View
226
Download
4
Category
Preview:
Citation preview
DEBT INDICATORS
DEBT INDICATORS
Content
1. Introduction
2. Financial Indicators
3. Vulnerability Indicators
4. Sustainability Indicators
5. Final Consideration
2
Three groups of indicators
DEBT INDICATORS 1.-Introduction
Risk of current conditions’ impact on debt status
Government’s ability to
address future contingencies
Liabilities’ performance
as market variables
3
DEBT INDICATORS 1.-Introduction
4
Analyzing and describing the most accepted vulnerability, sustainability and financial indicators, along with their implementation scope within public debt management and auditing policies.
Aim of Work
5
Risk Classification
DEBT INDICATORS 2- Financial Indicators
Market risk
Credit risk
Reputation risk
6
Risk Classification Market Risk
Most accepted indicators :
1. Interest Rates and Yield Curve
These are the gain measure for those who decide to
save. Capital markets provide an efficient mechanism to
transfer capital between economic agents.
DEBT INDICATORS 2- Financial Indicators
7
Risk Classification Market Risk
1. Position and Slope of the Yield Curve
DEBT INDICATORS 2- Financial Indicators
Slope Market Expectations Theory
Liquidity Preferences Theory
Market Segmentation Theory
Positive Short-term rates are expected to rise
Positive price to liquidity
Excessive supply regarding long-term demand
Negative Short-term rates are expected to decrease
Negative price (punishment) to liquidity
Excessive supply regarding short-term demand
8
Risk Classification Market Risk
1. Position and Slope of the Yield Curve
DEBT INDICATORS 2- Financial Indicators
Slope Market Expectations Theory
Liquidity Preferences Theory
Market Segmentation Theory
Horizontal Short-term rates are expected to remain the same
Absence of liquidity price
Equilibrium between supply and demand in all terms
Concave Short-term rates are expected to rise and subsequently decrease
Positive price to liquidity followed by a negative price to liquidity
Excess of supply regarding mid-term demand
9
Risk Classification Market Risk
2. Weighted Average Maturity and Duration
These statistics measure the average time in which
issuers must face debt’s service.
The weighted average maturity term possesses a
limited use because it only considers payment dates
of the principal, while the duration additionally takes
into account the interests payment dates.
DEBT INDICATORS 2- Financial Indicators
10
Risk Classification Market Risk
3. Modified Duration
It is used to measure the risk of a bonus. It indicates
the impact on the bonuses’ prices resulting from
interest rates’ variations.
DEBT INDICATORS 2- Financial Indicators
11
Risk Classification Market Risk
4. Standard Deviation
It indicates the average detachment between a data
set and its average value.
DEBT INDICATORS 2- Financial Indicators
12
Risk Classification Market Risk
5. Risk-Adjusted Yield (RaR)
It indicates the way in which an expected interest
rate associated to an issue, could cover the expected
loss due to an increase in such interest rate.
This indicator shows the number of times that the
loss expectations surpass the expected earnings.
DEBT INDICATORS 2- Financial Indicators
13
Risk Classification Market Risk
6. Amortization Profile
It is used for distributing on a timeline payments to
capital.
The main idea is creating a regular series of
amortizations intended to minimize the risk of
refinancing large portions of debt if unfavorable
market conditions arise.
DEBT INDICATORS 2- Financial Indicators
14
Risk Classification Market Risk
7. Risk Cost (CaR)
Together with the term and the amortization profile,
CaR is used for risk-management purposes in a debt
portfolio.
This indicator allows assessing the cost-related
consequences resulting from different issue
strategies.
DEBT INDICATORS 2- Financial Indicators
15
Risk Classification Credit Risk
CONCEPT
The potential loss resulting from noncompliance of a party in a financial transaction, or noncompliance with the terms and conditions of a transaction.
It is conceived as the weakening of a party’s credit quality, or the weakening of an originally agreed guarantee or collateral.
