M A R C H 2 0 0 5 Public Debt Risk Management Anderson Caputo Silva Head of Public Debt Strategic...

M A R C H 2 0 0 5

Public Debt Risk Management

Anderson Caputo SilvaHead of Public Debt Strategic Planning

Department Brazilian National TreasuryRio de Janeiro, Brazil

March 2005

FIRST ANNUAL MEETING OF

LATIN AMERICAN AND CARIBBEAN PUBLIC DEBT MANAGEMENT SPECIALISTS

Ministério da Fazenda

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Fundamental Challenges to Public Debt Risk ManagementFundamental 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


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Institutional Structure

History CODIP (domestic debt) x COREX (external debt) New paradigm: back, middle e front offices

Deputy Secretary IIIDeputy Secretary III(Responsible for Public Debt)(Responsible for Public Debt)

CODIP (Front Office)CODIP (Front Office) COGEP (Middle Office)COGEP (Middle Office) CODIV (Back 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)


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Risk Econom ic Scenario Investors Relation Special Studies

M iddle Office Head

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


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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


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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.


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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


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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


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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


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Benchmark Studies - Model Simulation

VARIABLES PATH SIMULATIONVARIABLES PATH SIMULATION

DEBT/GDP SIMULATIONDEBT/GDP SIMULATION


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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


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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.


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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)

(600,0)

(500,0)

(400,0)

(300,0)

(200,0)

(100,0)

-

100,0

200,0

300,0

Price Index Exchange Rate Interest Rate Fixed Rate Others

R$

Bill

ion

2004 2005

Source: National Treasury

Mismatch Between Assets and Liabilities


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Integrated management of asset and liabilities (ALM)

INDEXADOR TN/BC ATIVOS R$ bi TN/BC PASSIVOS R$ bi Descasamento

TOTAL 1.632,37 1.274,91 357,47

ÍNDICE DE PREÇOS 1.455,74 117,61 1.338,12 TN VP DO RESULTADO PRIMÁRIO (1) 1.028,38 TN DPMFi 117,61 TN LEI Nº 9.496/ 97 232,72 TN MP 2.185 34,13 TN ROYALTIES - ESTADOS LEI Nº 7.990/ 89 19,00 TN OUTROS 50,57 BC VP DE IMPACTO DA BASE MONETÁRIA SOBRE A DPF (2) 90,93

CÂMBIO 61,02 400,42 (339,40) TN AQUISIÇÃO - RECEBÍVEIS II 25,14 TN DÍVIDA EXTERNA 226,19 TN DMLP - RESOLUÇÃO SF Nº 98/ 92 17,16 TN DÍVIDA REFERENCIADA 38,39 TN LEI Nº 7.976/ 89 - MF 030 7,66 BC DÍVIDA REFERENCIADA 18,51 TN OUTROS 11,06 BC OPERAÇÕES DE SWAP 44,01

BC VP DE ACUMULAÇÃO DAS RESERVAS INTERNACIONAIS (3) 73,33 JUROS 87,14 628,78 (541,64)

TN BNDES - BNDESPAR SELIC 11,07 TN DPMFi - Selic 447,95 TN LEI Nº 8.727/ 93 21,08 TN DPMFi - TR 13,65 TN OUTROS 10,98 TN DPMFi - Demais 0,02 BC OPERAÇÕES DE SWAP 44,01 TN DIV. EM PROC. DE SECURITIZAÇÃO (FCVS e OUTROS) 87,57

BC OPERAÇÕES DE MERCADO ABERTO 79,59 PRÉ TN PROGRAMAS DIVERSOS 10,08 TN DPMFi 128,09 (118,01) DEMAIS TN FAD E FND 18,40 18,40 (1) Somatório do valor presente dos fluxos de resultado primário que afetam a DPF, para 100 anos (ver anexo).

(2) Somatório do valor presente dos fluxos de emissão de Base Monetária para os próximos 100 anos (ver anexo).

(3) Somatório do valor presente da diferença entre o estoque atual das reservas internacionais líquidas (de US$$ 25 bilhões) e o "ideal" (arbitrado em US$ 50 bilhões) - mais detalhes no anexo.

GAP GOVERNO CENTRAL - PRINCIPAIS ITENS - AGO/04


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Monitoring market risk

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1.000

2.000

3.000

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5.000

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7.000

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9.000

jul-94 mai-95 mar-96 jan-97 nov-97 set-98 jul-99 mai-00 mar-01 jan-02 nov-02 set-03 jul-04

0

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9.000

DV01 Nominal (mil) DV01 a Preços de Set04 (mil)

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600

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3º

jan 2

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3º

set 2004

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set 2004

2º

out 2004

R$ M

ilhões

VaR LTNVaR LTN

DVO1 LTNDVO1 LTN


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Targets set in the Annual Borrowing Plan

Results and Targets for the Federal Public Debt - DPF

Minimum Maximum

Stock of DPF held by the public (R$ billion) 1013,9 1160 1240

Average maturity - Federal Outstanding Debt (months) 35,3 36 41

% Due in 12 months 39,3 34 40

Share of DPF

Fixed-rate (%) 16,1 16 25

Floating-rate (%) 45,7 39 47

Price-Index (%) 24,2 18 23

Exchange-rate (%) 11,9 12 16

Others (%) 2,1 1 3

Source: National Treasury

IndicatorsDec/04

PAF-2005


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Monitoring PAF Limits

Stock of Federal Public Debt

1000,0

1050,0

1100,0

1150,0

1200,0

1250,0d

ec

/04

jan

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feb

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Higher Lower Basic Observed

Average Maturity

32,0

34,0

36,0

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Dec

/04

jan

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Lower Higher Basic Observed

%Maturing in 12 Months

33,00%

36,00%

39,00%

42,00%

45,00%

dec

/04

jan

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feb

/05

mar

/05

apr/

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may

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jun

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5

aug

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sep

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/05

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v/05

dec

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Lower Higher Basic Observed


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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).


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Stochastic risk indicators

General methodology Generation of correlated stochastic scenarios Effects of the scenarios on the public debt Calculus of uncertainty for specific indicators


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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)

tttt dzJdtJJdJ 1* )(

tttt dzCdtCCdC 2* )(

tttt dzIdtIdI 3


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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.


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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.

Cashflow at risk (CFaR)

0,00

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R$ M

ilhões

0,00%

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1,60%

Acréscimo a 95% Volatilidade


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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.


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Annex


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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.


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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


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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


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GERIR – Front Page


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GERIR - Scenarios


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GERIR – Portfolio Selection


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GERIR – Short-term strategies


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GERIR –Stochastic Models Parameters


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GERIR –Results


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DPMFiDPFe

Maturação Mensal da DPF

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EstoqueRecompraEstratégia

Maturação Mensal Com e Sem Refinanciamento

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GERIR –Results

M A R C H 2 0 0 5 Public Debt Risk Management Anderson Caputo Silva Head of Public Debt Strategic...

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