Part 4 Text:

Unit 1:
Introduction: What is MTDS?:
Drawing on experience, the IMF and World Bank have developed a systematic and
comprehensive framework to help countries develop an effective medium-term debt
management strategy (MTDS). MTDS is primarily focused on determining the
appropriate composition of the debt portfolio, taking into account macroeconomic
indicators and market environment. Sovereign debt management is distinct from fiscal
policy, which highlights the level of public debt, and the DSA.

In this part of the course, we will introduce you to the MTDS, a framework and
tool that aims to guide countries in developing a debt management strategy
that explicitly recognizes the relative costs and risks involved, takes account of
the linkages with other key macroeconomic policies, and is consistent with
maintaining debt sustainability.

The financial crises of the 1990s and early 2000s illustrated very clearly why the
composition of the public debt portfolio is an important factor in the degree of resilience
to external shocks. For example, in some countries such as Argentina, Brazil, Indonesia
and Russia, currency exposure was a key determinant of the increase in public debt
levels. The chart below shows the impact of exchange rate depreciation on the ratio of
public debt-to-GDP:

In other cases, realization of implicit contingent liabilities related to the banking

sector (e.g. Turkey, Korea or Thailand), or the cost of assuming other private sector
liabilities, aggravated existing vulnerabilities in the debt portfolio with a similarly
negative impact on the overall debt level and the government's budget.
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Debt management is not just about funding the budget taking into consideration the
cost-risk characteristics of the underlying instruments. Good debt management can help
avoid a crisis whereas a poor debt management could avert a country towards default.
Of course, debt management is not a substitute for other policies and reforms. It is just
one component in the sovereign strategy. To be effective it requires of political stability,
sound fiscal policies (as the Russian crisis evidenced for example) and structural reforms
for investors to believe in the sustainability of the debt and be willing to buy debt.

Source: IMF and World Bank, Developing a Medium-Term Debt Management Strategy
(MTDS)--Guidance Note for Country Authorities, 2009.

Maria A. Oliva: “Re-accessing Debt Markets: Learning from the Past” Mimeo, 2015.

A Note on the MTDS Toolkit:

The full MTDS Toolkit includes:

1. A Guidance Note which describes the process of designing and implementing a debt
management strategy in a low-income country context (though it can be equally useful
in other developing and emerging market economies).

2. An Analytical Tool which can be used for cost-risk analysis.

3. A draft User Guide to complement the Analytical Tool.

More information on these materials (as well as translated versions) can be found on
the MTDS Webpage.

In this part of the course, we intend to walk you through the steps of creating a
debt management strategy for your country. In a way, you will play the role of a
debt manager that will take into account multiple variables to craft a strategy to improve
the composition of your country's debt portfolio. At times in this part we will reference
the Analytical Tool and show you some of its outputs. However, from this course we do
not expect you to become fluent in using this Tool, as it is quite involved and
requires information on your country's debt portfolio that may not be easily accessible.
Those wishing to learn to use the Analytical Tool more extensively should consult the
detailed User Guide provided.
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The MTDS 8-Step Approach:

As discussed, designing an MTDS involves eight steps:

1. Identify the Objectives for Public Debt Management & the Scope of the MTDS Exercise

2. Identify the Costs and Risks of the Existing Debt Portfolio

3. Identify Potential Sources of Funding for the Future

4. Identify Baseline Macroeconomic Projections & Risks in Key Policy Areas--Fiscal,

Monetary, External and Market Risks

5. Review Longer-Term Structural Factors That May Impact Debt Composition

6. Identify Cost-Risk Tradeoffs for Alternative Debt Management Strategies

7. Review Implications of Alternative Strategies for Macroeconomic

Policies and Market Development

8. Recommend the MTDS for Approval

Note that if the candidate strategies determined in Step 7 are not compatible with the
macroeconomic policies or market structure the country has in place, you may want to
return to Step 4 and review what additional structural reforms may be needed in the
future. After this, you then would repeat Steps 5-7 until you have identified
alternative strategies that are compatible with the medium-term macro outlook and
consistent with reforms that could be put in place. See below:
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Also note that Steps 1-6 are the "Input Steps" that you can incorporate into the
Analytical Tool to perform a quantitative analysis of the different alternatives based on
the costs and risks of the strategies considered.

