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NATIONAL TREASURY: SOUTH AFRICA CASE STUDY ON DEBT MANAGEMENT

NATIONAL TREASURY: SOUTH AFRICA CASE STUDY ON DEBT MANAGEMENT. 18 June 2003. THE SOUTH AFRICAN GOVERNMENT SECURITIES MARKET HAS GONE THROUGH VARIOUS PHASES SINCE THE LATE 1970’. SUMMARY OF HIGHLIGHTS. HISTORY

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NATIONAL TREASURY: SOUTH AFRICA CASE STUDY ON DEBT MANAGEMENT

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  1. NATIONAL TREASURY:SOUTH AFRICA CASE STUDYON DEBT MANAGEMENT 18 June 2003

  2. THE SOUTH AFRICANGOVERNMENT SECURITIES MARKET HAS GONE THROUGH VARIOUS PHASES SINCE THE LATE 1970’

  3. SUMMARY OF HIGHLIGHTS HISTORY The Government first issued Bonds at Par, periodically when needed (Late 1970’) When market developed, Government realized the importance of creating benchmark bonds across the yield curve to increase liquidity (late 1980’) Early 1990’s a debt trap was looming – Government Intensified its focus on Debt Management

  4. SUMMARY OF HIGHLIGHTS Government Macroeconomic framework under the growth, employment and redistribution (GEAR) was designed As a result, the then Department of Finance Developed a Framework of Philosophies and Principles to Managed its Debt. This led to guidelines and Strategies to managed Debt More actively.

  5. TODAY The Central Government, State-owned entities, and Local Governments issue +/- 95% of total Fixed Interest Securities in the Market Government has taken great care to prove itself as a reliable and responsible borrower, Domestically and Abroad Funding is concentrated in Large Liquid Benchmark Bonds to Provide Liquidity.

  6. CURRENTLY Government is able to Finance the Total Funding Requirement in Sophisticated, Liquid and Well – Regulated Domestic Market Much attention has been paid to Structural, legal and Infrastructure to support Market Development Interaction with: Bond Exchange of South Africa (BESA) Financial Services Board (FSB) South African Reserve Bank (SARB)

  7. CURRENTLY Government has maintained a transparent relationship with Market As a result, South Africa’s Debt Management moved beyond the stage that characterized most emerging Markets.

  8. DEVELOPMENTS IN DOMESTIC MARKET BEFORE 1990 AND AFTER – UNTIL 1999 In the late 1970’s Periodic Public Issues No Active Secondary Market Several Investigations and Reports on Development of the Market De Kock Commission Stals Report

  9. 1980’S Government issued Bonds on an open –ended TAP BASIS No clear separation between monetary and fiscal policies Investment community was concerned about the Act on Prescribed Assets Also concerned about the small holdings kept in a particular Bond.

  10. LATE 1980’S Act on prescribed was finally done away in 1989 In 1989 several smaller issues were consolidated in new 5-, 10-, 15- and 20-year Benchmark Bonds.

  11. 1990’s BESA were formally licensed in 1996 BESA adopted the group of thirty (G30) recommendations on clearing and settlements Formal recognized clearing house (UNEXCOR) was introduced Today all BESA members benefit from electronic trade reporting, matching and settlement Electronic Net Settlement takes place each trading date and is facilitated by Four Settlement Agent Banks and their Central Depository LTD

  12. INTRODUCTION OF AUCTIONS AND MARKET-MAKING Early 1990’s SARB was responsible for market-making of Government Bonds on an Agency Basis Method of Selling Bonds on Demand Basis was reviewed Regular Auctions were introduced In 1998 the National Treasury appointed 12 Primary Dealers (6 Local + 6 Foreign)

  13. PRIMARY DEALERS REASONS Reduce refinancing and market risk Improve liquidity and efficiency To create clear and Transparent Price Formation CRITERIA Local and Non-Residents Market-Makers to hold a specified Minimum amount of Rand-Denominated Capital in South Africa

  14. PRIMARY DEALERS REQUIREMENTS IDENTIFIED BEFORE APPOINTING PRIMARY DEALERS: STRUCTURAL IMPROVEMENTS CT+3, Market Surveillance, Minimum Capital Requirements ect. LIQUIDITY ENHANCING Continuous provision of Market-Related Bid and Offer Prices

  15. FRAMEWORK OF PHILOSOPHIES AND PRINCIPALS SITUATION BETWEEN EARLY AND MID-1990’s: An ever-increasing Budget Deficit Rising Stock of Debt Rising cost of Servicing the Debt Interest Rates were high Average Maturity of Debt Portfolio below 10 years

