Slovenia
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Page 190
After attaining independence in 1991 and throughout the first half of the 1990s, efforts were devoted to the reestablishment of Slovenia's access to international financial markets, which involved Slovenia's assumption of a share in the external debt of the former Yugoslavia. It also involved a smooth execution of the process of rehabilitating the banking system and restructuring various enterprises. Given the fact that the budget remained in surplus until 1997, debt management operations focused on establishing access for borrowing in different financial markets. Borrowing operations started in the domestic market through short-term borrowing to manage liquidity, continued in 1996 with the first Eurobond issue in the euro market, and, in 1997, with issuance of inflation-indexed bonds and loans in the domestic market.1
When relatively small budget deficits emerged, the main objective was to develop a domestic market for debt, primarily for bonds, to finance the budget and any debt obligations incurred before 1996 in the succession process to the former Socialist Federal Republic of Yugoslavia and cover programs of real and banking sector rehabilitation.
Developing the domestic market for debt has become a priority to ensure timely financing in domestic currency and reduce macroeconomic risk associated with financing the deficit with external debt. This task has been eased recently by the lifting of capital controls and increase of foreign direct investment. A growing market capacity for government borrowing has just recently allowed undertaking of active debt management operations to reduce the overall cost of the portfolio. Efforts have also been devoted to enhancing the transparency and tradability of instruments, with the aim of deepening and enhancing liquidity of the secondary market. Similarly, building up a yield curve to price other instruments in the market has also been a priority.
The basic principle underlying debt management activities is harmonization of the goals of (a) minimiz- Page 191 ing borrowing costs over the long term with a maturity structure that ensures a sustainable level of risk in refinancing the debt and (b) a currency and interest rate structure that minimizes the exposure to exchange rate, interest rate, and other risks.
In 1998, for the first time, an annual program of financing the central government budget (financing program) was adopted, stating the main objectives- both strategic and operational-and targets for debt management. These main guidelines were supported by the Public Finance Act, which was enacted in October 1999.
Strategic objectives include, next to provision of sufficient and timely financing of the budget, cost minimization; maximum reliance on financing in the domestic market, pending the crowding out or distorted effects on the market; broadening both the domestic and the foreign investors' base; minimizing interest rate risk; minimizing foreign currency risk through continued increase of euros in the currency structure of foreign debt; and minimizing the risk of inflation in the debt in domestic currency by pursuing interest rate nominalism.
Operational objectives include determination of the short-term versus long-term financing mix consistent with a view on the term structure of the portfolio; determination of the external/foreign currency borrowing mix in total borrowing consistent with the strategy of prioritizing the domestic market; determination of the structure of the instruments, including the shares of fixed-rate, variable-rate, and foreign currency-indexed debt consistent with the strategy toward nominalism and cost and risk considerations.
Debt management encompasses all direct financial obligations of the central government. The annual financing program includes the amount to finance, which is determined by the annual budget and is the sum of the deficit and debt repayment obligations in the given fiscal year. It sets the amounts for both domestic and foreign currency borrowings, which are coordinated within the program. The choice of market is given in the form of minimal domestic and maximum foreign borrowing amounts and as maximum short-term and minimal long-term financing.
The public debt management department (PDMD) within the ministry of finance (MoF) also exercises central administrative and control functions over debt of public sector entities, whose debt represents contingent liabilities of the central government and issuance of government guarantees.
There is a clear legal, regulatory, and actual separation of debt management and monetary policy objectives and accountabilities. The Bank of Slovenia (BOS), the central bank, is an independent institution and not a part of the executive government. The government is legally banned from borrowing from the BOS, which, however, manages the foreign currency reserves and is the government's paying agent for foreign currency payments, the depositary for foreign currency cash deposits, and, together with commercial banks, a depositary for domestic currency deposits.
On completion of the proposal of the annual financing program, it is discussed within the scope of fiscal policy documents and also shown to the BOS for (nonbinding) commentary and suggestions. The coordination takes place within the framework of a medium-term fiscal scenario.
The MoF and the BOS also discuss general liquidity conditions in the economy at the time of preparation of the annual financing program. Debt managers share information on the government's current and future financing requirements as well as their dynamics during the year. The MoF informs the BOS of borrowing intentions in advance, whereupon the BoS provides information on market conditions.
There are regular meetings of MoF and central bank officials to discuss, without formal arrangements, the technical scope of their respective policies' execution.
According to a formal agreement between the MoF and the BOS, the former provides two types of monthly forecasts. The first, for three months in advance, consists of day-by-day cash flows of all revenues and expenditures for all items to be received or paid by the government. The second forecast provides the same information one month in advance, but the information is updated and thus more accu- Page 192 rate. The three-month forecast provides an indication of future developments in the government's account movements, and the second forecast contains updated and reviewed information.
Within the MoF, a committee on liquidity meets weekly, monitoring monthly liquidity situations and determining necessary activity versus financing and versus budget expenditure management. Budget, tax and customs, debt management, and liquidity management departments are permanent members of the committee. The MoF notifies the central bank about budget liquidity projections and monthly changes, and the BOS provides the MoF with necessary information on market liquidity conditions.
The financing program's objectives and accomplishments are regularly announced. The format of reports contains a separation of objectives and, for every objective where possible, statements of development. Documents are available to the financial community, as well as to the general public. The objectives and instruments of the debt management policy are made public through the annual financing program and other policy documents, including the macroeconomic and fiscal scenarios. These documents are permanently available on the MoF's web site (http://www.sigov.si/mf/angl/apredmf1.html) and other government web sites. The public finance bulletin is also permanently available on the MoF web site and is updated monthly. It includes data on general and central government finance accounts, government debt, and outstanding guarantees.
The annual report on debt management is made public once the government has accepted it. The report includes information pertaining to the execution of strategic objectives of debt management; a description of the debt instruments issued and costs with a cost analysis; an analysis of developments of the central government debt portfolio and dynamics; information on general government and public debt and debt with central government guarantees; data on debt stock, flows, and instruments; and a brief international comparison of debt. In the form of a public finance bulletin, the MoF also publishes monthly information on the structure of the debt portfolio.
Slovenia has a practice of enacting budgets for the current year and the following year and releasing a midterm fiscal strategy paper to parliament and the general public. The amount of debt and debt-servicing projections are regular parts of policy papers. Monthly, the BOS reports a service schedule for total external debt.
The domestic market provides transparency of operations through a choice of standardized instruments, which are offered in a calendar...
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