Formulation and Implementationof Annual Debt Management Strategies in Turkey
M. CoşkunM. Coşkun CANGÖZ CANGÖZ
Acting Director General of Public Finance Acting Director General of Public Finance
Turkish TreasuryTurkish Treasury
1
Annual Financing Program(Billion YTL) 2006 Prog
I. Total Debt Service 168,4
Principal 126,2
Interest 42,2
Domestic Debt Service 144,5
Principal 108,8
Interest 35,7
External Debt Service 23,8
Principal 17,4
Interest 6,4
II. Financing Items 168,4
Non-Debt Resources 40,2
Primary Surplus 30,2
Privatization 7,0
Collections from On-lent Loans 3,1
Change in Bank Account 0,0
Total Borrowing 128,1
External Borrowing 16,7
Domestic Borrowing 111,4
Memo Item:
Roll-over ratio for Domestic Borrowing 77,1%
2
Principles and Constraints
Regulation on the Principles and Procedures of Coordination and Execution of Debt
and Risk Management
(Published in the Official Gazette dated September 1, 2002 and no. 24863)
Principles
Article 4- The execution of public debt and risk management shall be based on the
following principles:
a) To follow a sustainable, transparent and accountable debt management policy
that conforms to monetary and fiscal policies, in line with macroeconomic
equilibriums,
b) To address financing requirements with the lowest possible cost in the
medium and long term, taking into account the risk level determined according
to domestic and international market conditions.
3
Annual Financing Program(Billion YTL)
I. Total Debt Service
Principal
Interest
II. Financing Items
Non-Debt Resources
Primary Surplus
Privatization
Collections from On-lent Loans
Change in Bank Account
Total Borrowing
External Borrowing
Domestic Borrowing
Memo Item:
Roll-over ratio for Domestic Borrowing
Sustainability
Fiscal Policy
Macroeconomic and political performance
Monetary policy
Debt Management Policy
Market sentiment
Lowest Possible Cost
Accountability & TransparencyPrudent Risk Level
4
Policy ObjectivesMonetary Policy
-Price Stability
- Financial Stability Reports
- Analysis of macroeconomic and fiscal policies
- Monitoring financial markets
- Caring the Payment System
- Credit facility by open market operations
- Credit facility for extraordinary situations
Fiscal Policy
- Efficient use of public funds for the provision of social goods and services
- Budget Document
- Tax and transfer policies
- Deficit financing
-Setting the major macroeconomic targets
Debt Management Policy
- Meeting the Financing Requirement
- Minimum cost with a prudent level of risk
- Deepening the market
- Widening the investor base
- Setting a medium & long term financial horizon
- Benchmark securities
5
Strategy Formulation
Change in Interest Rates
Contingent LiabilitiesLoan GuaranteesPerformance GuaranteesBanking Sector Guarantees
Market Appetite / Demand
Economic and Financial Conditions
Legal Conditions
Bank DepositFinancial Assets
On-Lent LoansUndertaken Guarantees
External DebtDomestic Debt
Change in FX Rates
Fiscal Risk
6
Aims to identify probable limits within which the costs of debt may fluctuate (the degree of market risk) for a given strategy.
Serves as a tool for comparison of alternative borrowing strategies in terms of expected costs and risks.
Strategy Formulation... (cont.)Strategy Formulation... (cont.)
Cost at Risk – C@R
7
Simplicity (clear communication of the medium/long-term objectives of debt management)
Applicability (should fit the market environment)
Robustness (should not rely on too strict assumptions)
Credibility (should have a good track record of performance)
Strategy Formulation... (cont.)Strategy Formulation... (cont.)
8
Cost of any borrowing strategies
under the base scenario
Strategy Formulation... (cont.)Strategy Formulation... (cont.)
Deterministic Simulation Model
Risk Scenario
Risk
Base Scenario
Time
Cost
Risk: Cost differences between the alternative scenarios and the base scenario
Borrowing Strategies Module
Measurement of the costs of borrowing strategies under alternative scenarios including the base scenario.
Cost
Base Scenario
Time
9
Efficient Frontier
Strategy Formulation... (cont.)Strategy Formulation... (cont.)
Cost
Risk
9
5
6
8
7
1310
1
23
4
16
1512
11
14
1718
2221
20
19
RelativeCost at Risk
ExpectedCost
Absolute Cost at Risk
Cost at Risk
10
58.8
J02
M M J S N J03
M M J S N J 04
M M J S N J 05
M M J S N J 06
M
8.6
13.216.4
18.923.3
9.4
2001 2002 2003 2004 2005 2006 (1)
16.4
12.79.4
4.7
0.9
(0.7)
2001 2002 2003 2004 2005 2006(1) (2)
6.3 6.9 6.5 6.5
4.2
5.5
2001 2002 2003 2004 2005 2006P
Strategy Formulation... (cont.)Strategy Formulation... (cont.)