MTDS Outputs
What kind of tangible outputs should we expect from the MTDS? What will be the result
of implementing the debt management strategy?

Information on Existing Portfolio:

Table on Cost and Risk Indicators of Existing Debt Portfolio: As shown in the table
below, produced by the Analytical Tool, the MTDS provides a snapshot of the
composition of your current debt portfolio:

The table examines different cost and risk indicators for domestic, external and total
debt. These indicators will be discussed in depth in later units.

A Redemption Profile of For Existing Debt: MTDS also provides a debt manager with
a redemption profile, broken down by domestic debt, external debt and domestic
arrears. This gives an idea of the amount and nature of debt coming due over time.
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Information about Financing Strategies for Multiple Scenarios

Note that the MTDS also provides the tables and redemption profiles as shown above
that compare different strategies for the debt manager's portfolio going forward,
including:

A Tool to Quantify the Characteristics and Tradeoffs of Alternative Debt Management

Strategies: The MTDS provides several tools for analysis of strategies based on different
mixes of debt.
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One can compare different strategies and the costs/risks associated with each. For
example, the redemption file can be used to compare the refinancing risks associated to
several different strategies:

Finally, the MTDS exercise produces easy-to-use charts to help compare multiple
strategies, based on cost vs. risk. Strategies with low cost and low risk for debt-to-GDP
and interest-to-GDP at end-year T are preferable, but may not always be feasible. The
choice of strategy ultimately depends upon your medium-term objectives.
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Unit 2:
Medium-Term Debt Strategy (MTDS) Step 1: Identify the
Objectives and Define the Scope of the Debt Management
Strategy
The first of the eight steps in the MTDS Framework is to identify the objectives of the
debt management strategy and define the scope of the strategy. In identifying
objectives, a debt manager must be clear about the end goal of the debt management
as well as the intermediate steps necessary to achieve that goal. Intermediate goals can
help in measuring whether the debt strategy is on the right track to meet the end
objective.

The MTDS is a framework to design the characteristics of the sovereign debt portfolio
taking into account a medium-term objective. Therefore, we are not talking about the
debt portfolio for tomorrow or next year. Instead, we want to design a debt portfolio
that goes beyond next year's interest and includes properties that we would like the
sovereign portfolio to have in 3-5 years.

An overall deficit requires financing and this is where the medium-term debt strategy
comes in. The MTDS will tell you what kind of instruments you are actually going
to be using in order to finance this debt. Will you use fixed rate or variable rate
instruments? Might you use debt of long maturity or more short-term Treasury bills to
finance this debt? In which currency will the debt be denominated? Who will provide this
financing? All of these questions entail different answers with different amounts of cost
and different degrees of risk. The MTDS provides a framework to think about these
tradeoffs, based on your objectives.

Each period a government must decide how to fund its new debt. But its decisions may
be limited based on the characteristics of its current debt portfolio. Each period, "legacy"
debt from the past comes due. For example, as we move from period 1 to 2, 2 to 3,
etc, we will have a stock of old debt that must be serviced, as well as new debt which
must be financed. The terms that we receive on this new debt will largely depend
on the terms of past financing. Thus, we may only be able to change the
characteristics of our portfolio over time more slowly than we would like.

The scope of the strategy involves choosing the appropriate definition of "government
debt." What types of debt will we consider to be "within" the government's debt
portfolio? Should we include external debt in our analysis? What about contingent
liabilities? We will discuss scope more in depth in an upcoming video.

The objectives and scope of the MTDS will be different for every country. Identifying
both is the most crucial step of the MTDS exercise.
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Formal Objectives and Strategy:

As discussed, the debt manager needs to be clear from the start about the formal
objective(s) of implementing a new debt management strategy. This objective needs
to be consistent with the government's medium-term goals (the characteristics of the
debt portfolio it desires within the next 3-5 years, as well as any other developments it
would like to see in the country's debt market in the near future).

In most countries, there are two major goals for a debt management strategy.

1. Attaining a given risk/cost level of the government debt portfolio: Debt

managers would like to minimize both the cost of the debt portfolio as well as the risks
associated with various instruments in the portfolio. In general, there is a tradeoff
between cost and risk: cheaper instruments tend to carry more risk. Thus,
managers need to analyze these tradeoffs to create a portfolio that strikes a balance
between the two, in line with their objectives.