DEBT INDICATORS 2- Financial Indicators
16
Risk Classification Credit Risk
1. Credit default Swap (CDS)
CDS provide an insurance against bankruptcy risk from any entity used as reference .
The seller of the protection is obliged to purchase the referred bonus at its par value in case of a credit event.
The purchaser periodically makes payments to the seller during the term of the contract or until a credit event occurs, whatever happens first.
DEBT INDICATORS 2- Financial Indicators
17
Risk Classification Reputation Risk
CONCEPT
Reputation Risk refers to losses resulting from untaken
financing opportunities, due to issuer’s bad reputation
resulting from failure in payment or from a damaged fiscal
situation.
DEBT INDICATORS 2- Financial Indicators
18
Risk Classification Reputation Risk
1. Credit Ratings
This indicators represents the private agents’ perception of a country’s debt situation.
Rating Agencies
DEBT INDICATORS 2- Financial Indicators
19
Risk Classification Reputation Risk
2 A. Country Risk Indicators
They measure the degree of risk operating within a country for foreign investments.
Investors seek for earnings’ maximization and take risk into consideration, i. e., the possibility of less than expected earnings, or loss occurrence.
DEBT INDICATORS 2- Financial Indicators
20
Risk Classification Reputation Risk
2 B. Country-Risk Indicators
The country-risk index equals the over-rate that a
country pays for its bonuses related to the rate paid by
the Treasury of the United States.
DEBT INDICATORS 2- Financial Indicators
21
Risk Classification Reputation Risk
2 C. Country-Risk Indicators
The more damaged the country-risk rating is, the
larger it will be the cost of debt, and the lesser
economic policies can be handled; hence, the risk of
noncompliance will be bigger.
DEBT INDICATORS 2- Financial Indicators
DEBT INDICATORS 3.- Vulnerability Indicators
Monetary crisis effectsEmerging market
economies
The 90´s
Main issue of economic policy:
Analysis and research on fiscal vulnerabilities and their link to debt.
22
Emerging market economies
• They are vulnerable to variation of investors’ attitude
• Special attention was placed on this group of countries and their vulnerability assessment work
23
DEBT INDICATORS 3.- Vulnerability Indicators
Vulnerability analysis
• Data’s quality and transparency
• Availability of timely and detailed data on international stocks, external debt and capital flows
• Definition of critical values
• Conduction of strain tests
• Applying early-warning system models
24
DEBT INDICATORS 3.- Vulnerability Indicators
Vulnerability analysis
Vulnerability indicators encompass:
• Public sector
• Financial sector
• Households
• Enterprises
When economies are under strain, one sector’s problems spread to others.
25
DEBT INDICATORS 3.- Vulnerability indicators
Vulnerability analysis
These are useful indicators to define debt’s evolution and payment capability.
They offer certain signals about the worsening or improvement of the government’s position.
26
DEBT INDICATORS 3.- Vulnerability indicators
Vulnerability analysis
Most accepted indicators by international institutions and governments and the academic sector:
1. Debt’s balance / domestic budgetary revenue
27
DEBT INDICATORS 3.- Vulnerability indicators
Vulnerability analysis
Most accepted indicators by international institutions and governments and the academic sector:
2. Debt’s service / domestic budgetary revenue
28
DEBT INDICATORS 3.- Vulnerability indicators
Vulnerability analysis
Most accepted indicators by international institutions and governments and the academic sector:
3. Current value / domestic budgetary revenue
29
DEBT INDICATORS 3.- Vulnerability indicators
Vulnerability analysis
Most accepted indicators by international institutions and governments and the academic sector:
4. Interests / GDP
30
DEBT INDICATORS 3.- Vulnerability indicators
Vulnerability analysis
Most accepted indicators by international institutions and governments and the academic sector:
5. Interests / domestic budgetary revenue
31
DEBT INDICATORS 3.- Vulnerability indicators
Vulnerability analysis
Frequently used indicators in a cross-cutting way with the aforementioned :
6. Foreign debt / exports
32
DEBT INDICATORS 3.- Vulnerability indicators
Vulnerability indicators
Frequently used indicators in a cross-cutting way with the aforementioned :
7. Net International reserves / foreign debt
33
DEBT INDICATORS 3.- Vulnerability indicators
Vulnerability analysis
Frequently used indicators in a cross-cutting way with the aforementioned :
8. • Amortization / external debt disbursements
34
DEBT INDICATORS 3.- Vulnerability indicators
Minimal suggested levels for emerging countries, provided by two different international organizations.
