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M A R C H 2 0 0 5 Public Debt Risk Management Anderson Caputo Silva Head of Public Debt Strategic Planning Department Brazilian National Treasury Rio de.

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Presentation on theme: "M A R C H 2 0 0 5 Public Debt Risk Management Anderson Caputo Silva Head of Public Debt Strategic Planning Department Brazilian National Treasury Rio de."— Presentation transcript:

1 M A R C H Public Debt Risk Management Anderson Caputo Silva Head of Public Debt Strategic Planning Department Brazilian National Treasury Rio de Janeiro, Brazil March 2005 FIRST ANNUAL MEETING OF LATIN AMERICAN AND CARIBBEAN PUBLIC DEBT MANAGEMENT SPECIALISTS

2 Ministério da FazendaTesouroNacional Fundamental Challenges to Public Debt Risk Management - Main Objective Minimize long-term costs, subject to prudent risk levels - Scope of Action Search for a Benchmark – What is the optimal debt composition (steady-state) in terms of types of instruments, maturities and currencies? Strategic Planning – How fast should (can) we get to the Benchmark? Annual Borrowing Plan and Medium-term borrowing strategies Risk Monitoring - Likelihood of meeting targets for debt profile, exposure to different types of risks (refinancing, market, budget, legal, etc.) Asset and Liability Management Framework

3 Ministério da FazendaTesouroNacional Institutional Structure History CODIP (domestic debt) x COREX (external debt) New paradigm: back, middle e front offices Deputy Secretary III (Responsible for Public Debt) CODIP (Front Office) COGEP (Middle Office) CODIV (Back Office) Registering, controlling, payment and monitoring domestic and external debt budget. Long-term planning, Risk management, scenarios generation (macroeconomic team) and Investor Relations Short-term refinancing strategies and the issuance process by public auctions or direct issuance (special operations)

4 Ministério da FazendaTesouroNacional Economic and financial research; Participate on the middle and long term financing strategy; Monitoring, analyzing and forecasting domestic and external scenarios. Maintain and improve relationship with investors and market analysts; Broaden the investors Base; Provide internal and external investors with accurate data, aiming at increasing National Treasury´s actions; Assist Rating Agencies. Develop studies on public debt management; Monitoring peer countries risk developments; R&D to other debt management offices. Monitoring risk exposure indicators and Asset and Liabilities Management; Identify and propose the optimal structure of asset and liabilities; Middle and long term strategic planning. MIDDLE OFFICE

5 Ministério da FazendaTesouroNacional Development of the Public Debt Benchmark; Proposes the guidelines and objectives for medium and long-term refinancing strategies (PAF/PPP); Risk Analysis, considering Market point of view (demand side) Value-at-Risk VaR Dolar-Value of 01 Basis Point DV01 Monitoring the Annual Borrowing Plan limits; Monitoring proposed strategies and their modifications; Monitoring public debt risk indicators at risk Indicators (Cost-at-Risk, Cash-Flow at Risk, Budget-at-Risk) Stress testing Assets and Liabilities Management Support for front-office operations. Risk Management – A broad scope of activities

6 Ministério da FazendaTesouroNacional Risk Management Risks Considered: Value Market Risk (fluctuations of public debt value, caused by volatility in macroeconomic indicators); Refinancing Risk (Volatility in the cashflows or problems at refinancing time); Liquidity Risk; Budget Risk; Demand Side Risk (Market point of view); Others. National Treasury works considering an ALM framework in all analysis.

7 Ministério da FazendaTesouroNacional Development of a Public Debt Strategy and Risk Management System (GERIR) Other systems Assets and Liabilities Control System; Matlab Routines; Excel, Access (Visual Basic for Applications – VBA); Integration with other back/front-office systems; Capacity - Technological Resources

8 Ministério da FazendaTesouroNacional Benchmark Studies Set Steady-state for relevant macroeconomic variables; Test alternative debt compositions (fixed, floating, inflation and fx-linked instruments); Economic evolution: modeling of the main macroeconomic variables: interest, exchange rate and price index; Two alternative approaches: Correlated stochastic process Macro-structural models

9 Ministério da FazendaTesouroNacional Benchmark Studies Settle the Composition Calculate several macroeconomic variables for different scenarios Pricing assets Calculate debt cost of carrying Determination of the Debt/GDP relation for each scenario Risk and return of the Debt/GDP relation Hold results (composition and risk/return of the Debt/GDP relation) Correlation matrix calculation Creation of the efficient frontier Performance measure of the National Treasury

10 Ministério da FazendaTesouroNacional Benchmark Studies - Model Simulation VARIABLES PATH SIMULATION DEBT/GDP SIMULATION