2. Developing the domestic debt market: Developing the domestic debt market serves
three main purposes:

 It helps broaden the investor base: The country will have more domestic entities
(i.e., domestic institutional investors such as pension funds and fund managers in
addition to banks) willing to buy sovereign debt. Authorities would ideally like to borrow
from citizens and institutions within their own country.

 It reduces the risk of the portfolio: Debt denominated in local currency does not
carry foreign exchange risk and thus reduces the currency risk that the portfolio is
embedding.

 It sets benchmarks for the rest of the economy: The development of the sovereign
yield curve serves as a reference to the corporates that also want to issue debt
instruments to fund their activities.

However, simply declaring an objective is not enough. Debt managers need a

strategy, a plan that provides direction and benchmarks for debt management
on the road to accomplishing the ultimate objective. The MTDS will help you to
craft that strategy.
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Constraints on Your Objectives and Strategy:

Both the formal objectives and the strategy of your debt management are subject to
certain constraints and realities:

 The Medium-Term Macroeconomic Outlook: What is the state of the economy today
and how will that affect setting objectives and crafting a strategy? The strategy and
objectives must take into account macro realities, such as current GDP growth, inflation,
interest rates and exchange rates. The debt manager must be cautious about being too
optimistic while projecting macro variables over the next 3-5 years.

 Stock of Debt: Today we have legacy debt with certain terms and conditions. Our
current stock of debt, as well as its composition (external vs. domestic, short-term vs.
long-term, etc.), will have something to say about our ability to borrow now and in the
future.

 Market Development: Today our country's debt market is developed to a certain

degree. We may be able to issue debt in domestic currency, but maybe not. This limits
the scope of our potential strategy.

 Market Access: We also have a certain level of international market access. For
example, if we defaulted on our debt two years ago, we may not be able to borrow from
foreigners, or our access may be limited at a very high cost. This is the reality.

 Legal and Institutional Framework: Each country has a unique legal and institutional
framework through which the authorities and debt managers must navigate. For
example, it may be that because of certain regulations we are not allowed to issue
certain types of debt. In crafting the strategy, we need to work with the framework we
have in the present and propose changes to certain restrictions that prevent us from
accomplishing the objectives. This, however, will take some time.

In short, the objectives and debt strategy are inevitably subject to certain
constraints and the reality of the country's situation. Debt managers must
plan within this reality, discuss with authorities to help change the macroeconomic and
legal realities of the country as the plan is implemented.
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Unit 3:
Medium-Term Debt Strategy Step 2: Identify the Costs and Risks
of the Existing Debt
As discussed, the second step of MTDS is to identify the costs and risks of our existing
debt (our "legacy" debt from the past).

In the current period, we have both new debt that must be issued to cover any
overall deficits for the period and payments from old debt (interest and
principal) coming due. It's likely that some of this legacy/old debt will be maturing this
period and thus we must either (1) pay off the debt or (2) roll it over by issuing more
debt. Note that rolling over our debt does not guarantee that we will receive the same
terms on the debt or even that the same creditor will again be willing to lend to us (i.e.
rollover risk).

The following equations help us understand the total amount we owe, as well as the
types of new debt that we must issue:

Equation 1: Total debt equals legacy debt from the previous period not maturing this
period, plus any new debt issuances.

Equation 2: The new debt issuances that we must finance consist of (1) legacy debt
maturing within the current period, (2) the interest payments on debt from the previous
period, (3) any primary deficits in the current period, (4) potential contingent liabilities
as defined by the scope of the MTDS, and (5) valuation effects owing to exchange rate
or interest rate movements.

The MTDS focuses on changing the composition of new debt issuances to improve the
profile of our debt portfolio. In the short-term, the debt portfolio will still be dominated
by our legacy debt. As we implement the strategy, however, we aim to smooth out
properties that are too costly or risky to move towards a more desirable portfolio.

One question that we would want to know is what is the amount of domestic debt vs.
external debt in our portfolio? The MTDS Analytical Tool helps us to see the situation
(the baseline scenario) of our current portfolio. For example, consider the debt
redemption profile of the following portfolio:
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In this case, the debt coming due soon consists of mainly domestic debt and thus the
currency risks are not so large. This is the case for countries with developed domestic
debt markets that have the capacity to absorb all this debt. In many countries, however,
the situation is the opposite. Total debt consists of little to no domestic debt and instead
a large amount of external debt. In low-income countries and some emerging
economies, a fair amount of the debt is also concessional.