35
Minimal Suggested Levels
Vulnerability Indicator
International Debt Relief *
International Monetary Fund**
Debt Service /income
28%-63% 25%-35%
Debt VP /income
88%-127% 200%-300%
Interest/income 4.6%-6.8% 7%-10%
Debt/GDP 20%-25% 25%-30%
Debt/Income 92%-167% 90%-150%
* Debt Relief International: “Key Aspects of Debt Sustainability Analysis”, 2007
** International Monetary Fund, Foreign Affairs Department: Technical Note “Vulnerability Indicators”, April 30, 2003 and several research documents.
DEBT INDICATORS 3.- Vulnerability indicators
Fiscal sustainability indicators
Public debt and the corresponding interest payment
became a structural problem in countries showing
persistent deficits.
36
DEBT INDICATORS 4.- Sustainability indicators
Fiscal sustainability indicators
Fiscal sustainability indicators seek to describe public
finances’ inter-temporal aspects, based on year-to-year
available information.
37
DEBT INDICATORS 4.- Sustainability indicators
Fiscal sustainability indicators
Systematic fiscal imbalances will mean future pressures
concerning interest expenditure, which will in turn
contribute to new debt accumulation.
38
DEBT INDICATORS 4.- Sustainability indicators
Main indicators
1 A. Fiscal Consistency Indicator
It takes into consideration the consistency of the current tax policy, while keeping the debt-to-GDP ratio constant.
39
DEBT INDICATORS 4.- Sustainability indicators
Main indicators
1 B. Fiscal Consistency Indicator
wheretn* is the fiscal burden stabilizing, in a period of
(n) years, the debt-to-GDP ratio in level d*, g being the expenditurer being the interest rate, and q being the GDP’s growth rate.
40
tdqrn
g
tt
n
n
*)(*
DEBT INDICATORS 4.- Sustainability indicators
Main indicators
2 A. Buiter’s Indicator
It calculates the gap between the sustainable primary balance and the primary effective balance.
The sustainability condition is defined starting from a wider net wealth concept than the one implicit in the ratio debt / GDP.
41
DEBT INDICATORS 4.- Sustainability indicators
Main indicators
42
2 B. Buiter’s Indicator
whereb* is the ratio debt / sustainable GDP, b is the ratio debt / GDP,wt is the net / real government wealth value as a
GDP proportion,r is the interest rate, andq is the GDP increase rate.
ttt bwqrbb )(*
DEBT INDICATORS 4.- Sustainability indicators
Main indicators
43
2 C. Buiter’s Indicator
A tax policy is defined as sustainable by this indicator if
the net government wealth is kept steady, in a ex-ante
sense.
DEBT INDICATORS 4.- Sustainability indicators
Main indicators
3 A. Short-term primary gap indicator
It provides the primary balance level needed to stabilize debt as a proportion of the GDP.
44
DEBT INDICATORS 4.- Sustainability indicators
Main indicators
45
3 B. Short-term primary gap indicator
whereBP* is the primary balance needed to stabilize
debt, BP is the prevailing primary balancer the real interest rate trendn is the population growth’s rate, andb is the ratio debt / GDP.
BPbnrBPBP tt )(*
DEBT INDICATORS 4.- Sustainability indicators
Main indicators
46
3 C. Short-term primary gap indicator
If the permanent primary balance exceeds the current primary balance, the primary path is positive. This means that the fiscal policy is not sustainable.
