Bangladesh: Debt Risk Management and Use of MTDS Toolkit

8/6/2019 Bangladesh: Debt Risk Management and Use of MTDS Toolkit

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Bangladesh: Debt Risk

Managem ent and Use o f

MTDS Too lk i t

I qba l Abdu l lah HarunDeputy Secre t a ry

16-18 March, 2011

Phuket, Thailand


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Outline

q Macroeconomic Performance and Outlook

q

Debt Profile

q Debt Management Strategy and Reform Events

q Risk Assessment Results Using MTDS Toolkit


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Macroeconomic

Performanceand Outlook


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Macroeconomic Performances

Average GDP growth ratewas 6% during 1990-2010

Significant change in the

GDP structure took placeduring 1990-2010 period

Contribution of industryand service increased

during 2005-2010 period;share of industry sectorincreased while share ofagriculture sector declined


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Medium Term Macroeconomic OutlookIndicators Actual Prov. Projection

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

GDP Growth (%) 6.2 5.7 6.0 6.7 7.2 7.6 8.0 8.0

Gross Investment( as % of GDP) 24.2 24.4 24.4 26.4 28.3 29.9 31.5 32.0

Private 19.3 19.7 19.7 21.0 22.3 23.4 24.6 24.9

Public 5.0 4.7 4.7 5.4 6.0 6.5 6.9 7.1

Indicators Actual Prov. Projection

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

TOTAL FINANCING 5.1 3.9 4.5 5.2 4.9 4.8 4.7 4.6

NET FOREIGNFINANCING 1.6 0.8 2.0 2.2 2.4 2.3 2.2 2.2Gross Borrowing 1.9 1.2 2.1 2.2 2.3 2.3 2.2 2.2

Grants 0.4 0.4 0.5 0.6 0.7 0.7 0.7 0.7

Amortization 0.8 0.8 0.7 0.7 0.7 0.7 0.7 0.7DOMESTIC FINANCING 3.5 3.1 2.5 3.0 2.5 2.5 2.5 2.4

Banking System 3.0 2.2 1.3 2.0 1.8 1.7 1.7 1.7

Non-Bank 0.5 0.9 1.3 1.0 0.8 0.8 0.8 0.7


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Resource Gap and Financing RequirementsResource gap up to 2014-15 Total: US$ 35.1 bi llion

Public sector: US$ 13.7 billion

Flow and additional requirement for public sector during FY12-FY14

Expected to receive : US$ 3 billion

Additional requirement :US$10.6 billion

Additional Financing Need During FY12-14

Average US$ 2.1 billion to finance its public investment

May have to resort to semi-consessional or commercial term borrowing

FY11 FY12 FY13 FY14 FY15

A Public Investment Required 0.9 1.8 2.7 3.8 4.5

B Expected Financing (ECF/PRSC) 0.0 1.0 1.0 1.0 0.0

(A-B) Semi-concessional/Commercial loan 0.9 0.8 1.7 2.8 4.5


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Debt Profile


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Outstanding Debt- End FY10

AmountUS$ billion

Share% of Total

Debtas % of GDP

DOMESTIC DEBT 18.8 49% 19.6%

Marketable 7.6 20% 7.9%

T-Bills 1.4 4% 1.4%T-Bonds 5.2 14% 5.4%

Non-Marketable 11.2 29% 11.7%

Special Bonds 1.0 3% 1.0%

Central Bank Loans 2.7 7% 2.8%

Retail Debt 8.5 22% 8.9%

EXTERNAL DEBT 19.2 51% 20.0%

Multilateral 16.7 44% 17.4%

Bilateral 2.5 7% 2.6%

TOTAL 38.0 100% 39.6%


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Redemption Profile-End FY10


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Rate of interest for externalconcessional ranges from 0.75%to 1.25%

Rate of interest for retail debtranges from 3.3% to 11.04%(3-5 years maturity)

Rate of interest for marketable T-bond ranges from 8% to 10.5%(5-20 years maturity)

Interest expenditure rose to 13.5%of total expenditure in FY10 from5.2% in FY97

Domestic interest vs externalinterest cost is 9:1

Interest Rate Structure and Contribution


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Debt: Currency Composition-End 2010

USD

23%

JPY

10%

EUR

19%

BDT

48%


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Debt Management Strategyand

Reform Events


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Debt Management StrategyNo Formal Debt Strategy but there is an implicit strategy

Implicit strategy of maximizing external concessionalborrowing and financing the gap from domestic sources (retailand market) while gradually reducing trend of debt to GDPratio;

The sequence of importance of the implicit debt managementstrategy is to:

Continue and expand external concessional official borrowing

Borrowing from retail sources

Borrowing from market sources

The only discretionary variable is the composition ofmarketable domestic debt (T-Bills and T-Bonds)

Implicit strategy is cheaper than recourse to commercial

external debt or domestic debt and less risky


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Initial Reforms: 2005-2007 Organized efforts started in Mid-2005 through a series of

reforms

Aseparate unitwas established that concentrated mainlyon separating debt management from cash management

Reform coincided with the growth of domestic debt aspercentage of GDP

To ensure coordination, the Cash and Debt Management

Committee was formed

Assessment of DM strengths and weaknesses wasconstrained bylack of technical capacitybut wasessential for planning further reforms


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2nd Round Reform: 2008 to 2009DeMPA was done in 2008 Firsthand status report on DeM Helped identify risk areas Helped formulate reform priorities and plans

MTDS Toolkit was introduced in 2008 Identified issues for reforms

Introduced the usefulness of the toolkit

Trained Debt managers (basic)