Defining Cost:
Debt managers continue to look for ways to better capture the notion of cost in relation
to their debt portfolios. While the accounting cost (book value) of the total amount of
sovereign debt gives us a starting point of cost, measures that focus exclusively on
prevailing accounting or budgetary practices are often inadequate. It makes more sense
to focus on the economic concept of cost, which should aim to incorporate the unique
characteristics, vulnerabilities and qualitative aspects behind the existing debt portfolio.

Economic costs can be measured along several dimensions:

 Timing of Payments:

 Accrual: Cost is recorded when the transaction takes place.

 Due-for-Payment Basis: Cost is recorded at the time of scheduled repayment.

 Cash Basis: Cost is recorded when the actual transfer of money takes place.

 Nominal vs. Real: Does the cost account for inflation (real) or not (nominal)?

 Discounted Cash Flows vs. Regular Cash Flows: Does the cost take into account the
concept of net present value to measure payments in the future or just the stated
amount? Discounted measures tend to produce a lower cost than stated cash flows,
which is crucial when quantifying the cost of longer loans (for example, concessional
ones).
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Ideally, the debt manager should look at cost along all of these dimensions and then
evaluate which definition applies the best to their country.

______________________________________________________________________

Unit 4:
Non-Marketable Debt: Official Sector Loans
The first type of non-marketable debt is official sector loans. This category consists
of concessional and semi-concessional loans from bilateral or multilateral official
creditors.

Concessional Loans:

 Lenders: Multilateral and Bilateral Official Creditors (ex: World Bank IDA Loans, IMF
Poverty Reduction and Growth Trust)
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 Cost Characteristics: Concessional loans are cheap instruments that usually

incorporate a grant element. The grant element is typically 35% for multilateral creditors
and a bit less for bilateral creditors. Concessional loans also typically contain a grace
period during which no payments are due. Such loans are typically requested by
governments and institutions in low-income countries without much access to private
financing.

 Factors Affecting Amounts Available:

 Income Level: Typically only low-income countries.

 Quality of Institutions: Government typically in need of help managing debt.

 Access to Market Financing: Little to no market financing.

 Size of Multilateral Balance Sheet: How much is allocated to the country based
on multilateral allocation rules (ex: IMF quota)? How much funding does the
institution assess it to need?

 Economic Developments: An economy facing problems may be eligible for this

financing, but financing is not guaranteed to any country.

 Risk Characteristics:

 Interest Rate Exposure: Limited because of favorable conditions of loan (usually

long-term with a low, fixed rate).

 Exchange Rate Exposure: Payments almost always in foreign currency, but risk
mitigated by amortizing loan structure.

 Rollover/Refinancing Exposure: Mitigated by amortizing structure and nature

of creditor (trying to promote financial solvency in the country rather than create
payment pressures).

 Allocation: Linked to an allocation rule. No open credit line.

Semi-Concessional Loans:

 Lenders: Multilateral and Bilateral Official Creditors (usually Bilateral)

 Cost Characteristics: Semi-concessional loans are negotiated at a discounted rate to

market financing. These loans will also typically have conditions attached to them, such
as exchange rate requirements or minimum purchase conditions.

 Factors Affecting Amounts Available:

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 Availability of Funds: Does the creditor have the funds to lend?

 Strategic Factors: There may be some reasons why the government or

multilateral creditor is lending to you. Case-specific incentives to get involved in
that country's economy.

 Economic Developments: Funds could be tied to economic development goals.

 Risk Characteristics:

 Interest Rate Exposure: Some, in the case of floating rate loans.

 Exchange Rate Exposure: Payments almost always in foreign currency, but risk
mitigated by amortizing loan structure.

 Rollover/Refinancing Exposure: Similar to concessional

 Allocation: Linked to an allocation rule and purposes of creditor. No open credit line.

Other Non-Marketable Sources of Financing:

Aside from concessional and semi-concessional borrowing, other non-marketable
financing consists of commercial bank loans and other non-marketable
loans (including private retail debt). Here we touch upon commercial loans and loans
from the Central Bank.
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Commercial Bank Loans:

 Lenders: Domestic and International Banks

 Cost Characteristics: Commercial bank loans are most often negotiated at market
rates. They are typically more expensive than bonds, but the cost of carry may be lower.

