage authorities to consider the risks associated with dangerous debt strategies and structures when they set the objectives for debt managers and suggest that debt management should encompass the main financial obligations over which the central government exercises control. Given the importance of ensuring appropriate coordination among debt management and fiscal and monetary policies, they recommend that authorities share an understanding of the public policy objectives in these domains. They also promote the sharing of information on the govern- ment's current and future liquidity needs, but argue that where the level of financial development allows, there should be a separation of debt management and monetary policy objectives and accountabilities.
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Table I.2. Survey of Debt Management Practices
| Yes | No | |||
| Institutional framework | ||||
| Annual borrowing authority | 14 | 78% | 4 | 22% |
| Debt ceiling limit | 10 | 56% | 8 | 44% |
| Domestic and foreign currency debt programs managed together | 13 | 76% | 4 | 24% |
| Separate debt agency | 4 | 22% | 14 | 78% |
| Separate front and back offices | 15 | 83% | 3 | 17% |
| Separate risk management unit (middle office) | 12 | 67% | 6 | 33% |
| Formal guidelines for managing market and credit risk | 10 | 56% | 8 | 44% |
| Annual debt management reports | 15 | 83% | 3 | 17% |
| Regular external peer reviews of debt management activities | 10 | 63% | 6 | 38% |
| Annual audits of debt management transactions | 16 | 89% | 2 | 11% |
| Code-of-conduct and conflict of interest guidelines for debt management staff | 12 | 67% | 6 | 33% |
| Business recovery procedures in place | 11 | 69% | 4 | 25% |
| Portfolio management | ||||
| Stress test of market risk exposures | 10 | 59% | 7 | 41% |
| Trading conducted to profit from expected movements in interest or exchange rates | 5 | 29% | 12 | 71% |
| Government cash balances managed separately from debt | 11 | 65% | 6 | 35% |
| Foreign currency borrowing integrated with foreign exchange reserves management | 5 | 31% | 11 | 69% |
| Specialized management information technology in place for risk management | 9 | 56% | 7 | 44% |
| Primary market structure for government debt | ||||
| Auctions used to issue domestic debt | 18 | 100% | 0 | 0% |
| UP = uniform price | 10 | 56% | 8 | 44% |
| MP = multiple price | 15 | 83% | 3 | 17% |
| Fixed-price syndicates used to issue domestic debt | 5 | 28% | 13 | 72% |
| Benchmark issues for domestic market | 16 | 89% | 2 | 11% |
| Preannounced auction schedule | 17 | 94% | 1 | 6% |
| Central bank participates in the primary market | 6 | 33% | 12 | 67% |
| only on a competitive basis | 6 | 43% | 8 | 57% |
| Primary dealer system | 13 | 72% | 5 | 28% |
| Universal access to auctions | 10 | 56% | 8 | 44% |
| Limits on foreign participation | 1 | 6% | 17 | 94% |
| Collective action clause, domestic issues | 0 | 0% | 18 | 100% |
| Collective action clause, external issues | 6 | 33% | 12 | 67% |
| Secondary market for government debt | ||||
| Over-the-counter (OTC) market | 15 | 88% | 2 | 12% |
| Exchange-traded market mechanism | 14 | 82% | 3 | 18% |
| Clearing and settlement systems reflect sound practices | 17 | 94% | 1 | 6% |
| Limits on foreign participation | 1 | 6% | 17 | 94% |
| Portfolio management statistics: strategic benchmarks | ||||
| Duration | 11 | 65% | 6 | 35% |
| Term-to-maturity | 12 | 71% | 5 | 29% |
| Fixed-floating Ratio | 12 | 71% | 5 | 29% |
| Currency composition | 14 | 88% | 2 | 13% |
| Are benchmarks publicly disclosed? | 8 | 50% | 8 | 50% |
| Use of derivatives | 9 | 56% | 7 | 44% |
Note: Percentages are computed on the basis of the number of responses to each question because some countries did not answer all of the questions.
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The objectives governing debt management in all 18 countries emphasize the need to ensure that the government's financing needs and its payment obligations are met at the lowest possible cost over the medium to long run. However, although most countries' statement of objectives makes explicit references to the need to manage risks prudently, this is not universal. For example, the goals governing debt management in the United States emphasize the need to "meet the financing needs of the government at the lowest cost over time." Similarly, Jamaica's objectives are defined as "to raise adequate levels of financing on behalf of the Government of Jamaica at minimum costs, while pursuing strategies to ensure that the national public debt progresses to and is maintained at sustainable levels over the medium term." Even though no explicit reference is made to the need to manage risks in a prudent fashion, these countries do not simply strive to minimize costs in the short run without regard to risk.
Many countries also promote the development and maintenance of efficient primary and secondary markets for domestic government securities as an important complementary objective for debt management. In the short run, governments may have to accept higher borrowing costs as they seek to develop a domestic market for their securities. However, most governments are willing to incur these costs because they expect that over time they will be rewarded with lower borrowing costs as the domestic market matures and becomes more liquid across the yield curve. In turn, this also should help them achieve a less risky debt stock, because a well-functioning domestic market would enable them to issue a larger share of their debt in longer-term, fixed-rate, domestic currency-denominated securities and thus reduce interest rate, exchange rate, and rollover risks in the debt stock. 1 For example, countries such as Brazil, Jamaica, Morocco, and South Africa have focused on the need to develop the domestic debt market as a means of lessening dependence on external sources of financing. And even when this objective is not explicitly included in the list of objectives governing debt management, in practice debt managers play an active role in developing the domestic government securities market. An example in this regard is the active role played by debt managers in many countries in working with market participants to introduce electronic trading in their domestic government debt markets.
Developing the market for government securities can also help to stimulate the development of domestic markets for private securities. For example, in Japan the development of the secondary market for government securities is considered to be an important objective for debt management because this market, by virtue of being a low credit risk, serves as the foundation for domestic financial markets and is by far the most actively traded segment of the domestic bond and debenture market.
Debt management activities in most countries surveyed encompass the main financial obligations over which the central government exercises control. Where differences arise, they tend to be over the extent to which debt managers play a role in managing retail debt issued directly to households (e.g., nonmarketable savings instruments), contingent liabilities, and debt issued by subnational governments, and also on the extent to which foreign currency debt management is integrated with domestic debt management. For example, in the United Kingdom, the wholesale and retail debt programs are managed by separate agencies, but in the United States, both debt programs are managed by a single group. In Ireland, the management of explicit contingent liabilities is handled by the Ministry of Finance (Exchequer), and wholesale debt funding is managed by the debt management agency, whereas in Colombia and Sweden, debt managers play an active...
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