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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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