 Factors Affecting Amounts Available:

 Strategic Factors: Various reasons why bank may lend to your country. Bank can
charge higher rates based on country's creditworthiness.

 Economic Conditions: Better economic conditions associated with increase in

loans and funds available.

 Liquidity Conditions: Excess liquidity in financial system (domestic or global)

could cause banks to park their money in loans with potentially high returns
(search for yield).

 Ability to Market Loans Through Syndication: If bank is able to package

sovereign commercial loans and sell them to investors, may be willing to lend
more.

 Risk Characteristics:

 Interest Rate Exposure: Some in the case of floating rates.

 Exchange Rate Exposure: Depends on the type of loan, but potential for
exposure if loan is not from domestic bank.

 Rollover/Refinancing Exposure: Greater than concessional or semi-

concessional because of much shorter maturity of these loans (1-5 years).

 Allocation: Will depend on allocated credit line with specific banks.

Central Bank Loans:

Government borrowing from the Central Bank is country-specific and usually a poor
source of long-term financing. Such borrowing is typically linked to fiscal
dominance, a situation in which the government is generating deficits and forcing the
Central Bank to absorb them. This dynamic usually ends up generating inflation. As the
Central Bank continues to print money, prices rise, the value of the currency
depreciates, and economic distortions begin to pervade the economy.
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Marketable Debt: International Sovereign Bonds:

The first type of marketable debt we will discuss are international sovereign bonds.
These are also called foreign bonds or Eurobonds. These bonds have become popular
instruments for countries facing pressures in domestic debt markets without access to
concessional borrowing. They are often issued offshore and underwritten by a syndicate
of security investors.

"Eurobonds":

 Lenders: International and Domestic Institutional Investors

 Cost Characteristics: The costs of Eurobonds are market determined. Eurobonds

typically include high transaction costs, such as legal fees and other transaction costs.
 17

 Factors Affecting Amounts Available:

 Track Record of Economic Performance: Countries that have performed well

recently can obtain more financing at lower yields.

 Medium-Term Outlook: Eurobonds are medium to long-term instruments and

thus economic prospects over the next 3-10 years will determine the financing
available.

 Credit Rating: Economies with better credit ratings will have to pay less yield on
their bonds. Countries with lower ratings typically pay more on their bonds.

 Investor Risk Appetite/Global Market Conditions: Funding available based on

risk appetite of creditor base. If creditor base is searching for yield, can issue
riskier sovereign bonds more easily.

 Risk Characteristics:

 Rollover Risk and Exchange Rate Exposure: Aggravated by the "bullet"

amortization structure: a country issues its bond and then does not pay until
maturity. High rollover/liquidity risk and exchange rate risk.

 Reflects Nature of Capital Market Demand: Eurobonds face exposure to

"sudden stops" in international capital markets. During times of excess liquidity,
they are in high demand. When capital dries up, however, the issuing country may
face trouble.

 Interest Rate Risk: Interest rates on these bonds can be customized (fixed,
floating, bullet.)

 Length: Potentially longer tenures for bonds than when compared to those issued
in domestic markets. Can thus spread risk from short to longer term.

 Investor Base: Helps countries to alleviate some risk by diversifying the investor
base.

Allocation: There is typically a minimum amount ($200 million) that a country must
borrow. It's often the case, however, that a country needs less than this and thus
problems arise when countries must find profitable investments for the remaining
money in order to pay the full amount back with interest.
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Marketable Debt: Domestic Securities:

The two main types of domestic market financing are Treasury bills (T-
bills) and Treasury Bonds (T-bonds). T-bills are short-term instruments with
maturities of less than a year, while T-bonds are medium to long-term instruments with
maturities as short as 2 years and as long as 30+ years.

Treasury Bills:

 Lenders: Domestic (banks, pension funds, insurance companies, mutual funds, etc.)
and International Investors

 Cost Characteristics: The cost of T-bills is determined by the market, usually by the
demand for such bills in primary auctions or the secondary market. T-bills are usually
cheaper than T-bonds.
 19

 Factors Affecting Amounts Available:

 Economic Developments: T-bills are used widely to fund gaps in government

financing. Demand for T-bills is determined by how much investors are willing to
lend you in particular months.