On the contrary, when the permanent primary balance is lower than the current primary balance, the fiscal policy tends to reduce the debt level regarding the GDP.
DEBT INDICATORS 4.- Sustainability indicators
Main indicators
4 A. Macro-adjusted primary deficit
This indicator was created due to the high volatility of macroeconomic variables, which leads deficit in a specific moment to be different from the one that would appear within normal macroeconomic conditions.
47
DEBT INDICATORS 4.- Sustainability indicators
Main indicators
48
4 B. Macro-adjusted primary shortage
wherer is the real interest rate, g represents the analyzed year’s real growth
is the primary macro-adjusted balance
Mtt
Mt db
g
grI
11
)(
Mtd
DEBT INDICATORS 4.- Sustainability indicators
Main indicators
49
4 C. Macro-adjusted primary shortage
The inconvenience of this indicator lies within the need of establishing what a “normal economy
condition” is.
DEBT INDICATORS 4.- Sustainability Indicators
Main indicators
5 A. Sustainable fiscal position indicator
It considers a historical methodology which explicitly assess the tax authority reaction in face of changes in those variables defining debt’s sustainability in time.
50
DEBT INDICATORS 4.- Sustainability Indicators
Main indicators
51
5 B. Sustainable fiscal position indicator
where β is the relation between the real
interest rate (r) and the GDP’s growth rate (g)
λ is the function of fiscal policy’s reaction, defined as the ratio between the primary effective balance gap (BP) related to the primary sustainable balance or goal (BP*), and the current gap between the ratio debt / GDP from the last period (b) respect to the ratio debt / sustainable GDP or goal (b*).
*1
*
1
1)(
bb
BPBP
g
rI
t
t
t
ttt
PFSt
DEBT INDICATORS 4.- Sustainability Indicators
Main indicators
52
5 C. Sustainable fiscal position indicator
If the ratio debt / GDP of the last period is higher than the goal, it will converge to b* if, and only if
| βt - λt | <1.
DEBT INDICATORS 4.- Sustainability Indicators
Main indicators
53
5 D. Sustainable fiscal position indicator
In static terms, an indicator value superior or equal to 1, is an evidence that the fiscal authority maintains an inconsistent fiscal policy with the convergence of the ratio debt/sustainable GDP levels.
An indicator value minor than 1 indicates that the fiscal position is consistent with the conditions
required to ensure sustainability.
DEBT INDICATORS 4.- Sustainability Indicators
Main indicators
6 A. Currency availability indicator
The initial assumption is that volatility of capital flows’ variables is higher than that of macroeconomic variables.
54
DEBT INDICATORS 4.- Sustainability Indicators
Main indicators
55
6 B. Currency availability indicator
This indicator compares the proportion of external debt related to internal debt with the proportion of tradable goods related to the non-tradable goods in economy:
DEBT INDICATORS 4.- Sustainability Indicators
Main indicators
56
6 C. Currency availability indicator
where b is the ratio debt / GDP,B is the debt in terms of non-tradable
goods,e is the type of real exchange,B* is the debt in terms of tradable goods,y the GDP of non-tradable goods, and y* the GDP of tradable goods.
DEBT INDICATORS 4.- Sustainability Indicators
**
eyyeBB
b )(a
Main indicators
57
6 D. Currency availability indicator
When
The debt’s composition and the production are perfectly consistent.
When this condition occurs, the variations in the exchange rate have no effects in fiscal sustainability holding the ratio debt / constant GDP.
1
*
*
eyyeBB
(b)
DEBT INDICATORS 4.- Sustainability Indicators
Main indicators
58
6 E. Currency availability indicator
When the value is closer to 0 instead of 1, the fiscal position becomes highly sensitive to variations of the real exchange rate.