11 Ministério da FazendaTesouroNacional Portfolio selection => the financing efficient frontier (trade-offs well explained by the model) For the determination of the benchmark is necessary to choose the risk aversion of the government (society) The model indicates perfomance measures Efficient criteria based on the efficient frontier Benchmark Studies Results

12 Ministério da FazendaTesouroNacional Medium-Term Planning - Annual Borrowing Plan – PAF : Stages of the PAF : Elaboration of alternative deterministic scenarios (optimist, pessimistic and neutral); Elaboration of alternative strategies (state contingent); Determination and evaluation of the financial and risk statistics; The definitions of the limits to the main indicators (outstanding debt, average maturity, debt falling due in 12 months, composition of domestic and total Federal Debt); Accomplishment and revision of the results (PAF revision ); Monitoring execution and need for tactical corrections in the financing strategy.

13 Ministério da FazendaTesouroNacional ALM Integrated management of asset and liabilities of the central government Map of asset and liabilities of the National Treasure and the Central Government (National Treasury + Central Bank)

14 Ministério da FazendaTesouroNacional Integrated management of asset and liabilities (ALM)

15 Ministério da FazendaTesouroNacional Monitoring market risk VaR LTN DVO1 LTN

16 Ministério da FazendaTesouroNacional Targets set in the Annual Borrowing Plan

17 Ministério da FazendaTesouroNacional Monitoring PAF Limits HigherLowerBasicObserved

18 Ministério da FazendaTesouroNacional Risk Indicators Traditional Indicators average maturity, debt falling due in 12 months, composition, etc. Stochastic Indicators Cost-at-Risk (CaR), Cashflow-at-Risk (CFaR), Budget-at-Risk (BaR), Value-at-Risk (VaR).

19 Ministério da FazendaTesouroNacional Stochastic risk indicators General methodology Generation of correlated stochastic scenarios Effects of the scenarios on the public debt Calculus of uncertainty for specific indicators

20 Ministério da FazendaTesouroNacional Stochastisc Risk Indicators Stochastics Scenarios – models Interest-rate: Cox, Ingersoll and Ross – CIR Inflation: geometric brownian movement Exchange-rate: Chan, Karolyi, Longsta and Sanders - CKLS for real exchange-rate Correlation for Single Value Decomposition (SVD)

21 Ministério da FazendaTesouroNacional Stochastisc Risk Indicators Cost-at-Risk (CaR) The CaR indicates, to a level of significance, the maximum value that the amount of the debt can achieve, in a specific date in the future. Simulation of the debt amount into differents scenarios. Contemplates the refinancing strategy.

22 Ministério da FazendaTesouroNacional Stochastic Risk Indicators Cashflow-at-Risk (CFaR) O CFaR indicates, to a level of significance, the maximum value that the each cash flow can achieve, in its maturity date Simulation of each cash flow of the debt into differents scenarios.

23 Ministério da FazendaTesouroNacional Stochastic Risk Indicators Budget-at-Risk (BaR) O BaR indicates, to a level of significance, the uncertainty of the debt budget, or, in another view, indicates the probability of the projected debt expenses overcome the approved budget by the Congress.

24 Ministério da FazendaTesouroNacional Annex

25 Ministério da FazendaTesouroNacional GERIR - Objectives System objectives: Helps the integrated analysis of the assets and liabilities Improves the public debt strategy elaboration and evaluation Estimates the financial indicators and the risk to the National Treasury assets and liabilities. Helps in the evaluations of others National Treasury operations with the market.

26 Ministério da FazendaTesouroNacional Main Inputs of the System: SCENARIOS: The system is able to use different macroeconomic scenarios or construct them based on market informations. ASSETS AND LIABILITIES PORTFOLIO: The user can choose all the assets and liabilities or just a specific selection. STRATEGY: Many domestic and external debt strategies can be simulated and compared among them simultaneously. The system can elaborate short and long-term strategies using its own methodology. GERIR – Scope and Flexibility

27 Ministério da FazendaTesouroNacional Main Results of the System: Reports with the main debt indicators and risks (average maturity,outstanding stock, duration, debt falling due in 12 months, composition, maturity, etc) Stochastic indicators (CaR, CFaR, BaR e VaR) National Treasury assets and liabilities map. GERIR – Results

28 Ministério da FazendaTesouroNacional GERIR – Front Page

29 Ministério da FazendaTesouroNacional GERIR - Scenarios

30 Ministério da FazendaTesouroNacional GERIR – Portfolio Selection

31 Ministério da FazendaTesouroNacional GERIR – Short-term strategies

32 Ministério da FazendaTesouroNacional GERIR –Stochastic Models Parameters

33 Ministério da FazendaTesouroNacional GERIR –Results

34 Ministério da FazendaTesouroNacional GERIR –Results

35 Ministério da FazendaTesouroNacional GERIR –Results


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