Sustainable External

Debt Management

Presented by
Tarun Das
Economic Adviser, Ministry of Finance, India and
Resource Person for UNITAR

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 Contents
1. Definition of external debt
2. Conceptual issues
3. Debt Sustainability Measurements
3.1  Economy wide model in ALM framework
3.2  Different Types of Risk
3.3  Risk Management
3.4  Sustainability Indicators
3.5  World Bank Classification of Ext debt

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 1.1 Definition of external debt
“Gross external debt, at any time, is the amount
of disbursed and outstanding contractual
liabilities of residents of a country to non-
residents to repay the principal with or without
interest, or to pay interest with or without
principal”.
1. Gross external debt
2. Contractual obligation
3. Disbursed and outstanding
4. Principal with or without interest
5. Interest with or without principal
6. Concept of residency not nationality
7. Current not contingent
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 1.2 Definition of external debt
- Other Issues
1. Valuation
2. Present value of debt
3. Short-term debt – original and residual
maturity
4. Interest costs- actual / accrued
5. Foreign and domestic currency
6. Traded and unlisted securities
7. Govt and non-govt( monetary
authority, banks, others)
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 1.1 Definition of external debt
“Gross external debt, at any time, is the amount
of disbursed and outstanding contractual
liabilities of residents of a country to non-
residents to repay the principal with or without
interest, or to pay interest with or without
principal”.
1. Gross external debt
2. Contractual obligation
3. Disbursed and outstanding
4. Principal with or without interest
5. Interest with or without principal
6. Concept of residency not nationality
7. Current not contingent
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 2 Conceptual Issues
on Sustainable Debt
2.1 Debt Sustainability and Fiscal Deficit
2.2  Debt Sustainability and Current
Account Deficit
2.3  Liquidity versus Solvency
2.4 Economy wide models
2.5 Asset Liability framework
2.6 Debt sustainability indicators
 

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 3.1 Different types of risk
• Market-Based Risks
a) Liquidity risk
b) Interest rate risks
c) Credit risk
d) Currency risk
e) Convertibility risk
f) Budget/ Fiscal Risk
g) Contingent liabilities

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 3.2 Different types of risk
• Country specific and Political risks
a) appropriation of capital,
b) nationalisation of companies,
c) no repatriation of capital etc.
d) no sovereign guarantee
• Operational Risks
a) Control system failure risks
b) Financial error risk
c) Auditing/ Accounting/ Monitoring Risk
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4.1 Management of liquidity risk
(a)   Monitor debt by residual maturity
(b)  Monitor exchequer cash balance and flows
(c) Maintain certain minimum level of cash
balance
(d)  Maintain access to short-term borrowing
(e)  But, fix limits for short-term debt
(f)   Pre-finance maturing debt
(g)   Do not negotiate for huge bullet loans
(h) Smooth the maturity profile to avoid bunching
of debt services
(i)   Develop liquidity benchmarks
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 4.2 Management of
interest rate risk
(a) Fix benchmark for ratio of fixed
versus floating rate debt
(b) Maintain ratio of short-term
versus long-term debt
(c)   Use interest rate swaps

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 3.3 Management of
credit risk
(a)      Have credit rating of various scrips by
international credit rating organizations such as
S&P’s, Moody’s, JBR etc.
(b)  Identify key factors that determine credit-rating
(c)  Develop a culture of co-operation and
consultation among different departments and
with credit rating organisations
(d)   Set overall and individual counter-party credit
limits

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 3.4 Management of
currency risk
(a)    Fix benchmark for the ratio of domestic and
external debt
(b) Fix ratios of short-term /long-term debt
(c)   Fix currency mix for external debt
(d)  Determine single currency and currency pool
debt
(e)   Use currency swaps
(f)  Try to have natural hedge by linking
dominant currency of exports & remittances to
the currency denomination of debt