DEBT INDICATORS 4.- Sustainability Indicators
Main indicators
59
6 F. Currency availability indicator
Thus, to estimate indicator (a) it is necessary to determine (b) and, therefore, the indicator to be estimated is:
I
eyyeBB
*
* )10( I
DEBT INDICATORS 4.- Sustainability Indicators
Main indicators
60
7 A. Fiscal Sustainability Indicators with Long-Term Restrictions
Debt and fiscal sustainability indicators fail when no long-term budgetary restrictions are
represented by them.
DEBT INDICATORS 4.- Sustainability Indicators
Main indicators
61
7 B. Fiscal Sustainability Indicators with Long-Term Restrictions
In order to try to cover these possible upcoming events, Bagnai (2003) presents two indicators consistent with these restrictions, in order to keep debt sustainability.
DEBT INDICATORS 4.- Sustainability Indicators
In the mid- and long-term,
generations from a country will act as a
governmental funding source regarding debt
(financial markets) and tax payment
(macroeconomic).
62
ObjetiveTo keep the debt /
GDP ratio (B/y) stable in time.
7 C. Indicators that consider the budgetary restrictions - Bagnai, 2003. First case
DEBT INDICATORS 4.- Sustainability Indicators
63
Dynamic fiscal stability will be reached only when the following two conditions are met:
(a)
(b)
)1(1
)1(~
rn
nkb
y
B
0)1(
)1(
)1()1(1
s
r
ns
7 D. Indicators that consider the budgetary restrictions - Bagnai, 2003
DEBT INDICATORS 4.- Sustainability Indicators
64
where n is the population growth rate, is the income tax, s is the income proportion that is saved, r is the real tax rate is the elasticity of savings related to the interest rate, is the investment elasticity related to the interest rate,
is the elasticity of consumption related to income,k is the ratio capital GDP, and is the elasticity of the product related to capital.
7 E. Indicators that consider the budgetary restrictions - Bagnai, 2003
DEBT INDICATORS 4.- Sustainability Indicators
65
If debt exceeds the level, the economic system turns dynamically unsustainable and debt will respond to any exogenous shock, acquiring an explosive trajectory.
b~
7 F. Indicators that consider the budgetary restrictions - Bagnai, 2003
DEBT INDICATORS 4.- Sustainability Indicators
66
7 G. Indicators that consider the budgetary restrictions - Bagnai, 2003. Second case
Inter-temporal restrictions
The equilibrium’s steadiness depends on the provisions regulating
fiscal and monetary policies
DEBT INDICATORS 4.- Sustainability Indicators
67
7 H. Indicators that consider the budgetary restrictions - Bagnai, 2003. Second case
When a monetization coefficient is zero and public expenditure endogenously vary with the strengthening
of debt, then the necessary condition to achieve a dynamic equilibrium is the following:
(a)0)1()1(1
ryB
yL
Lwr
DEBT INDICATORS 4.- Sustainability Indicators
68
7 I. Indicators that consider the budgetary restrictions - Bagnai, 2003. Second case
Formula:
where y is GDP, is the income proportion by the total income
capital,L represents currency, L1 is the first derivate of the former variable
respect to the real interest rate, and w is the wealth as a proportion of the GDP.
0)1()1(1
ryB
yL
Lwr
DEBT INDICATORS 4.- Sustainability Indicators
69
7 J. Indicators that consider the budgetary restrictions - Bagnai, 2003. Second case
Public debt balance in real terms B
where elasticity of money’s demand related to the interest rate
r
rwb
y
B
1*
0)1( 1 LrL
DEBT INDICATORS 4.- Sustainability Indicators
70
7 K. Indicators that consider the budgetary restrictions - Bagnai, 2003. Second case
When an expansive fiscal policy is funded through
deficit, the interest rate needs to be increased in order
to induce the economic agent to reallocate its balance
portfolio to the new debt.
DEBT INDICATORS 4.- Sustainability Indicators
71
DEBT INDICATORS 5.- Final consideration
These three main indicators groups:
financial
vulnerability
sustainability
aim understanding the public debt phenomena from
different angles, with the objective of allowing
governments to control and manage public debt based
on sound credit practices.
Recommended