Sustainable External

Debt Management

Presented by

Dr Tarun Das
Economic Adviser
Ministry of Finance
UNITAR Lecture-1 External Deb-Tarun Das 1
 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

UNITAR Lecture-1 External Deb-Tarun Das 2

 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

UNITAR Lecture-1 External Deb-Tarun Das 3

 1.2 Definition of external
debt
1. Valuation
- Other Issues
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)

UNITAR Lecture-1 External Deb-Tarun Das 4

 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

UNITAR Lecture-1 External Deb-Tarun Das 5

 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
 

UNITAR Lecture-1 External Deb-Tarun Das 6

 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

UNITAR Lecture-1 External Deb-Tarun Das 7

 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

UNITAR Lecture-1 External Deb-Tarun Das 8

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

UNITAR Lecture-1 External Deb-Tarun Das 9

 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

UNITAR Lecture-1 External Deb-Tarun Das 10

 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

UNITAR Lecture-1 External Deb-Tarun Das 11

 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

UNITAR Lecture-1 External Deb-Tarun Das 12

 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.

UNITAR Lecture-1 External Deb-Tarun Das 13

 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

UNITAR Lecture-1 External Deb-Tarun Das 14

 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
 

UNITAR Lecture-1 External Deb-Tarun Das 15

 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
UNITAR Lecture-1 External Deb-Tarun Das 16
 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

UNITAR Lecture-1 External Deb-Tarun Das 17

 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

UNITAR Lecture-1 External Deb-Tarun Das 18

 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

UNITAR Lecture-1 External Deb-Tarun Das 19

 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

UNITAR Lecture-1 External Deb-Tarun Das 20

 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

UNITAR Lecture-1 External Deb-Tarun Das 21

 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

UNITAR Lecture-1 External Deb-Tarun Das 22

 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

UNITAR Lecture-1 External Deb-Tarun Das 23

 Thank you
Have a Good Day

UNITAR Lecture-1 External Deb-Tarun Das 24