Medium-Term Debt Management Strategy (MTDS): A Framework

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Medium-Term Debt Management Strategy (MTDS) A
Framework

• MDB Meeting on Debt Issues
• July 10, 2008

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Motivation

• Post MDRI perspective
• New borrowing opportunities ? new risks
• A clear framework to fully assess the related
  costs and risks of new financing is absent in
  many cases
• Shareholders of the World Bank and IMF have
  instructed both instituions to scale-up work
  program to help improve debt management in LICs
• MTDS aims to provide coherent framework to fully
  assess relevant costs and risks of new financing

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What is an MTDS?

• A framework to fully assess relevant costs and
  risks associated with a governments desired
  composition of debt
• It is a document that describes the plan that the
  government intends to implement to achieve this
  composition
• Medium-term planning horizon of the government
  (usually 3-5 years)

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What is an MTDS?

• The principal benefit of a MTDS It can help a
  country avoid expensive mistakes.
• Improves evaluation of cost-risk tradeoff
• Improves risk measurement and management
• Facilitates policy coordination
• Facilitates domestic debt market development

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What is an MTDS?

• MTDS Toolkit
• Guidance Note a step-by-step how-to guide on
  the process of developing and implementing an
  MTDS.
• Scenario Analysis Model (spreadsheet-based
  analytical tool) to help compare alternative
  strategies under different scenarios for future
  market rates, accompanied by a Users Guide
• A template for strategy documentation

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Debt Management, Macroeconomic Framework and
Market Constraints
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Designing an MTDS

• Objectives and scope of the MTDS
• Cost and risk of existing debt
• Potential sources of finance
• Medium-term macro-policy and market environment
• Broad structural factors and risks
• Analysis of alternative debt management
  strategies
• Review with fiscal, monetary and market
  authorities
• Propose and approve MTDS

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Objectives Scope

• Objective
• Identify main objectives for public debt
  management and the scope of the MTDS
• Outputs
• Description of the overall objectives for public
  debt management
• Definition of the types of debt to be covered by
  the MTDS

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Cost Risk of Existing Debt

• Objectives
• Identify outstanding debt and its composition
• Calculate basic cost and risk indicators
• Outputs
• Detailed information on outstanding debt
• Debt servicing profile of outstanding debt
• Description of main portfolio risks

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Potential Instruments Characteristics

• Objective
• Identify potential sources of finance, their
  financial characteristics including cost and risk
  parameters
• Output
• List of existing and potential instruments,
  domestic and external, and description of their
  financial characteristics
• Evaluation of the potential of annual borrowing
  in each instrument
• Discussion/ranking of the instruments based on
  cost/risk characteristics

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Macro and Market Environment

• Objectives
• Identify the baseline projections for key fiscal
  and monetary policy variables, as well as market
  rates, the mains risks to this, and the relevant
  constraints and implications for MTDS formulation
• Output
• Baseline projections for key fiscal, monetary
  policy and market variables
• A clear and comprehensive set of country specific
  risk scenarios to be tested

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Review Key Longer-term Structural Factors

• Objective
• Review structural factors that will potentially
  influence the desired direction of the MTDS over
  the longer-term
• Output
• Articulation of long-run structural factors that
  the MTDS should take into account, e.g.,
• Commodity price vulnerability
• Macro vulnerabilities created by the debt
  composition

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Analysis of Strategies

• Objectives
• Identify and analyze possible debt management
  strategies, assess their performance, and chose a
  small number of preferred debt management
  strategies
• Outputs
• Comparison of feasible debt compositions,
  identifying preferences relative to objectives
• Comparison of cost and cost-range implications of
  debt management strategies
• Identify the preferred, and a few alternative
  strategies

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Review with Other Agencies

• Objectives
• Ensure that relevant feedback from the strategies
  identified is provided by the fiscal and monetary
  policy authorities
• Review the potential debt market implications of
  the strategies.
• Output
• A clear assessment that the candidate strategies
  are consistent with fiscal and monetary policies,
  maintaining debt sustainability, and in line with
  plans for market development

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Propose Approve the MTDS

• Objective
• Present the preferred and alternative strategies
  to the highest responsible authority
• Propose the preferred MTDS for approval
• Output
• A document describing the preferred strategy, as
  well as a few alternatives
• A clear description of the key associated costs
  and risks, and relationship with the broad
  objectives

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Disseminating the MTDS

• Once determined, the agreed MTDS should be
  disseminated
• Inform key stakeholders (e.g. Parliament, primary
  dealers, creditors, investors, ratings agencies)
• Secures (political) commitment to the strategy
• Reduces uncertainty, increases confidence
• Facilitates active decision-making by the DM
• Enhances transparency and accountability
• Improves the quality of the debate
• Strengthens analysis and (consequently) improves
  outcomes
• Establishes a reference point to evaluate debt
  management performance

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Implementing the MTDS

• Separate process from strategy formulation
• Operational focus
• Need to identify consistent borrowing plan
• More focused on precise characteristics and
  details of instruments
• Implementation will highlight key bottlenecks
  that constrain the set of feasible strategies,
  e.g.
• Shallow local debt markets
• Weaknesses in primary market operations
• Potential conflict with operating framework for
  monetary policy
• Limits on availability of (concessional) external
  finance
• Link to market development strategy

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Next Steps

• Field test MTDS toolkit Bangladesh, Ghana,
  Cameroon, Nicaragua 2
• Conclude elements of toolkit
• Present progress/experience to Boards in early
  2009