Public Sector Primary Balance (% of GNP) Public Sector Borrowing Requirement (% of GNP)
Debt Service- Interest Expenditures / GNP Central Bank Reserves (Billion USD)(%)
(%)
(1) Estimation of realization by end of year(2) Program
(1) Program.
2001 2002 2003 2004 2005 2006Interest Expenditures 41.1 51.9 58.6 56.5 45.7 46.3
(Billion YTL)
(1)
Fundamentals
11
Strategy Formulation... (cont.)Strategy Formulation... (cont.)
74.174.2
67.4
63.0
52.8
25.925.8
32.6
37.0
47.2
Total YTL Portfolio Total Forex Portfolio
2002 2003 2004 2005 2006(1)
13
16
19
22
03.01.05 23.02.05 13.04.05 02.06.05 21.07.05 09.09.05 28.10.05 20.12.05 13.02.06 03.04.06 23.05.06 11.07.06
(%)
0
1000
2000
3000
Mio
YT
L
Volume Interest Rate
V
Secondary Market Portfolio Preference of Financial Sector
Liquidity in the Market Investor Base
(1) As of March 31, 2006Porfolio refers to deposits, repos, government bonds, investment funds
Market Structure
8,2
13,212,712,0 11,4 10,5 11,0
0
50
100
150
200
250
300
2004 2005 M 06 N 06 M 06 H 06 T 06
(%)
Mio
YTL
0,02,04,06,08,010,012,014,0
Domestic Debt Stock Foreign Investors-1.500.000
-1.000.000
-500.000
0
500.000
1.000.000
1.500.000
2.000.000
2.500.000
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
12
Strategy Formulation... (cont.)Strategy Formulation... (cont.)
The fulfillment of financing requirements at the lowest possible cost in the medium and long term in accordance with the levels of risk determined in consideration of domestic and external market conditions and cost factors.
Strategic Benchmarks
Raise funds mainly in TRL by issuing zero coupon and couponed bonds
Use fixed rate instruments as the major source of borrowing and limit issuance of Floating Rate Notes
Increase the average maturity of domestic borrowing, considering the market conditions, by using 5 year-bonds
Have a strong cash reserve in Central Bank
Full redemption of FX indexed local government bonds
Max. 80 % roll-over of FX denominated local government bonds
13
Strategy Implementation
2006 Borrowing Strategy
Improve the predictability by announcing monthly auction calendar
Introduction of benchmark borrowing
Increase the liquidity of the securities by reducing the number of issuances and re-openings
Monthly issuance of YTL denominated fixed and floating rate semi-annual couponed securities
Introduce buy-back auctions
Introduce inflation indexed bonds
Close coordination with market participants and primary dealers
14
10
15
20
25
30
35
40
J 05
F M A M J J A S O N D J06
F M A M J J A
8
10
12
14
16
18
20
22
J 05
F M A M J J A S O N D J06
F M A M J J A
Strategy Implementation… (cont.)
Interest Rates on Issuance (%) Maturity on Issuance (Month)
Balance of Treasury AccountComposition of Domestic Borrowing
60%
80%
100%
120%
140%
160%
180%
Jan Feb Mar Apr May Jun Jul Aug
Deposit / Monthly Debt Service
Deposit / Monthly Domestic Debt Service1,310,1Float
0,00,8Fixed
1,310,9FX Borrowing
31,018,8Float
67,770,3Fixed
98,789,1TRL Borrowing
100100Total Borrowing
32,328,9Floating Rate
67,771,1Fixed Rate
100100Total Borrowing
Jan – Jul ‘06Jan – Jul ‘05%
15
Strategy Implementation… (cont.)
31.12.2002
35.0
40.0
45.0
50.0
55.0
60.0
Days
Inte
rest
Rat
e (%
)
31.12.2003
20.0
22.0
24.0
26.0
28.0
30.0
Days
Inte
rest
Rat
e (%
)
31.12.2004
0.0
5.0
10.0
15.0
20.0
25.0
Days
Inte
rest
Rat
e (%
)
30.12.2005
12.0
12.5
13.0
13.5
14.0
14.5
15.0
Days
Inte
rest
Rat
e (%
)
Yield Curve Construction
16
YTL64%
FX16%
FX Indexed20%
YTL FX FX Indexed
Strategy Implementation… (cont.)
2001 2006 July
YTL FX FX Indexed
YTL 85%
FX 14%
FX Indexed 1%
Domestic Debt Stock by Instruments
17
4138,239,833,435
14,325,230,5
4555,4
90,4
55,363,4
70,378,4
TL Foreign Exchange
2001 2002 2003 2004 2005
Strategy Implementation… (cont.)
