Seoul, Korea October 22-24, 2014 22.10.2014 | ASF | WGPD Debt Management Offices Annual Meeting of...

Seoul, Korea

October 22-24, 2014 22.10.2014 | ASF | WGPD

Debt Management Offices

Annual Meeting of the INTOSAI

Working Group on Public Debt

Content

1. Background information2. Effective Debt

Management3. Location and

organizational structure of DMO

4. Main issues and problems related to DMOs

5. Best practices in the DMO6. Conclusions

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1. Background information

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1. Background information

Negative consequences of a poorly managed public debt

Discourage private investment

Be a source of financial volatility

Financial crisis, inflationary expansions and chronic low growth

Affect taxpayers of other countries

Restrict future access to financial markets

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1. Background information

Level of indebtedness remains on a sustainable path.

Risk management strategy to avoid excessive debt levels.

Managers of public debt and public officers must supervise:

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2. Effective Debt Management

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2. Effective Debt Management

1. Executive Debt Management

2. Operational Debt Management

Effective Debt Management Office Functions are:

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2. Effective Debt Management

Establishing a normative framework overseeing any kind of debt acquired by the goverment.

Executive Debt Management

Main purpose:

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2. Effective Debt Management

A group of high-ranking officials called the Executive Board on Debt Management (EBDM).

Executive Debt Management

Responsible for the executive functions:

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2. Effective Debt Management

i) Policy function

ii) Regulatory function

iii) Resourcing function

Executive Debt Management

Executive debt management functions include:

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2. Effective Debt Management

Involves the formulation of national debt policies and strategies in agreement with a country’s overall macroeconomic policy.

Executive Debt Management

i) Policy function

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2. Effective Debt Management

The establishment and review of the administrative and legal framework, rules and procedures of the debt management units.

Executive Debt Management

ii) Regulatory function

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2. Effective Debt Management

• Ensure the existence of qualified personnel.

• Supply maintenance and technical support for the debt management system.

Executive Debt Management

iii) Resourcing function

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2. Effective Debt Management

To perform the operational functions within the guide-lines provided by the EBDM.

Operational Debt Management

Main purpose:

EBDM: Executive Board on Debt Management.

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2. Effective Debt Management

The DMO perform the basic operational debt managements functions:

iv) Recording, analyzing and operating

Responsible for the operational functions:

Operational Debt Management

DMO: Debt Management Office.

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2. Effective Debt Management

The DMO’s senior staff ensures that the guide-lines issued by the EBDM are applied and followed.

v) Controlling, coordinating and monitoring functions

Responsible for the operational functions:

Operational Debt Management

DMO: Debt Management Office.EBDM: Executive Board on Debt Management.

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2. Effective Debt Management

Recording: Collect and provide detailed information on debt on a loan-by-loan basis.

iv) Recording, analyzing and operating functions

Operational Debt Management

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2. Effective Debt Management

Analyzing: Macroeconomic analysis to explore available options through given economic and market outlook.

iv) Recording, analyzing and operating functions

Operational Debt Management

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2. Effective Debt Management

Operating: All activities related to borrowing, such as negotiating, utilization of loan proceeds and debt service.

iv) Recording, analyzing and operating functions

Operational Debt Management

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2. Effective Debt Management

Supply substantive feed-back to the EBDM for the implementation, evalua-tion and revision of the debt strategy.

v) Controlling, coordinating and monitoring functions

Operational Debt Management

EBDM: Executive Board on Debt Management.

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3. Location and organizational structure of DMO

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3. Location and organizational structure of DMO

The DMO’s physical loca-tion in the national orga-nizational set-up is linked to the role that the office has been given.

Location of the DMO

DMO: Debt Management Office.

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3. Location and organizational structure of DMO

i) Office at the Central Bank

ii) Office at the Ministry of Finance

iii) Autonomous Debt Office

Most frequent models of loca-tion of the DMOs are:

Location of the DMO

DMO: Debt Management Office.

