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1. Public Debt Management Strategy
2
Direct(intertemporal funding at an adequate cost-risk
trade off)
Cost
Risk (refinancing, exchange rate, interest rate)
Permanent access to several funding sources
Ability to withstand a wide range of stress scenarios
Indirect(strategic role of the yield curve – externalities)
Promote the development of the local and foreign debt markets
Yield curve as a benchmark for other issuers
Develop a liquid yield curve
Short and long term instruments
1
2
3
4
Funding terms and
conditions
Option
to issue
1
2
3
4
Two Main Objectives
3
To cope with the 2008-2009 crisis fiscal and monetary policies provided unprecedented stimulus to support aggregate demand.
Significant portfolio adjustment towards emerging markets (push and pull factors).
Emerging markets have been strongly influenced by US interest rates and changes in global risk appetite.
Low and uneven growth among regions will continue to induce FX volatility.
Global conditions and lower growth in China have put pressure in commodity prices and some emerging markets.
1
2
3
4
5
2. Global Financial Markets Conditions
3. Debt Management Challenges and Opportunities
4
Strategic role of the yield curve for aggregate demand management
(externalities)
Links between monetary policy and public debt policies
• Risk free vs. risky debt (spreads pricing/ratings)
• Role of the central bank and firewalls
Public debt sustainability (stress testing, etc.)
Local (national) currency debt
Macroeconomic Dynamics
Regular business-cycle(incentives well aligned:
separability principle)
Crisis/crash (incentives may differ)
vs
5
Increasing role of foreign investors
•Diversification of the investor base
•Improved price dynamics
•Increased tail-risks (liquidity buffers are needed)
Key role of global benchmarks
Increased correlation in investors’ risk appetite
Regulatory challenges (derivatives, capital ratios, etc.)
Buy and hold investors
Market-makers
Global Portfolio Reallocation (pull-push factors)
Liquidity
3. Debt Management Challenges and Opportunities
2009
2010
2011
2012
2013
20142015
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
2.5% 3.5% 4.5% 5.5% 6.5%
Exp
ecte
d C
ost
Cost at Risk (95%)
6Source: SHCP.
Local Debt
Risk-Cost Trade Off
4. Issuance Strategy
External Debt
Risk-Cost Trade Off
2009
2010
20112012
2013
2014
2015
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
9.0% 11.0% 13.0% 15.0% 17.0%
Exp
ecte
d C
ost
Cost at Risk (95%)
Total Debt
Risk-Cost Trade Off
2009
2010
2011
2012
2013
2014
2015
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
2.70% 3.70% 4.70% 5.70% 6.70%
Exp
ecte
d C
ost
Cost at Risk (95%)
Mexico’s debt management strategy takes into account the trade-off between
expected cost and risk to optimize its debt portfolio.
7
Financial Cost
(% of GDP)
Source: SHCP.
Gross Financing Needs
(% of GDP)
e/ Estimated
4. Issuance StrategyThe Federal Government has sought to reduce costs and lower portfolio risks
through an adequate mix of currencies, debt instruments and maturities.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015e
8Source: SHCP.
Average Maturity of
External Government Debt(years)
Government Debt Breakdown by
Currency*(%)
97.0
72.3
6.5
2.717.3
0.3 3.9
0
10
20
30
40
50
60
70
80
90
100
2006 2015
USD Yen Euro GBP
* Considers only market debt.
22.0
13.4
0.00
5.00
10.00
15.00
20.00
25.00
06-I
06-I
II
07-I
07-I
II
08-I
08-I
II
09-I
09-I
II
10-I
10-I
II
11-I
11-I
II
12-I
12-I
II
13-I
13-I
II
14-I
14-I
II
15-I
15-I
II
With UMS 100yr
Without UMS 100yr**
**Excludes UMS, EUR, USD and GBP 100 year bonds.
4.1. External Markets StrategyDiversify funding sources and extend average maturity
9Source: SHCP.