  16. FRAMEWORK OF PHILOSOPHIES AND PRINCIPALS 60% of stock of bonds had to be refinanced within 5 years Besides the net new deficit, a high % of existing debt had to be refinanced in an environment of high interest rates. The ever looming Debt Trap and this Triggered the focus on Prudent Debt Management

  17. FRAMEWORK OF PHILOSOPHIES AND PRINCIPALS A framework of philosophies and principals to manage Public Debt, Cash and Risk, was developed and Approved by Parliament. An Official Public Debt Office was Established. Asset and Liability Management

  18. EVOLVING DEBT MANAGEMENT STRATEGY - 1999 No longer at a nascent stage Debt Management Objectives Revised (from Strategic to Active Debt Management) Investors willing to Commit their Funds at the long End (27 year maturity) Active Participation of Foreign Investors Research Paper – Comprehensive Debt Management Framework

  19. COMPREHENSIVE DEBT MANAGEMENT APPROACH IDENTIFIED CERTAIN POLICY GAPS i.e. Design and use of instruments Use of derivatives Maturities Proper coordination of the funding activities of State Owned Enterprises (SOE’s) Coordination of Liability Management and Monetary Policies

  20. ACTIVE DEBT MANAGEMENT INCLUDES How Primary Issuances are Designed and Managed How Debt Instruments are Designed and Traded How Liquidity is Provided Concentrate on Actively Managing the Outstanding Stock of Debt

  21. MAIN CHALLENGES TODAY Ways to uphold an efficient, transparent and liquid Government Bond Market in an Environment with declining borrowing needs Budget Deficit Decreased from 8% in the early 1990’s to 1,5% in 2001/02 This has been achieved by means of Active Debt Management Strategies

  22. ACTIVE DEBT MANAGEMENT STRATEGY TOOLS Debt Consolidation (Switched) Debt Buybacks Inflation-Linked Bonds Stripping of Government Bonds SWAPS

  23. FOREIGN BORROWING Partial – Debt Standstill (1984 – 1985) Four Debt Standstill Agreements Final Repayment was made in August 2001

  24. RETURN TO FOREIGN MARKETS IN 1994 First Issue after return was a USD Global Bond (US$750 million) Followed by a Japanese Yen Bond in 1995 Integrated Strategic Approach has been followed when entering the Foreign Market to Fund the Budget Deficit Usually Foreign Funding Amounts to US $1 billion per fiscal year.

  25. PRIME FOCUS OF FOREIGN FUNDING To create Bench Marks in Specific Foreign Markets Mainly due to the capability of South Africa to Fund total deficit in Domestic Capital Market More recently another objective – to eliminate the Net Open Forward Position (NOFP) of Government as kept at the SARB

  26. RISK MANAGEMENT FRAMEWORK From 1996 – 1999 three Risk Management objectives drove Liability Management Controlling the Quantum of Capital Optimizing the return on Capital Managing the Cost of Capital

  27. RISK MANAGEMENT TODAY 1996 needs to be re-aligned due to evolvement of Debt Management Risks Identified are: Short and Long Term liquidity Interest Rate Risk Currency Risk Budget Risk

  28. RISK MANAGEMENT TODAY Credit Risk Downgrade Risk Operational Risk Benchmark was Formulated

  29. CASH MANAGEMENT Manage Liquidity Plot Projected Flows and Monitor the Actual Flows Against Projections Create an Appropriate organizational Structure Engineer the required Linkages between Tax and Loan Accounts

  30. MANAGING INVESTOR RELATIONS ANNUAL INVESTOR PROGRAMME Road Shows Primary Dealer Meetings One-on-One Meetings

  31. MANAGING INVESTOR RELATIONS Road Shows to Promote the Exchange of Ideas between National Treasury and Investors (Foreign and Domestic) on issues of mutual interest Primary Dealers, National Treasury, the SARB and Bond Exchange coordinate their responsibilities to ensure a transparent and efficient Bond Market.

  32. LEGAL FRAMEWORK Public Finance Management Act Forms basis for Financial Administration Stipulates limits on borrowing, guarantees and other commitments Improve accountability of Debt Management Lists the purpose for which the Minister of Finance, as an executive authority, may borrow

  33. CONCLUSION • South Africa has gained valuable experience and learned important lessons in public debt management: • Development of liquidity in both financial instruments and in the capital markets • Development of a yield curve and issuing bonds across the yield curve • Diversification of fixed income instruments • Market making, trading and investment risks were transferred to the market • Possibility to issue bonds in a proper, well structured (regulated) and developed market • Introduction of cash management

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