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Medium-term Debt Management Strategy

(MTDS): A Framework For Analyzing Cost and

Christian Mulder
Asset and Liability Management Division
Monetary and Capital Markets Department

Kuala Lumpur, 3 November 2009

MTDS background

The Motivation for MTDS
„ New borrowing opportunities ⇒ new risks
„ More choices ⇒ greater complexity
„ MTDS aims to provide coherent framework to
fully assess relevant costs and risks
„ Guide choice on composition between:
„ Concessional / quasi-concessional / commercial

„ Currency composition

„ Balance between short- and long-tenors

„ Etc.


„ MTDS can be jointly performed with debt

sustainability analysis (which is focused on
the level of debt).
„ Joint IMF/World Bank initiative
„ Tools:
„ Guidance note
„ Spreadsheet tool

More specifically:

„ Standard DM objective: Meet government financing

need at lowest cost consistent with a prudent degree of
„ MTDS focuses on the financing strategy over the medium-
term planning horizon of the government (usually 3-5 years),
consistent with macro-economic settings and related debt
„ The MTDS defines
„ desired public debt composition and
„ a plan to achieve this composition

An integrated (8) step process…

Debt Management Integrated in
Macroeconomic Framework and Market

Constraints Information on cost

and risk

Debt Management
Strategy Development
Consistency/ Demand
Constraints constraints

Information on development
Macroeconomic cost and risk Financing Sources/
Framework/Debt Market Environment
8-step approach
Step 1 Step 2
Identify Identify cost &
objectives & risk of existing
scope debt

Step 4 Step 3
Identify baseline
projections & Identify potential
risks – fiscal, funding sources
monetary &

8-step approach

Step 5 Step 6
Identify cost risk
Review key trade-off for
structural alternative debt
factors management

Step 8 Step 7
Recommend implications for
MTDS for macroeconomic
approval policies &

Analyzing cost in the MTDS

(1): What is cost
„ Tension between nominal and real
„ Budget is formulated in nominal terms
„ Costs are real: inflation reduces the amount of goods and services that
need to be forgone to service debt

„ Real cost is essential to define but this is surprisingly hard: A first

approximation of long-term real cost of debt service is the real
interest bill (nominal bill minus inflation) plus FX debt
multiplied by the real exchange rate depreciation
„ see guidance note for complications, e.g. zero coupons

„ Risk is unexpected change in cost

(2): What drives cost
„ Real interest and exchange rate drive long-term cost:
„ Real exchange rate (ep/p*)trend varies significantly:
„ “Asian tiger” has LT real implying cheap FX funding
„ Bangladesh suffered 10 years of about 2 percent real depreciation
„ Exchange rate overshooting: models can tell what equilibrium “real”
exchange rate is:
„ Debt of Argentina, a “closed” economy with relatively large import deficit,
tripled to 200% of GDP in one year (2002).
„ Real interest rate trend:
„ Currently low real rates. If investment demand returns this will reverse.
„ Debt market improvement, fiscal consolidation can reduce real interest rates

„ The nominal component is driven by very different models:

„ E.g. inflation targeting, money creation

(3): Approaches to identifying
cost/risk trade offs in the MTDS
„ Review cost/risk characteristics of each instruments (step 2)

„ Numerically simulate cost of the whole portfolio over time

(step 6)
„ Horizon needs to encompass some stability otherwise not an equilibrium

„ As input to both (step 5): identify, in consultation with economic

policy-makers, structural features of the economy that may
influence the cost and thereby the desirable debt composition.

(4): Simulation Tool

„ Any tool can work. Understanding is key. Standard

IMF/World Bank Tool may help as it is tested and
„ It creates buckets of debt to make them tractable
„ Requires macro assumptions (similar to DSA)
„ The tool has been set-up to test several strategies at a
„ Allows for yield curve assumptions and to cost a buffer
„ Generates figures and ratios for the scenarios

(5): Insurance/Costing of Roll-
over risk
„ Cost of roll-over risk and mitigation can be costed to
make it comparable:

„ Shorter maturities require buffers that cost

„ rollover risk of foreign debt (and domestic investors under
fixed exchange rate regimes who can switch into alternative
foreign investments) can be covered by building reserves
„ similarly for other domestic roll-over risks domestic buffers
can be created—overdraft arrangement with central bank or
commercial banks?
„ the net cost of these additional buffers can be included in the
relevant instrument.
Implementing an MTDS

Enabling Framework
„ Implementation will also highlight weaknesses in
enabling framework

„ Debt recording
„ Comprehensive? Is data sharing set up well?

„ Legal framework
„ Clear debt management objective?

„ Institutional arrangements
„ Appropriate coordination mechanisms

Implementing the MTDS
„ Separate process from strategy formulation

„ 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
„ Limits on availability of (concessional) external finance

„ May need special market development strategy


Benefits of MTDS
„ Objective and systematic approach
„ Prompts the addressing of all key issues
„ Enables underlying assumptions to be challenged

„ Improves risk measurement and management

„ Explicitly links macro vulnerabilities to strategy
choices and portfolio evolution
„ Quantifies key debt portfolio risk exposures

Benefits of MTDS
„ Prompts a better understanding of costs and
improves evaluation of cost-risk tradeoff

„ Facilitates policy coordination

„ Aims for consistency with the macro-economic
framework (e.g. fiscal and monetary policy settings)

„ Facilitates domestic debt market development

„ Provides medium-term supply perspective
„ Strengthens dialogue with investors, reducing uncertainty
and lowering cost