 Size of Banking Sector: A larger banking sector can absorb more T-bills.

 Market Development: For how long can the government issue bills? Countries
with very incipient markets must usually begin with 3-month issuances and roll
them over each quarter. Investors need confidence that the sovereign can pay
them back first.

 Risk Characteristics:

 Interest Rate Risks: Extremely high because of need to rollover the short-term
bills each period.

 Rollover/Refinancing Exposure: Very high.

 Allocation: Auction for issuances usually announced beforehand. Some governments

announce a minimum bid and maximum bid and allow investors to bid in order to
determine the final price for that particular issuance.

 Other Features:

 Useful at early stages of market development: A country cannot issue 10-

year bonds right off the bat. It must first issue bills for shorter maturities and
"deepen" its yield curve as it is able to pay back creditors and gain credibility. (We
will discuss the yield curve in a later unit).

 Versatile financial tool: T-bills are used by banks to meet required reserve
ratios and are a key tool for the functioning of the overall payment system in the
country.

 Tool of monetary policy: Central Bank issues T-bills and T-bonds to help banks
stay liquid and thus serves as a "backstop" for the economy.

Treasury Bonds:

 Lenders: Domestic (banks, pension funds, insurance companies, mutual funds, etc.)
and International Investors

 Cost Characteristics: The cost of T-bonds is determined by the market. T-bonds carry
a risk premium over T-bills because the investor does not recover his or her money for
 20

multiple years. However, T-bonds can indexed for inflation to eliminate this cost over
time. Inflation-indexed securities are called Treasury Inflation Protected Securities
(TIPS).

 Factors Affecting Amounts Available:

 Economic Developments: Depends on medium to long-term fiscal and economic

outlook for the government. Governments with more debt typically pay higher
yields on their bonds.

 Size of Banking Sector: A larger banking sector can absorb more T-bonds. T-
bonds are used by some institutions to hedge their financial positions on balance
sheets.

 Market Development: More developed markets will demand more T-bonds for
hedging and financing.

 Risk Characteristics:

 Interest Rate Risks: Shorter bonds will carry more IR risk.

 Rollover/Refinancing Exposure: Longer bonds carry less rollover/refinancing

risk.

 Exchange Rate Risk: Yes, if offered in foreign currency.

 Allocation: Auction for issuances usually announced beforehand. Some governments

announce a minimum bid and maximum bid and allow investors to bid in order to
determine the final price for that particular issuance.

 Types:

 Fixed and Floating Rate

 Zero-Coupon Bonds: Issuance value of bonds is lower than face value. Investor
buys bonds at discount, does not receive interest payments, and redeems bond at
face value.

 Indexed Bonds: Bonds that apprise their value from some underlying economic
indicator (inflation, inflation volatility, GDP growth, etc.)
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Unit 5:
Medium-Term Debt Strategy Steps 4 & 5: Identifying Baseline
Projections, Policy Risks & Long-Term Structural Factors:
Step 4 of the MTDS involves identifying baseline projections for key fiscal,
monetary, and external policy variables in the medium-term as well as potential
risks to these projections. A debt manager should have a clear understanding of the
macroeconomic framework underlying the MTDS is to be implemented and how the
country's macroeconomic accounts (real sector, balance of payments, fiscal accounts,
and monetary accounts) are affected by decisions on debt management and vice versa.
For example, there will surely be a need to understand how the macro environment
affects borrowing, how monetary policy impacts domestic debt issuance and how various
institutional and market constraints influence the debt strategy. The baseline
projections for the macro variables will be the same as those used in the
authorities' DSA.

Step 5 of the MTDS involves reviewing structural factors that will potentially
influence the desired direction of the debt composition over the long term. In
consultation with economic policymakers, a debt manager should examine items such
as:

 Economic dependence on commodities and vulnerabilities to commodity price volatility.

 Prospects for continued access to concessional finance.

 Medium/long-term trends in the effective exchange rate.

 Medium/long-term inflationary trends.

