Asset-Liability Management – the
Case of Hungary
London, March 6-7, 2007
András Réz, Head of Planning, Research and Risk Management
Asset-Liability Management (ALM) – Rationale
During portfolio management or management of the
balance sheet of a bank or a private company:
• Market risks or financial risks can be reduced by having similar
assets and liabilities characteristics (e.g. given liability structure
by investing in instruments with similar terms of maturity, interest
rate and currency.
• Derivative instruments can also be used to reduce „gaps”,
• With successful cover any market risks will affect assets and
liabilities on a similar way therefore actual net losses (or gains)
from market risks will be minimised.
ALM – from a Debt Manager’s Point of View
Liabilities: = debt and other obligations
Assets: = ? (difficult to identify)
•
Equity, State ownership – only divident revenues, very long
durations, state ownership usually not for profit making, not the
primary goal of the Government >> Privatisation,
•
Other state assets (e.g. motorway, national parks, army) –
theoretical value, good for balancing the State balance sheet,
but no real revenue from them,
Future discounted tax revenues – most accepted views, but
difficult to use practically for ALM calculations.
•
ALM – a Possible Point of View of the Central Bank
Assets – Foreign currency reserves, and other
assets on the CB balance sheet:
•
Rationale of ALM – Foreign currency reserves and other
(sterilisation) assets may be costly for the CB and the
Government,
•
Coordinated ALM - With coordinated foreign currency
issuance FX reserves (and other assets) can be
reduced, potential cost savings.
ALM – from the Point of View of the Government
Liability: debt, Assets FX reserves:
•
FX debt is usually cheaper (lower yields, longer terms),
•
Coordination is difficult – institutional autonomy or
independence,
Coordinational problems – different time horizon
(monetary policy – short term, inflation target, debt
management long term, cost saving, growth), different
objectives (e.g. level of local yields).
•
ALM – Problems
Stock of Foreign Reserves (1997=100%)
800%
Argentina
700%
Turkey
600%
Venezuela,
Rep. Bol.
Hungary
500%
400%
Poland
300%
Czech Republic
200%
Thailand
100%
Russia
0%
1997
1998
1999 2000
2001 2002
2003
2004
Rapid increase of foreign currency reserves in
emerging countries – need to limit the rise
ALM – Basics
Ways of FX currency reserve reductions:
•
•
Borrowed reserves – simple issue, reduce FX financing
and reserves,
Non-borrowed reserves:
Buy-back of FX debt,
Replace FX currency debt with domestic debt,
Unnecessary FX currency reserves can be used to
invest in higher yielding assets to avoid cost problems
(advisable only if reserves are coming from good BoP
position e.g. oil revenues).
ALM – Buy-backs
Stock of Brady Bonds Outstanding
(USD billion face value)
60
40
30
20
Venezuela
Russia
Poland
Mexico
Croatia
0
Bulgaria
10
Brazil
Remaining
in April
2006
50
Argentina
Peak
Foreign currency reserves are already used
actively to reduce outstanding foreign
currency debt- limited future role
ALM – Use of domestic market
Foreign Investors Share in Total Debt Issuance
(IMF Global Financial Stability Report April, 2006)
16,0%
14,0%
12,0%
10,0%
8,0%
6,0%
4,0%
2,0%
0,0%
2000
2001
2002
2003
2004
2005
By replacing foreign currency debt with domestic
debt foreign owned debt may not decrease rapidly
– FX risk replaced with interest rate risk
ALM – Basics II.
Non-borrowed FX currency reserve levels reduction
can be difficult:
•
ALM management can work if good cooperation between
fiscal and monatary policy,
•
Replacing FX currency debt with domestic debt can work
but depends on market conditions,
Coordination should work in case of outflow, CB cannot
leave debt management alone,
Slow process.
•
•
ALM – the Hungarian Case
Several institutional changes between 1990-2006:
•
Early years of setting up new systems until 1991,
•
•
Intermediate system with the CB having a major role until 1997,
Co-ordination with a strong emphasis on FXY currency reserve
levels until 2002,
•
Balanced co-ordination from 2003.
ALM – Early Years until 1991
Important measures to transform economic system,
however debt management less effected:
•
Strengthening central bank position, limitation of monetary
financing (no deficit problem projected),
•
NBH maintains its role as FX debt manager on behalf of the
government and manages FX currency reserves,
Underdeveloped local debt management by the Ministry of
Finance.
•
Economic and deficit problems emerged in the mid 1990s
ALM – Intermediate system until 1997
Economic austerity program includes development of
domestic debt management:
•
Rapid development of domestic government securities
market and institutions,
•
On the basis of local market monetary financing stopped,
later prohibited by law,
FX debt management done by the NBH according to FX
currency reserve needs.
•
Previous funding relationship creates balance sheet
problems for the NBH (devaluation losses)
ALM – Co-ordination with a Strong Emphasis on
FX reserve levels until 2002
NBH balance sheet problems solved by transformation of
foreign currency debt and management to the government in
1997:
• Foreign currency debt management becomes part of public debt
management strategy,
• NBH ensures strong coordination to reach FX currency reserve
level targets,
• Co-ordination also resulted in hedging FX debt and reserves
(currency benchmarks),
• Debt management strategy aims for renewing maturing FX debt
(no domestic monetary effect), some ad hoc deviation from the
rule by the initiative of the NBH.
ALM – Coordination with a Strong Empasis on FX
Reserve Levels – Role of Foreigners
Ratios to total government debt
60,00%
50,00%
40,00%
non-resident total holdings in HUF
30,00%
foreign currency denominated government debt in HUF
20,00%
Replacing FX
debt did not
reduce role of
foreign investors
10,00%
0,00%
1998
1999
2000
2001
2002
2003
2004
2005
2006
ALM – Balanced Co-ordination from 2003
Fiscal loosening creates fiscal problems and smaller
investors’ demand:
• New debt management strategy adopted to decreased demand
and medium term objectives (EMU accession),
• Stable FX currency debt ratio,
• NBH also ask for higher FX currency reserves (deteriorating
BoP balance),
• Net FX currency issuance exchanged at the NBH, avoidance of
simultaneous activity on the FX market.
ALM – Results in Hungary
• FX currency reserve levels are relatively low vs. peer group,
cost reduction target reached,
• Several benchmarks (e.g. funding in domestic currency, FX
debt composition) are set up using basic ideas of ALM,
• With relative success of coordination policy, other possible
measures to solve present problems (monetary, sterilisation
assets) are less taken into consideration,
• In time of economic problems, relatively small FX currency
reserve levels is not an advantage (countries with too high
levels are the benchmarks).
Conclusions
•
Volatile international flows, and small local market may result in
high FX currency reserve levels, causing problems in monetary
policy and debt management
•
Unnecessary FX currency reserves levels are costly, reduction
can be advisable
•
ALM may be introduced/implemented but practical use is difficult
due to lack of comprehensive data, independent actors, and
different objectives
•
Co-ordination is needed in case of both inflows and outflows of
capital
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