PERFORMANCE AUDIT OF PUBLIC DEBT AN EXERCISE OF REFERENCE TERMS

1. PERFORMANCE AUDIT OF PUBLIC DEBT AN EXERCISE OF REFERENCE TERMS

2. 1. Introduction June, 2003 June, 2004 PERFORMANCE AUDIT OF PUBLIC DEBT AN EXERCISE OF REFERENCE TERMS 2

3. Map 1. Introduction Reference terms map 3

4. Six lines of work 1. Introduction • 1. Conceptual framework • 2. Normative and legal framework • 3. Reference terms for debt management • Reference terms toevaluate vulnerability and sustainability • 5. Behavior of the actors • 6. Accountability 4

5. Future work agendas 1. Introduction • A. Evaluation of social and economic impacts • of public debt in indebted countries • Up to what point, has public debt contributed to • economic development in emerging countries? • Up to what point has the debt service impeded • their development? • What has been the purpose of indebtedness? • How different would the current conditions be if • the resources had not been available? 5

6. Future work agendas 1. Introduction • B. Crowding out effect • Do the resources which are handed over by the • private investors to the government imply a • higher multiplicative effect in the capital • formation process? • Which is the allocation made by the • government and which would be the one made • by the private investors? • Who is more efficient at investing? 6

7. 2 Conceptual framework 7

8. Main requirements for a sound definition of debt 2. Conceptual framework • Precise • Clear • Consistent throughout the time • Suitable for the analysis • Comprehensive 8

9. Debt definition must allow to assess 2. Conceptual framework • Debt management • Vulnerability • Sustainability • The actors’ competence • Accountability 9

10. Conceptualization must embrace debt arising from 2. Conceptual framework • Central government • Organizations and firms • Governmental financial system • State and municipality governments • Monetary authority • Contingent liabilities • Potential existence of hidden liabilities 10

11. Governmental Fiscal Risk Matrix 11

12. 3 Normative and legal framework 12

13. 3. Normative and legal framework Laws and administrative norms Operations and activities regulation Public debt management Laws and administrative norms with a general scope 13

14. 3. Normative and legal framework Coordination of mandates and functions Faculties Normative and legal framework Debt management entities Accountability Coordination Information sharing 14

15. 3. Normative and legal framework Responsibilities designation process Congress Debt approval Executive Branch Debt contracting management accountability 15

16. 3. Normative and legal framework The normative and legal framework should establish at least, the following: • Formulation of policies and strategies on public debt • Explicit definition on objectives and debt allocation • Entity or federal agency designed to acquire credits on behalf of the nation and to look after debt payments • Entity responsible for the approval of debt contracts 16

17. 3. Normative and legal framework The normative and legal framework should establish at least, the following • Entities authorized to sign contracts for debt • Establishment of the entity in charge of recording and managing public debt • Cases and conditions in which the government acts as guarantor • Obligations regarding publication of reports on the debt status and, in general, on public access to information 17

18. 4 Reference Terms for Debt Management 18

19. Debt management concept 4. Reference terms for debt management Necessary operations to obtain financial resources, in the amount and time required, and to fulfill the debt service at the lowest possible cost 19

20. 4. Reference terms for debt management Debt management • Medium and long-term plan design: • Debt structure in accordance to • currencies, holders, rates, terms, • instruments and contractor entities • Risk evaluation • Prudent management practices • Recording, control, monitoring processes 20

21. Debt plan 4. Reference terms for debt management • Statement and execution of a strategy • to manage the debt in order to • determine: • Agreed financing • Risk and cost goals • Compliance of payments obligations • any other debt management goals 21

22. Debt management plan must comprise activities oriented 4. Reference terms for debt management • To guarantee liquidity of the • government’s treasury • To maintain equilibrium • between costs, rates, terms • and risks • To establish adequate • coordination with external • markets 22

23. Debt management plan must comprise activities oriented 4. Reference terms for debt management • To establish and maintain an • effective internal capital market • To have an adequate recording • system 23

24. Debt structure assessment must consider 4.1 Debt structure • Currencies and holders • Interest rates • Terms • Instruments • Government entities 24

25. Indicators 4.1 Debt structure • Share of short-term to long- • term debt • Profile of maturing debts • Portfolio diversification • Ratio of internal debt to • external debt 25

26. Concept 4.2 Risk assessment • Process whereby situations and events that might prevent the debt management authorities from meeting their obligations are defined, as well as the probability of such contingencies occur 26