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 3.5 Convertibility Risk
(a) Have gradual and cautious approach
towards capital account convertibility.
(b) An orderly and sequenced manner in
line with strengthening domestic
financial systems through adequate
prudential and supervisory regulations.
(c) Encourage initially non-debt creating
financial flows followed by long term
capital flows.
(d) Short term or volatile capital flows may
be liberalised only at the end of capital
account convertibility.
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 3.6 Budget Risk
(a)  Enact a Fiscal Responsibility Act.
(b)  Put limits on debt outstanding and
annual borrowing as a percentage of GNP
or GDP
(c ) Use government guarantees and other
contingent liabilities (such as insurance and
pensions etc,) judiciously and sparingly.
(d) Fix limits on contingent liabilities
(e) Fix targets on fiscal deficit, primary
deficit
(f) Fix limits on short term borrowing
(g) Monitor debt service payments
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 3.7 Operational Risk
(a)      Have stable and sound macro-economic
policies
(b)      Have co-ordination among monetary and
fiscal authorities
(c)      Allow independence and transparency of
different offices (such as front, back, middle and
head offices) dealing with public debt
(d)      Strengthen capability of different offices
 

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 4.1 Solvency Ratio
(a) Interest service ratio –interest payments /
XGS ratio
(b)   External debt / GDP ratio
(c)  External debt / exports ratio
(d)  External debt / revenue ratio
(e)  PV of debt services/ GDP ratio
(f)   PV of debt services / XGS ratio
(g) PV of debt services / revenue ratio

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 4.2 Liquidity monitoring ratio
(a)  Basic debt service ratio- Ratio of debt services
on long term debt to XGS ratio
(b)   Cash-flow ratio for total debt or the total debt
service ratio (i.e. total debt services to XGS ratio
(c) Interest payments to reserves ratio.
(d) Ratio of short-term debt to exports of goods and
services
(e) Import cover ratio- Ratio of total imports to
total foreign exchange reserves.
(f)  Reserves to short-term debt ratio
(g) Short-term debt to total debt ratio
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 4.3 Debt Burden Ratio
(a) Total external debt to GDP (GNP) ratio
(b)    Total external debt to XGS ratio
(c)    Debt services to GDP (GNP) ratio
(d)     Total public debt to revenue ratio
(e) Ratio of concessional debt to total debt

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 4.4 Debt structure indicators
(a)    Rollover ratio- ratio of amortization (i.e.
repayments of principal) to total
disbursements
(b)   Ratio of interest payments to total debt
services
(c)   Ratio of short-term debt to total debt

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 4.5 Public sector indicators
(a)  Public sector debt to total external debt
(b)  Public sector debt services to exports
ratio
(c)   Public sector debt to GDP ratio
(d) Public sector debt to revenue ratio
(e)    Average maturity of non-concessional
debt
(f)    Foreign currency debt over total debt

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 4.6 Financial sector indicators
(a)              Open foreign exchange position- Foreign
currency assets minus liabilities plus long term
position in foreign currency stemming from off-
balance sheet transactions
(b)   Foreign currency maturity mismatch
(c)   Ratio of foreign currency loans for real estate
to total debt
(d)   External sector related contingent liabilities
(e)  Trends of share market prices
(f)    GDRs and Foreign cur conv bonds issued
(g)    Inflows of FDI and portfolio investment
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 4.7 corporate sector indicators
(a)   Leverage (debt/ equity ratio)- Normal
value of debt over equity
(b)  Interest to cash flow ratio
(c)  Short-term debt to total debt
(d)  Return on assets
(e)  Exports to total output ratio
(f)   Net foreign currency cash flow
(g) Net foreign currency debt over equity

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 4.8 Dynamic ratios
(a) Average interest rate/ growth rate of exports
(b) Average interest rate/ growth rate of GDP
(c) Average interest rate/ growth rate of revenue
(d)  Change of PV of debt service/ change of exports
(e)   Change of PV of debt service/ change of GDP
(f) Change of PV of debt service/ change
of revenue

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 Thank you
Have a Good Day

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