Ninth UNCTAD Debt Management Conference
Geneva, 11 - 13 November 2013
Debt Portfolio:
Composition and Risk Management
by
Ms. Fatoş Koç
Head
Market Risk Management Department
Turkish Treasury
The views expressed are those of the author and do not necessarily reflect the views of UNCTAD
Debt Portfolio: Composition and
Risk Management:
Notes from Turkish Experience
Fatoş KOÇ
Head of Market Risk Management
Turkish Treasury
November 12, 2013
Outline

Debt stock as a parameter in public debt
management

Debt management strategies to manipulate debt
stock

Notes from Turkish experience

Final Remarks
3
Debt Stock as a Parameter in
Public Debt Management
4
Importance of Debt Stock

Considered as an important indicator of financial
health and solvency

Not only the level but also the structure of the debt
stock is an important indicator for vulnerability
assessments (maturity, currency and interest rate
composition)

Also, its relation with the macro economic
parameters (e.g. GDP, tax revenues) and sovereign
assets (e.g. International reserves, sovereign funds) needs
to be carefully evaluated.
5
Major Risks Associated with the Debt Stock


Interest rate risk

Ratio of floating rate debt

Ratio of debt with interest rate re-fixing in a short term period of time
(e.g. Less than 12 months)
Exchange rate risk


Ratio of FX denominated/indexed debt
Refinancing risk

Average time to maturity

Ratio of short-term term debt
6
Debt Management Strategies to
Manipulate Debt Stock
7
Debt Management Strategies to Manipulate
Structure

Borrowing policies
 Easier to implement
 Have limited effect on debt stock if the ratio of new
borrowing to debt stock is low

Liability management
 Needs well-designed legal and operational infrastructure
 Could more directly and rapidly affect the debt stock
8
Debt Management Strategies to Manipulate
Structure
The concept and the role of risk management

Debt managers face cost and risk trade off when
determining how to finance the borrowing requirements

Debt portfolio can be structured on the bases of cost and
risk criteria to reduce vulnerabilities to various shocks:
Strategic debt targets

Strategic debt targets provide medium term guidelines
for debt management operations

Risk management policies and risk control procedures
covers formulation and implementation of strategic debt
targets
Source: Advances in Risk Managment of Government Debt, OECD 2005
9
Debt Management Strategies to Manipulate
Debt Stock

To effectively manage the risks embedded in debt
stock, debt management strategies should
 Cover all the risks associated with the debt stock
 Have consistent targets given current portfolio
 Set target ranges instead of exact levels
 Have monitorable parameters
 Be applicable given market conditions
10
Notes from Turkish Experience
11
Debt Management Strategy of Turkey

Covers

Borrowing policies

Cash management

Implemented through medium-term strategic
benchmarks

Strategic benchmarks are
 developed by the Middle Office based on debt simulation
model and complementary scenario analyses

set up by the Debt and Risk Management Committee
12
Turkish Debt Simulation Model





Stochastic
Cost and Risk Metrics:

Cash-based interest expenditures

Level of inflation adjusted debt stock
Risk Methodology: Cost-at-risk (C@R)
Time Horizon: 5 years
Number of Scenarios: 5000
13
Turkish Debt Simulation Model
Macroeconomic
Scenario
Generation
Expected
cost & risk
of a given
strategy
Debt
Database
Cash Flow Modelling and
Borrowing Requirement
Alternative
Strategies
14
Turkish Debt Simulation Model
Scenario-1
Cost
Scenario-2
.
.
.
Strategy-1
Risk
Scenario-n
Alternative Strategies (2,3, ..., m)
Cost
Risk
15
Setting Strategic Benchmarks







Full coverage of financing requirement determined by cash
and debt management operations
Consistency among the short and medium/long-term
objectives with long term concentration
Applicable set of instruments fitting the market structure,
be awaring of the market dynamics
Aiming the market development
Balancing cost–risk trade off
Be realistic by avoiding strict assumptions
Simple tools, understandable by both decision makers and
market participants
16
Strategic Benchmarks

Reduce liquidity risk:


Reduce currency risk:


To maintain a certain level of cash reserve
To borrow mainly in TRY
Reduce interest rate risk:

To use fixed rate instruments as the major source of domestic borrowing

To decrease the share of debt which has interest rate refixing period less than 12
months

Reduce refinancing risk:

To increase the average maturity of domestic borrowing taking market conditions
into consideration

To decrease the share of debt maturing within 12 months
Composition of Central Government Domestic
Borrowing
Source: Turkish Treasury
18
Composition of Central Government Debt Stock
2013 September
2003
TRY
(Floating)
29.4%
TRY (Fixed)
24.3%
Source: Turkish Treasury
FX
(Floating)
21.7%
FX (Fixed)
24.6%
TRY
(Floating)
33.5%
FX
(Floating)
5.8%
FX (Fixed)
23.4%
TRY (Fixed)
37.3%
19
Currency Composition of Domestic Debt (%)
100
21.9
17.6
15.5
13.8
5.2
1.6
1.0
0.0
0.0
10.2
8.4
94.8
98.4
99.0
100.0
100.0
2009
2010
2011
75
50
78.1
82.4
84.5
86.2
89.8
91.6
2004
2005
2006
2007
2008
25
0
2003
TRY
FX
2012 2013
September
Percentage of TRY Debt Re-Fixed within 12 Months
95
93.7
90
86.3
85
80.0
80
80.2
78.3
75.6
75
72.7
71.6
70
70.3
68.1
67.0
65
2003
2004
Source: Turkish Treasury
2005
2006
2007
2008
2009
2010
2011
2012
21
Sep.
2013
General Government Debt (*)
(*) EU defined
(**) MTP 2014-2016 projections
Source: Turkish Treasury, MTP 2014-2016
22
Sensitivity of Gross Public Debt to Shocks
2001
2012
+ / - 2.2 points
+ / - 0.5 points
10 percent
+ / - 2.0 points
+ / - 0.2 points
25 percent
+ / - 5.0 Points
+ / - 0.5 points
Change in GDP growth rate by
2 percentage points
+ / - 1.5 points
+ / - 0.7 points
Change in Primary Surplus/GDP ratio
by 1 percentage point
+ / - 1.0 points
+ / - 1.0 points
Change in real exchange rate app/dep
by 5 percentage points
Change in TL interest rate by*
(*) Reflects percent change in TL interest rate in succeeding years.
Note: The effects of scenarios on “Gross Public Debt Stock/GDP” ratio measured by deviations from baseline
scenarios (as defined by ESA standards) based on end-2001 and end-2012 stock realizations.
Source: Turkish Treasury
23
Final Remarks
24
Final Remarks
•
•
•
•
•
•
By adopting risk based debt management approach, we cannot
avoid a crisis, however, we can minimize its effects on debt
management via increasing resilience
In that framework, implementing debt management strategies
is necessary but not sufficient for a prudent debt management
Other elements of a prudent debt management are
Efficient co-operation and coordination with monetary and
fiscal authorities
Close communication with investor base including non-banking
institutions
Ensuring transparency and accountability principles
25