Identifying the Macro Inputs Fitting into the MTDS Template

In determining an explicit debt management strategy (and using the Analytical Tool),
the debt manager will need to take into consideration certain macro variables that will
serve as inputs into the exercise:
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This is not a theoretical or qualitative exercise. The debt manager will need concrete
numbers to determine the projected gross financing requirement for each year. The
financing needs must be well determined beforehand to avoid over-paying.

I. Example:
Assume that the government of Finopia has the following financing need for 2013:

The MTDS and accompanying Analytical Tool are designed to help you fill this gap with
specific instruments. Based on your inputs, the Tool will assist in breaking down
financing into concrete percentages. For example:
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In this case, Finopia is relying on several sources of financing, including official loans,
international bonds, commercial loans and the domestic market to pay its bills.

______________________________________________________________________

Unit 6:
MTDS Steps 4 and 5:
In this unit, we will continue our discussion of MTDS Steps 4 and 5, focusing mainly on
how prices (interest rates, exchange rates, yields, etc.) and other factors will pose risks
to the debt strategy. Next, we will discuss broader risks and complexities that need
to be taken into consideration when crafting the debt strategy. We will then dive into the
MTDS Analytical Tool to see examples of the types of stress test scenarios that can
be applied. This will help us to define our strategy and put us in a good position for
Steps 6 and 7 in which we will set up alternative strategies and assess their relative
performance.

But first, let's recap why we are so interested in assessing risks.

Recap: Why a MTDS?:

The main purpose of crafting a medium-term debt strategy is two-fold: (1) to mitigate
vulnerabilities in the funding of the budget and (2) to enhance financial market
development.

 Mitigating Vulnerabilities: Your choice of strategy can reduce risks and, therefore, the
likelihood that the country will experience a crisis. For example:

 A strategy that aims to lengthen debt maturities can help reduce vulnerabilities in
the funding of the sovereign by reducing rollover risk.

 A strategy that aims to deepen the domestic debt market can help to reduce
foreign exchange rate risk exposure.

 A strategy that aims to reduce reliance on variable interest rate debt can reduce
budgetary uncertainty and lessen exposure to interest rate risk.

 Enhancing Financial Market Development: Public debt management can effectively

support the development of more robust financial markets and improve the overall
functioning of the financial system. Forward-looking strategies to manage your debt can:

 Facilitate corporate debt markets by providing a sovereign benchmark for private

sector debt instruments as well as providing the scope for the securitization of
bank' assets.
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 Facilitate development of the market for repurchase agreements (repos) and

interest rate swaps, designed to help banks manage liquidity on their balance
sheets.

 Facilitate the development of derivatives markets, which allow for more effective
risk management throughout the economy.

______________________________________________________________________

Unit 7:
Medium-Term Debt Strategy Steps 6 and 7: Creating and
Assessing Alternative Strategies:
In this unit and the next, we will put all of our prior analysis together to implement
MTDS Steps 6 and 7.

For Step 6, in particular, we will finally identify specific debt management

strategies and assess their performance. In doing so, we will rely heavily on the
MTDS Analytical Tool and utilize the outputs that the Tool can provide to rank the
relative performance of different sovereign debt portfolios based on their cost-
risk tradeoffs.

After deciding on a few strategies, the debt manager would then review the
implications of the candidate strategies with the appropriate fiscal and
monetary authorities, and for market conditions (Step 7). In this course, we will
discuss some of the relevant variables to consider when creating a strategy that must be
in coordination with the authorities.

Alternative Strategies Example

As mentioned in the lecture, strategies must be realistic and include concrete numbers
on how the government will finance itself in the years ahead.

Below are some potential strategies:

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The 4 strategies above provide different methods of financing based on the

government's degree of financial and debt market development.

Strategy 1: Involves 100% concessional financing from the International Development

Association (IDA). This option may not be available to countries that have graduated
from concessional borrowing.

Strategy 2: Involves 100% semi-concessional financing from a bilateral lender.

Strategy 3: A mix of half concessional loans from IDA and the African Development
Fund (AfDF) and half semi-concessional from a bilateral lender.

Strategy 4: A mix of 50% concessional loans from IDA, 25% domestic 1-year
instruments and 25% domestic 5-year instruments. Note that this strategy would only
be realistic for a country that has a somewhat developed domestic debt market.
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Funding need not come all from one source. Below are some other strategies that
include many sources and aim to seek a balance of domestic vs. external sources:

Alternative Strategies: Some Issues to Consider

What are some issues to consider when creating and choosing a debt management
strategy?