4.1. External Markets StrategyMaturity extension objectives: lower refinancing risk, increases diversification,
broadens the investor base and helps differentiate from other issuers.
UMS Yield Curve
(%)
UMS 2026
UMS 2046
UMS 2110
UMS 2024
UMS 2045
UMS 2115
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0 5 10 15 20 25
Duration
USD
EUR
New investors in USD and EUR 100-year issuances*
(million)
1,843 1,500
45.8%
54.2%
30.7%
69.3%
* Order book compared to immediately prior 10 and 30 year bond issuances in each currency.
USD 1 0 0 YEAR EUR 1 0 0 YEAR
Investors in previous 10 and 30 year bonds New Investor Base
45.8%
54.2%
30.7%
69.3%
10Source: SHCP.
Average Maturity of
Local Government Debt(years)
4.2. Local Markets StrategyThe relative importance of short-term and floating rate notes has diminished and
duration has been increased (between 7-8 years since 2011).
8.0
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
06-I
06-I
V
07-I
II
08-I
I
09-I
09-I
V
10-I
II
11-I
I
12-I
12-I
V
13
-III
14-I
I
15-I
45.2
54.8
9.9
25.122.0
14.122.9
5.9
0
10
20
30
40
50
60
70
80
90
100
2006 2015Fixed Rate Bonds Inflation Linked Bonds
Cetes Floating Rate Notes
Composition of Local Government
Debt(%)
Mexico’s Yield Performance(USD and Peso)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
ene.
-08
jul.
-08
ene.
-09
jul.
-09
ene.
-10
jul.
-10
ene.
-11
jul.
-11
ene.
-12
jul.
-12
ene.
-13
jul.
-13
ene.
-14
jul.
-14
ene.
-15
jul.
-15
10 yr UST
10 yr UMS
10 yr Mbono
11
M Bonds Yield Evolution
2008-2015
(%)
Source: SHCP.
24oct08 24oct08
24oct08 24oct08 24oct08
9may13 9may13
9may13
2may132may13
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
3 year 5 year 10 year 20 year 30 year
Average Actual
4.2. Local Markets StrategyLocal debt markets have coped well with complex and challenging external
conditions in the last years.
The box limits are the 75th and 25th percentile.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
3 year 5 year 10 year 20 year 30 year
Average 4Q-15
Quarterly Issued Amounts of M Bonds
2008-2015
(million pesos)Max
Min
Max
Min
12Source: SHCP.
4.3. Stress TestsForeign holdings of local securities have been resilient to volatility episodes.
4
5
6
7
8
9
10
11
12
8
10
12
14
16
18
2007 2008 2009 2010 2011 2012 2013 2014 2015
Yie
ld
Exch
an
ge
Rate
Exchange Rate
Yield
Financial
Crisis
oct08-dec09
European
Crisis
mar11-jun12
Tapering
jun13-dec13
Current
aug14-sep15
Exchange Rate (USD-MXN) and 10yr M Bond
-1.000
-0.800
-0.600
-0.400
-0.200
0.000
0.200
0.400
0.600
0.800
1.000
10%
20%
30%
40%
50%
60%
2007 2008 2009 2010 2011 2012 2013 2014 2015
% o
f to
tal
M B
on
ds
ou
tsta
nd
ing
Financial
Crisis
European
Crisis Tapering Current
M Bond Foreign Holdings
5. Final Remarks
13
Debt Management Strategy
A sound debt management strategy is a key element of strong macroeconomic
fundamentals
Importance of flexibility in debt issuance programs (consider market conditions -
local and external risk appetite)
Debt Managers should maintain a wide range of options regarding funding
alternatives (option to issue)
Diversify the investor base (look for less correlated investors)
Consider the strategic role of the yield curve:
o Aggregate demand tool
o First building block in any funding in national currency (corporates and
households)
Importance to be perceived as a regular and predictable issuer in local currency
funding
Consider flexible issuance and hedging strategies (timing) in markets where you are
not a price setter (funding vs exposure)