Public Net Debt Stock / GNP (%)
Debt Service- Interest Expenditures / GNP
(%)
8.6
13.216.4
18.923.3
9.4
2001 2002 2003 2004 2005 2006 (1)
18
Strategy Implementation… (cont.)
(%)
55.8 58.146.3 41.5 37.6
34.2 26.4
29.428.5 31.8
10.015.5 30.0
30.0 30.6
FX Denom / FX Indexed TL Floating TL Fixed
2001 2002 2003 2004 2005
Increasing Endurance for Vulnerabilities
19
Strategy Implementation… (cont.)
Elasticity
BASED ON STOCK COMPOSITION
IN 2002 BASED ON STOCK COMPOSITION
IN 2005
CHANGE IN DEBT
STOCK / GNP CHANGE IN DEBT
STOCK / GNP
10 % Real Depreciation/ Appreciation of TRL
+ / - 4.7 Per cent + / - 1.5 Per cent
300 bps Increase / Decrease in Real Interest Rates of TRL Borrowing
+ / - 1.0 Per cent + / - 1.2 Per cent
1 % Increase / Decrease in GNP Growth
+ / - 0,8 Per cent + / - 0,6 Per cent
1 % Increase / Decrease in Primary Surplus
+ / - 1.0 Per cent + / - 1.0 Per cent
20
Strategy Revision
13
16
19
22
03.01.05 23.02.05 13.04.05 02.06.05 21.07.05 09.09.05 28.10.05 20.12.05 13.02.06 03.04.06 23.05.06 11.07.06
(%)
100000
110000
120000
130000
140000
150000
160000
170000
180000
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep
-05
Nov
-05
Jan-
06
Mar
-06
May
-06
Jul-0
6
Central Bank Interest Rates (%) TRL/$ Rates
EMBI + IndexFED Rates
100
150
200
250
300
350
400
450
A04
O05
Ş05
M05
N05
M05
H05
T05
A05
E05
E05
E05
K05
A05
O06
Ş06
M06
N06
M06
H06
T06
(bp)
EMBI+ EMBI+ Türkiye
-
1,0
2,0
3,0
4,0
5,0
6,0
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep
-03
Nov
-03
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep
-04
Nov
-04
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep
-05
Nov
-05
Jan-
06
Mar
-06
May
-06
Jul-0
6
%
21
Strategy Revision
Continue announcement of monthly auction calendar
Reduce maturity
Shorten the maturity of 5-year floating rate semi-annual coupon securities
Suspend monthly issuance of 5-year YTL denominated fixed semi-annual coupon securities
Increase the number of zero coupon bonds up to one year maturity
Reduce roll over ratio
Introduce domestic bond exchange auctions
Postpone Introduction of inflation indexed bonds
Increase coordination with market participants and primary dealers
Introduce PD expectations survey
Change tax regime of government borrowing instruments
22
Guarantee Limit
Limit for On-lent loans
Risk Account - A reserve for unexpected payments
Guarantee Fee
On-lent Fee
Partial Guarantee
Managing Fiscal RisksManaging Fiscal Risks
23
Credit Risk Model
Quantitative spreadsheet models where the behaviors of guaranteed institutions are simulated under different macroeconomic conditions
Credit Scoring Model
Model that forecasts default one period ahead through a linear weighted combination of observable explanatory variables
Managing Fiscal RisksManaging Fiscal Risks … … (cont.)(cont.)
24
EL ML
Liability
Possible Loss, x
Prob
abil
ity
of L
oss
99% MPL
EL: Expected (Average) Loss
MPL: Maximum Probable Loss
ML: Maximum Loss
1
ELportfolio=ΣELiMPLportfolio≠ΣMPLiMPLCi<=MPLi
Managing Fiscal RisksManaging Fiscal Risks … … (cont.)(cont.)
25
Year
Year Year
Year
NetIncome
Debt Payment
Reserves
Loss Distribution
Recovery Distribution
Macro Scenarios
PortfolioModule
ElectricityModel
. . .Model
MunicipalityModel
Expected LossMax Probable Loss
$27$156
GDP
Inflation
Exchange Rates
Credit Risk Model
Managing Fiscal RisksManaging Fiscal Risks … … (cont.)(cont.)
26
Statistical Tests Z-score equation
Risk Account
Financial Ratios Probability of DefaultCompany Default Information
Expected Loss Guarantee Fee
Past CollectionPerformance
Credit Scoring model
Managing Fiscal RisksManaging Fiscal Risks … … (cont.)(cont.)
27
Comprehensive Debt Management Approach
Prudent Macroeconomic Policies and Strong Fundamentals
TransparencyAccountability
Foreseeable Debt Management Policies
Broader Investor Base
Increased Financial Stability
Increased Market Confidence
Improved Borrowing Conditions
Strong Debt Management Capacity
28
Thank You