Rollover Pattern: What is the combination of long-term external debt and short-term
domestic debt? Can we re-balance foreign exchange rate risk through more domestic
debt issuances? Do we have a domestic debt market that allows us to start issuing
longer term instruments in exchange for lower borrowing on multilateral sources, if
access is becoming lower and lower?

Commitment vs. Disbursement: Oftentimes disbursements of financing do not come

at the same time as the lender's commitment to finance. For example, loans may be
disbursed throughout a year or over several years. Should committed or disbursed loans
be recorded in your MTDS exercise?
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Unit 8:
MTDS Steps 6 and 7: Assessing Strategies
In this unit, we continue our analysis from Unit 7 to evaluate alternative strategies
and assess their relative performance. In order to do so, we will rely again on the
MTDS Analytical Tool to produce a ranking of candidate strategies.

Assessing the Performance of Various Strategies

Assessing the performance of various strategies involves asking and answering several
questions:

1. Is this strategy in line with the ultimate objective set back in Step One?

2. What strategy is likely to be the least costly? What risk exposures are likely to increase
with each strategy? How do our stress scenarios complicate our choice of strategies?

3. How do I weigh cost vs. risk? What measures did I identify in Step Two to help me
decide?
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Unit 9:
Medium-Term Debt Strategy Step 8: Proposal and
Implementation:
Finally, we have arrived at Step 8. (Bravo for making it so far in the MTDS Framework!).
Step 8 of the MTDS involves the submission of your proposed strategy (and
ranked alternatives) to the highest authority responsible for debt management
for approval. In this course, we will assume that the authorities found your strategy to
be top-notch, exactly what the country's debt portfolio needs in the next 3-5 years.
Nonetheless, you still have some ways to go. A strategy on paper remains just that: a
strategy. A strategy is useless unless it is implemented effectively. Thus, in this unit
we will discuss the tasks necessary to make this happen.

First, the country must define both a financing plan and a borrowing/issuance
plan that is line with the country's needs. These two plans must match up for the
strategy to work.

Second, the country must monitor the implementation of the plan and make
necessary adjustments as needed.

Third, the country must push to implement the structural reforms that the MTDS
assumes for it to be successful.

II. Financing Plan, Example

Implementation requires a financing plan. What would such a plan look like? An ideal
plan should:

 Determine the gross borrowing needs for each type of instrument to cover expected
budgetary needs and rollover (amortization) needs.

 Be consistent with the debt strategy.

 Take into consideration the timing of the financing needs and ensure that borrowing
is adequate for each period to avoid surprises.

An example plan for the year ahead can be seen below:

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Note how it clearly defines the type of instruments that will be used, the sources of
the financing, as well as the amounts that will be needed. The debt manager would
also keep a schedule to help time disbursements, repayments, etc. There will be more
on timing and coordination in the next video.

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Unit 10:
MTDS Wrap-Up:
We have now gone through all 8 steps of the MTDS Framework! Hopefully by now you
have an idea of how to go about creating an MTDS for your country. For more
information on the MTDS Framework, we highly encourage you to consult the Toolkit we
provided back in Unit 1:

The full MTDS Toolkit includes:

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1. A Guidance Note which describes the process of designing and implementing a debt
management strategy in a low-income country context (though it can be equally useful
in other developing and emerging market economies).

2. An Analytical Tool which can be used for cost-risk analysis.

3. A draft User Guide to complement the Analytical Tool.

What does the end result of such an exercise look like? As mentioned in Unit 9,
Step 8 of the MTDS is to recommend the MTDS for approval. Debt managers in several
countries have done just that and below we provide some published reports:

Published Reports

Ministry of Finance of Bangladesh, 2013, Medium-Term Debt Management Strategy.

Ministry of Finance and Economic Development of Ethiopia, 2013, Medium-Term Debt

Management Strategy (2013-2017).

Ministry of Finance and Economic Planning of Ghana, Medium-Term Debt Management

Strategy (2011-2013).

Ministry of Finance of Iceland, 2010, Medium-Term Debt Management Strategy (2011-

2014).

Ministry of Finance of Tanzania, 2011, Medium-Term Debt Management Strategy.

Other reports can be found under the Course Readings tab or on the MTDS Homepage.