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3. Location and organizational structure of DMO

Operational debt manage-ment functions have been located inside the Central Bank given the interface between monetary policy and debt management.

Location of the DMOi) Office at the Central Bank

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3. Location and organizational structure of DMO

Nevertheless, literature suggests a conflict of interests when the Central Bank has a dual mandate for conducting monetary and debt policy.

Location of the DMOi) Office at the Central Bank

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3. Location and organizational structure of DMO

Since the main function of the Central Bank is to implement the monetary policy, debt management policy could be seen as an instrument to reinforce the price stability objective.

Reasons to separate the DMO from the Central Bank:

Location of the DMOi) Office at the Central Bank

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3. Location and organizational structure of DMO

This location has a clear system of delegation of authority from the Minister to the Head of the unit in charge of the debt.

Location of the DMO ii) Office at the Ministry of Finance

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3. Location and organizational structure of DMO

Gives an explicit emphasis to public policy objectives in public debt management, including the development of the domestic debt market.

Advantages:

Location of the DMO ii) Office at the Ministry of Finance

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3. Location and organizational structure of DMO

Facing political pressure to use debt management as a vehicle for opportunistic reductions in debt servicing costs and in the budget deficit in the short term.

Risk:

Location of the DMO ii) Office at the Ministry of Finance

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3. Location and organizational structure of DMO

Political risk could be substantially reduced if the EBDM sets a clear strategy and goals for the govern-ment’s debt management.

Risk control:

Location of the DMO ii) Office at the Ministry of Finance

EBDM: Executive Board on Debt Management.

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3. Location and organizational structure of DMO

Autonomous Debt Manage-ment Offices (ADMO) are located outside the Ministry of Finance or the Central Bank.

Location of the DMO iii) Autonomous Debt Office

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3. Location and organizational structure of DMO

• To achieve greater sophis-tication of debt manage-ment, given the growing emphasis on the control of risk.

• To overcome problems of recruiting and retaining staff with special expertise.

Reasons to establish an ADMO:

Location of the DMO iii) Autonomous Debt Office

ADMO: Autonomous Debt Management Office.

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3. Location and organizational structure of DMO

Advantage:

Location of the DMO iii) Autonomous Debt Office

ADMO: Autonomous Debt Management Office.

• The ADMO will force the rationalization of public debt management and will set up a clear governance and report structures.

• ADMOs are more efficient be-cause they follow market orien-ted principles and create an appropriate environment for quick decision-making.

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3. Location and organizational structure of DMO

The agency risk. Coordination becomes increasingly difficult when the ADMO is further from the Ministry of Finance.

Risks:

Location of the DMO iii) Autonomous Debt Office

ADMO: Autonomous Debt Management Office.

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3. Location and organizational structure of DMO

Issues concerning DMO organization are whether if it is a centralized or a decentralized system and its organizational chart.

DMO’s organizational structure

DMO: Debt Management Office.

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3. Location and organizational structure of DMO

When the functions are performed either by the Ministry of Finance, or by an autonomous body.

Centralized system

DMO’s organizational structurei) Centralized and decentralized

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3. Location and organizational structure of DMO

When a central DMO gathers information from all decentralized participants of the system.

Decentralized system

DMO’s organizational structurei) Centralized and decentralized

DMO: Debt Management Office.

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3. Location and organizational structure of DMO

The debt office can be organized by geographical units, loan sources, or specific tasks.

DMO’s organizational structureii) Organizational charts

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3. Location and organizational structure of DMO

Officers are responsible for all creditors within an assigned country or region, while other staff members are responsible for multi-lateral organizations.

Geographical units

DMO’s organizational structureii) Organizational charts

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3. Location and organizational structure of DMO

The organizational chart for this kind of model is divided into various offices specialized in the different types of loans.

Loan sources

DMO’s organizational structureii) Organizational charts

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3. Location and organizational structure of DMO

According to this organiza-tional chart, one section of the DMO is focused on disbursements and the others on repayments, loan contracts and reporting.