27. Most frecuent risks 4.2 Risk assessment • Market risk • Rollover risk • Liquidity risk • Risk of not attaining desired • fiscal revenue goals 27

28. Most frecuent risks 4.2 Risk assessment • Credit risk • Settlement risk • Risk of natural disasters or • adversities and anomies • Country risk • Operational risks 28

29. Operational risks 4.2 Risk assessment • Lack of clarity on the functions • and responsibilities • Staff with not enough training • Risks related to procedures • Documentation risks • Fraud risks 29

30. The auditor must prove the existence of sensible practices on debt management 4.3 Sensible practices on debt management • A legal and normative framework • that clearly establishes • attributions of those who are • allowed to contract debt • Debt managers should be able to • identify and weigh tradeoffs between • costs and risks 30

31. The auditor must prove the existence of sensible practices on debt management 4.3 Sensible practices on debt management • Debt management must be • linked to a clear • macroeconomic framework • Authorities must pay attention to • the elaboration of a strategy that • includes prudential debt • management practices 31

32. Basic quality criteria 4.4 Recording, control and monitoring • Data provided to the legislative branch and the citizenry must be: • Accurate • timely 32

33. INTOSAI, IMF, IADB and WB have promoted: 4.4 Recording, control and monitoring • Creating manuals of • procedures • Issuing of norms • Looking forward to guarantee data’s high quality 33

34. Recommendations 4.4 Recording, control and monitoring • Crossed verifications • Periodic conciliation of data • coming from different sources • Independent evaluation 34

35. Sound debt management practices 4.4 Recording, control and monitoring • Uniform accounting system • Integrated database • Clear-cut forms and reports • (in content and shape) 35

36. Main objective of inner control activities 4.4 Recording, control and monitoring • To provide reliable reports to those in charge of debt management for the decision-making process regarding: • Financing contracts • Budget • Cash flow 36

37. Main objective of inner control activities 4.4 Recording, control and monitoring • Verify the existence of record, control and supervision manuals in order to clarify every operation as well as to show the fiscal contingencies that might become obligations for the government 37

38. 5 Reference terms to assess debt vulnerability and sustainability 38

39. Two groups of indicators to verify the status of the public debt • Reference terms to evaluate debt • vulnerability and sustainability Vulnerability Static indicators Risk that current conditions might disturb the debt status Dynamic indicators They measure the government’s capacity to face negative situations in future scenarios Sustainability 39

40. 5.1 Vulnerability indicators 40

41. Vulnerability analysis 5.1 Vulnerability indicators Vulnerability analysis demands the construction of indicators that measure and prevent any situation that might compromise a government regarding its debt payment 41

42. Vulnerability (Static) indicators 5.1 Vulnerability indicators • Can the government meet its • obligations given the actual • conditions? • Are there elements or • phenomena that might disturb • the prevailing situation? 42

43. Vulnerability (Static) indicators 5.1 Vulnerability indicators • Total debt indicators -foreign and domestic debt: • Maturityprofiles • Payment Schedules • Sensitivity to interest rate • Debt composition in foreign currency 43

44. Vulnerability (Static) indicators 5.1 Vulnerability indicators • Total debt indicators -foreign and domestic debt: • These are useful indicators to define • debt evolution and payment • capacity • They provide signs on the decline of • economic conditions that government • and economy may face 44

45. Vulnerability (Static) indicators 5.1 Vulnerability indicators • Total debt indicators: • Ratio of debt to GDP • Ratio of deficit to GDP • Ratio of financial coststo GDP • Ratio of tax revenue to debt • Ratio of total revenue to debt 45

46. Vulnerability (Static) indicators 5.1 Vulnerability indicators • Total debt indicators • Rate of growth of total debt as compared to that of GDP • Quality of assets and out of balance positions 46

47. Vulnerability (Static) indicators 5.1 Vulnerability indicators • Total debt indicators • Profitability and liquidity • Rhythm and quality of credit growth 47

48. Vulnerability (Static) indicators 5.1 Vulnerability indicators • Total debt indicators • Averager maturity • Duration 48

49. Vulnerability (Static) indicators 5.1 Vulnerability indicators • Total debt indicators: • Foreign currency denominated • debt / total debt • Indexed Interest rate debt / • total debt 49

50. Vulnerability (Static) indicators 5.1 Vulnerability indicators • External debt indicators • External debt / GDP • External public debt service / income from exports • Foreign currency denominated debt / total debt 50