Transcript Economic and Debt crises

THE ROLE OF SAIs IN
PUBLIC DEBT
MANAGEMENT
ARUSHA 4TH SEPTEMBER 2013
Prepared by: Benjamin Mashauri
National Audit Office- Tanzania
Introduction
Public Debt Management defined
 Public debt management is the process of
establishing and executing a strategy for
managing public debt in order to raise the
required amount of funding at the desired risk
and cost levels.
Introduction
Public borrowing and debt can expand the
production and consumption choices of
current and future generations, allowing
governments to increase productive
investments and distribute the tax burden
more fairly between current and future
generations.
Introduction
 However, public borrowing and debt entail
significant risks if they are not managed
properly.
 An unsustainable public debt can impair the
government’s ability to reduce
unemployment and poverty levels precisely
when counter‐cyclical budget actions are
most needed, during an economic recession
or financial crisis
Why public debt management?
 The public debt portfolio is often the largest
financial portfolio in many countries and
can have a far-reaching impact on financial
stability – consequently, effective
management is essential.
 To ensure that the level and rate of growth
of public debt is sustainable in a wide range
of circumstances;
Why Public debt management
 To lower public borrowing costs over the long
term, thus reducing the impact of deficit
financing and contributing to debt and fiscal
sustainability;
 To avoid economic crises because of poorly
structured debt;
Few examples of economic and debt crises
experienced:
Economic and Debt crises
 Latin America (1994) and East Asia (1996) crises
Eg. Mexico
– the continued increases in U.S. real interest rates put
downward pressure on the peso and made Mexican
debt securities less attractive to investors.
– Rather than reduce expenditures, devalue the peso or
further increase the interest rate to continue attracting
investments, the government increased the issuance of
tesobonds to finance a current account deficit, even
though the sustainability of the exchange rate policy
was in doubt
Economic and Debt crises
 KITMP did not develop sufficient capacity to
adapt and manage capital inflows properly.
 Outdated banking rules, poor risk management
and weak supervision may have left these
economies unprepared to deal with the capital
flood.
 Financial institutions had little experience in
asset management.
Economic and Debt crises
 Many were making the same mistake of having
unhedged foreign currency exposure.
 Investment funds were misallocated and
institutions ended up with excessive currency
exposure and maturity mismatch.
 Corrupt practices seemed to have further
magnified the banking weaknesses, all of
which later proved fatal.
Economic and Debt crises
 The Global Financial Crisis
The credit crunch
– The global financial crisis is commonly
believed to have begun in July 2007 with
the credit crunch, when a loss of
confidence by US investors in the value
of sub-prime mortgages caused a
liquidity crisis.
Economic and Debt crises
 This, in turn, resulted in the US Federal Bank
injecting a large amount of capital into
financial markets.
 By September 2008, the crisis had worsened as
stock markets around the globe crashed and
became highly volatile.
 Consumer confidence hit rock bottom as
everyone tightened their belts in fear of what
could lie ahead.
Economic and Debt crises
The sub-prime crisis and housing bubble
 The housing market in the United States
suffered greatly as many home owners who had
taken out sub-prime loans found they were
unable to meet their mortgage repayments.
 As the value of homes fell, the borrowers found
themselves with negative equity.
Economic and Debt crises
 With a large number of borrowers defaulting on
loans, banks were faced with a situation where
the repossessed house and land was worth less
on today’s market than the bank had loaned out
originally.
 The banks had a liquidity crisis on their hands,
and giving and obtaining loans became
increasingly difficult as the fallout from the
sub-prime lending bubble burst.
Economic and Debt crises
 Euro Zone Sovereign Debt Crisis, eg. Greek
debt crisis:
Causes:
 Government deficit
Expenditure increased by 78% against an
increase of only 31% in tax revenue
 Tax evasion and corruption
– In 2010, the estimated tax evasion costs for the
Greek government amounted to well over $20
billion per year.
Economic and Debt crises
 To keep within the monetary union guidelines,
the government of Greece had also for many
years misreported the country's official economic
statistics
 At the beginning of 2010, it was discovered that
Greece had paid Golmansachs and other banks
hundreds of millions of dollars in fees since 2001,
for arranging transactions that hid the actual level
of borrowing.
Economic and Debt crises
 ] Most notable is a cross currency swap , where
billions worth of Greek debts and loans were
converted into Yen and Dollars at a fictitious
exchange rate by Goldman Sachs, thus hiding
the true extent of Greek loans
 The purpose of these deals made by several
successive Greek governments, was to enable
them to continue spending, while hiding the
actual deficit from the EU.
Economic and Debt crises
 Debt levels revealed
– Despite the crisis, the Greek government's bond
auction in January 2010 had the offered amount of
€8bn 5-year bonds over-subscribed by four times
– The continued successful auction and sale of bonds,
was however only possible at the cost of increased
yields, which in return caused a further worsening
of the Greek public deficit.
The Role of SAIs
 SAIs have no direct role to play in the
establishment of public debt management, data
disclosure policies and regulatory regimes for the
financial services sector.
 A SAI’s ability to influence and persuade public
debt managers will depend on its legal mandate,
responsibilities and credibility.
The Role of SAIs
 ISSAI 5420 and ISSAI 5430 suggest that:
– SAIs within the limits of their legal mandate,
could have a role in promoting and encouraging
policy makers to adopt debt and risk
management practices that will be sound and
robust.
The Role of SAIs
 SAIs could encourage governments to focus
more on vulnerability monitoring and give
high priority to risk management.
 SAIs could encourage data disclosure and
promote the need for a proper regulatory
and supervisory framework to be adopted
for the financial services sector.
The Role of SAIs
 SAIs could encourage governments to produce
better financial information and publish key debt
information in order to assess their financial
vulnerability and exposure
 SAIs may wish to encourage their government to
adhere to the international initiatives and
standards aimed at improving statistics disclosure
and data requirements
The Role of SAIs
 SAIs should position themselves to help
governments assess and monitor the potential
costs associated with fiscal exposures eg:
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Social security programs
Employee pension benefits
Health-related programs
Loans and guarantees to third parties
Insurance and reinsurance
Environmental clean-up costs
Banks failures
Evaluating the risk environment
 Vulnerability analysis demands the construction of
indicators that measure and prevent any situation that
might compromise a government regarding its debt
payment. It deals with answering these basic
questions:
– Can the government meet its obligations given the
current conditions?
– Are there elements or phenomena that might
disturb the prevailing situation?
Evaluating the risk
environment
 Vulnerability indicators on foreign and domestic
debt include maturity profiles, payment schedules,
sensitivity to interest rate and debt composition in
foreign currency.
 These are useful indicators to define the debt
evolution and payment capacity, and provide signs
on the decline of economic conditions that the
government and the economy might face.
Evaluating the risk environment
 Some of these indicators include:
– The ratio of debt/GDP
– The rate of growth of total debt as compared to that of
GDP.
– Deficit/GDP
– Tax revenue/GDP
– Tax revenue/Total debt
 Understanding how these variables are used and what
factors affect them will help the auditor to determine how
debt managers can protect their portfolio various
vulnerabilities.
Conclusion
Poor public debt management under degrading
market conditions can lead to public finance
weaknesses and fiscal vulnerability. Hence robust
debt strategies and proper risk management is
very critical for governments to withstand
economic shocks
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