Specific tasks

DMO’s organizational structureii) Organizational charts

DMO: Debt Management Office.

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3. Location and organizational structure of DMO

All the operative processes should be integrated in a vertical manner that clearly define roles, responsibili-ties, and reporting channels.

DMO’s organizational structureiii) Organization Structure of the DMO

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3. Location and organizational structure of DMO

The organization of a DMO

EBDM

Front-Office Middle-Office Back-Office

DMO

Executive Debt Management

Operational Debt Management

DMO’s organizational structureiii) Organization Structure of the DMO

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3. Location and organizational structure of DMO

Is responsible for funding transactions and relations with investors underwriters and banks.

DMO’s organizational structureiii) Organization Structure of the DMO

The Front-Office

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3. Location and organizational structure of DMO

The middle office performs two functions: analytical and risk analysis.

DMO’s organizational structureiii) Organization Structure of the DMO

The Middle-Office

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3. Location and organizational structure of DMO

Back office’s objective is to create and maintain a high-quality up-to-date database of the debt portfolio.

DMO’s organizational structureiii) Organization Structure of the DMO

The Back-Office

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4. Main issues and problems related to DMOs

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4. Main issues and problems related to DMOs

The interests of the principal (Ministry of Finance) and the agent (DMO) diverge, and it is either too expensive or too difficult to effectively monitor the behavior of the agent.

The principal- agent problem and the governance on DMO

The principal-agent problem

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4. Main issues and problems related to DMOs

The principal-agent problem could be solved with:

Benchmarks Incentives Monitoring and control Audits

The principal- agent problem and the governance on DMO

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4. Main issues and problems related to DMOs

They have two key roles: 1. Provide guidance for the

management of costs and risk.

2. Define a framework for assessing portfolio per-formance in relation to cost, return, and risk.

The principal- agent problem and the governance on DMO

Benchmarks

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4. Main issues and problems related to DMOs

The principal establish an incentive-compatible con-tract so that the agent will make the necessary efforts and perform well.

The principal- agent problem and the governance on DMO

Incentives

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4. Main issues and problems related to DMOs

The principal set up an independent risk control de-partment and internal audi-ting department reporting directly to the EBDM within the DMO.

The principal- agent problem and the governance on DMO

Monitoring and control

DMO: Debt Management Office.EBDM: Executive Board on Debt Management.

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4. Main issues and problems related to DMOs

The role of the Supreme Audit Institutions is to go from routine practices to best practices, but this process cannot be isolated from the macroeconomic framework of each country.

The principal- agent problem and the governance on DMO

The Role of Audits

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4. Main issues and problems related to DMOs

i) Regularity Audits

ii) Management Audits

iii) Human resources audits

iv) Information systems audits

v) Performance audits

The principal- agent problem and the governance on DMO

Audits performed by Superior Audit Institutions are:

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5. Best practices in the DMO

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5. Best practices in the DMO

The practices contributing to a sensible sovereign debt management include:

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5. Best practices in the DMO

Establishing debt manage-ment clear objectives.

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5. Best practices in the DMO

Balancing costs versus faced risks.

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5. Best practices in the DMO

Separating goals and res-ponsibilities of fiscal and monetary policies mana-gers.

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5. Best practices in the DMO

Establishing limits to debt expansion.

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5. Best practices in the DMO

Creating an institutional structure in order to reduce operative risk.

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5. Best practices in the DMO

The case of United Kingdom

The Case of Portugal

The case of New Zealand

The case of Canada

The case of Norway

The case of Mexico

Debt management paradigmatic models:

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6. Conclusions

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6. Conclusions

Debt management could be done in very different ways and still offer good results in terms of meeting the needs of the govern-ment at the lowest cost and risk levels.

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6. Conclusions

Each country should aim to adopt the models of advanced economies as far as their market charac-teristics allow it.

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