Developed data sharing format enabling cost-risk monitoring

MTDS based Risk Assessment done-2010 Bangladesh did its own Risk Assessment with technical support

from WB and the IMF

Results were presented to the Policy Level Management


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3rd Round of Reform: 2010-2014

Cost and Risk Assessment through MTDS could set thebase for formulating formal Medium Term Debt Strategy

Additional financing requirement for pursuing the

high growth and investment-targeted MTMF alsosupported MTDS formulation

Project-based structured Debt Management reform

programme is ongoing

Working group has been formed to submit Draft MTDSby April 2011


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Risk Assessment

ResultsUsing MTDS Toolkit


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Cost and Risk Elements of Existing Debt

External Domestic Total

Cost of Debt Weighted Average IR (%) 1.50% 10.40% 5.71%

Refinancing Risk ATM (Years) 16.91 5.07 13.67

Debt Maturing in 1 year 1.60% 15.80% 5.46%

Interest Rate Risk ATR (Years) 16.75 5.07 13.56

Debt Re-fixing in 1 Year 4.40% 15.80% 7.54%

Share of Fixed Rate Debt 97.10% 95.20% 96.56%

Exchange Rate Risk FX Debt as % to Total Debt 52.36%


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Strategies Considered

StrategyExternal :Domestic Main Characteristics

S1(Current)

40:60 External: All concessionalDomestic: Half in NSD

S2 40:60 External: 20% Concessional10% Non-concessional bilateral10% International bond

Domestic: Same as S1

S3 50:50 External: 40% Concessional5% Non-concessional bilateral

5% International bondDomestic: 25% market

25% NSD

S4 40:60 External: All concessionalDomestic: 20% NSD, 40% 5-year Market


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Baseline Pricing Assumptions and

Shocks Considered

Baseline Scenario Shock Scenario

Exchange Rate Nominal Depriciation of 3% p.a.( 1 % Real Appreciation )

One off Depriciation of 15% in FY12

Interest Rate

ExternalUS Yield Curve + 4.5% Credit Risk

Premium3% Parallel Shift

Domestic Existing Yield Curve 5% Parallel Shift


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Cost and Risk Measure: Debt/GDP Ratio

Analysisconsidered thecost and riskconsequences ofthe 4 alternativestrategies under

the baseline andshock scenarios

S1 S2 S3 S4

Baseline 38.09 38.49 38.11 38.06

FX Shock 39.59 40.01 39.58 39.57

IR Shock 39.65 40.19 39.56 39.63Max 1.56 1.70 1.47 1.57


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Cost and Risk Measure:

Interest Expenditure/GDP Ratio

S1 S2 S3 S4

Baseline 1.98 2.16 1.95 1.97FX Shock 2.01 2.19 1.98 .00

IR Shock 2.61 2.87 2.54 2.62

Maximum

Deviation 0.64 0.71 0.59 0.64


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NPV of Debt/GDP Ratio

S1 S2 S3 S4

Baseline 31.0 33.8 31.1 31.1FX Shock 26.5 29.1 26.3 26.7

IR Shock 34.3 37.8 34.0 34.4

Maximum

Deviation 3.2 3.9 2.9 3.3


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Interest + FX Capital Loss to GDP Ratio

Interest+Capital Loss to GDP

As at end FY14/15S2

S1

S3S4

2.92

2.96

3.00

3.04

3.08

3.123.16

3.20

- 0.20 0.40 0.60 0.80

Risk

Cos

S1 S2 S3 S4

Baseline 2.99 3.18 2.97 2.99

FX Shock 2.01 2.19 1.98 2.00

IR Shock 3.63 3.89 3.56 3.64

MaximumDeviation 0.64 0.71 0.59 0.64


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Other Cost and Risk Indicators:

As at End FY10 and FY15FY09/10

Strategy I Strategy II Strategy III Strategy IV

38.6 38.1 38.5 38.1 38.1

5.7 5.8 6.3 5.7 5.8Refinancing risk 13.67 15.7 13.7 15.6 15.5

5.46 8.7 9.2 7.2 8.5

Interest rate risk 13.56 23.8 18.3 23.3 23.5

7.54 22.7 35.2 26.3 22.2

96.56 87.7 83.1 87.7 87.8

FX risk 52.36 55.7 55.6 59.8 55.2* 1 year debt is treated as floating rate debt

Risk Indicators

Nominal debt as % of GDP

Cost of debt (%)ATM (years)

Debt maturing in 1yr (%)

As at end FY14/15

ATR (years)

Debt refixing in 1yr (%)

Fixed rate debt as % of total

FX debt as % of total


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Redemption Profile Under

Alternative Strategies

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2055

Strategy IRedemption profile as at end FY2014/ 15

Domestic

External

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Strategy IIRedemption profile as at end FY2014/ 15

Domestic

External

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2

055

Strategy IIIRedemption profile as at end FY2014/ 15

Domestic

External

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Strategy IVRedemption profile as at end FY2014/ 15

Domestic

External


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Conclusions

Bangladesh has made remarkable progress in DeMduring the last 5 years

With a sustainable level of debt and provisions formandatory debt repayment, DeM practices arefollowing a prudent path

Assessment of performance through DeMPA,assessment of cost risk through MTDS toolkit and

the decision to formulate MTDS are significantachievements

And, well-orchestrated medium-term reform plancan only better the debt and fiscal management


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Thank You

Documents

Bangladesh: Debt Risk Management and Use of MTDS Toolkit