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Analyzing Cost and Risk:

The MTDS Analytical Tool

Second Asian Regional Public Debt Management Forum
Thailand, March 16-18, 2011

Lars Jessen
Banking and Debt Management

 Risk models for analyzing cost and risk on

government debt portfolios
 The Medium-Term Debt Management Strategy
 The MTDS Analytical Tool
 Some thoughts about risk modeling
Risk Models in
Debt Management

 Models are widely used by debt managers to provide

input to decision-making, and to better understand the
cost and risk trade-offs
 Provides supplement to qualitative analysis
 Starting point is a clear definition of cost and risk
– This may seem trivial, but is at the core of risk modeling
 A model should only contain elements that are
needed to answer specific questions
– Additional details = additional complexity

The MTDS Toolkit
 Supports a structured approach to developing a
medium-term debt management strategy
– Requires a clear description of the framework within which
the strategy is developed, including objectives for debt
management, macro-economic issues, etc.

 Available on the web-sites of the Bank and the Fund

(search for “MTDS”)
– Guidance Note
– Analytical Tool and User Guide
 MTDS is a framework to fully assess relevant costs
and risks associated with a government’s desired
composition of debt
The Process to Develop a
Debt Management Strategy
1. Objectives and scope of the MTDS
2. Current strategy and cost and risk of existing debt
3. Potential sources of finance
4. Medium-term macro and market environment
5. Vulnerabilities, risks, and structural factors
6. Analysis of alternative debt management
7. Review with fiscal, monetary and market
8. Propose and approve MTDS
Why a Cost-Risk
Analysis Tool?

 Supports qualitative analysis, i.e., complements

the analysis described in the Guidance Note
 Allows
– Detailed cost-risk analysis of individual strategies
– Detailed analysis of individual instruments
– Detailed comparisons of strategies
– Sensitivity of portfolios to changes in macro
What Does the MTDS
Analytical Tool Do?

 Projects cash flows as function of

– Market scenarios, i.e., future interest rates and
exchange rates
– Debt management strategies, i.e., which borrowing
– Macro assumptions, i.e., primary balances
 Computes summary statistics based on complete
cash flows at the end of each year
 Multi-currency, multi-instrument
 Closely linked with DSA and MTEF
The Basic Structure of the
Analytical Tool (1)

•Existing debt cash

•Macro variables ENGINE OUTPUT

– Primary
Cash-flow Cost
Simulation Risk
•Structure of new
– Borrowing

•Financial variables
– Interest rates

The Basic Structure of the
Analytical Tool (2)
 Excel-based
 Developed on the basis of scenario-analysis models
used by debt management offices
– Structurally, it is similar to deterministic and stochastic
scenario models used in practice
 Four separate spreadsheets
– SDModel0XL.xls – the engine
– Strategy_Test.xls – specifies strategies to be tested
– ScenarioXLTest.xls – stress scenarios
– ScenarioAnalysis.xls – comparison of strategies
Measurement of Cost

 Nominal interest cost

 Real interest cost
 Nominal interest cost to GDP
 Nominal interest cost to government revenues
 Average interest rate
 Interest cost adjusted for gains/losses on
indexed debt
 Etc.
Measurement of Risk


Risk Scenario
1 Risk1,X

Baseline Scenario Cost1,X Costbaselin


Example of Output

Interest/GDP, end 2013 Debt/GDP, end 2013

How Can a Model Support the
Development of a Strategy?
 Gives deeper insight to the debt-process
 Forces discipline
– Clear cost and risk definition
– Clarification of macro framework
– Clarification of constraints, including regarding the domestic market
– Clear time horizon
 Ensures integrity when comparing alternative strategies
 Allows identifying strategic targets
– For example, a target range for Average Time to Maturity or
Average Time to Refixing
Common Challenges in Cost-
Risk Modeling

 Simple concepts, but need lots of details

– Model building and application is a gradual process
 Lack of integrated and high quality database
– The cash-flows of the existing debt is the starting point
 Projection of market variables
– How to model future market rates if no or limited history?
 Macroeconomic projections
 Non-standard instruments
 Availability of resources for model development
and lack of technical expertise
Some Final Thoughts …

 Scenario analysis is extremely useful when developing a

Medium-Term Debt Management Strategy
– Keep in mind that models are useful - but always wrong!
 Can a sound debt management strategy be developed
without scenario analysis?
– Yes, but a model allows digging deeper
 Model building is an iterative process
– It is better to start with modest objectives and add to it than to try to
build the ultimate model
 Is the MTDS analytical tool a black box?
– Not custom-built, rather, can accommodate many types of debt
– Requires training
– World Bank and IMF are piloting a simpler model that would be
substantially more user-friendly
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