R E P U B L I C O F P E R U Development of Debt Management IT Systems in Peru Mini nistry of of Econo nomy and and Fina nance Present ed t o: “ S overeign Debt Management Forum” World Bank Washington DC, October 2012
Agenda The first step – Developing t he syst em t o regist er t he debt and t he debt service The second step – Supporting risk analysis and the design of the Debt Management Strategy “In house” or Buying a Software – Things to take into account Ministry of Economy and Finance 1
THE FIRST STEP Developing the system to register the debt and the debt service From 1992-1998 S tatistics Module, Cash Planning and Accounting were developed and implemented in Clipper. They were not integrated. From 1998-2000, S IGADE was implemented with a mixed team with international consultants and MEF staff, however some problems arose: The complexit y of t he debt port folio. S t ruct ural adj ust ment s were needed and involved a significant period of t ime and money. Permanent dependence of S IGADE. In 2000, we decided to start the developing of S IAD (S istema Integrado de Administración de Deuda) “ in house” which started to operate in 2001. Ministry of Economy and Finance 2
Internal Relationship New loan Payments Disbursements contracts Register Disbursement s Undisbursed balance Budget Transfer Administ rat ive Reg. -Disbursement s -Payment s SIAF -Commit ment s SIAD Treasury DMS & Risk Cash Planning Accounting Simulation
Agenda The first step – Developing t he syst em t o regist er t he debt and t he debt service The second step – S upport ing risk analysis and t he design of t he Debt Management S t rat egy “In house” or Buying a Software – Thingst o t ake int o account Ministry of Economy and Finance 4
THE SECOND STEP S upport ing risk analysis and t he design of t he Debt Management S t rat egy In 2002 we start ed to look how other countries quantify the risk of their debt portfolio. As a result, we implement ed a det erministic model in a S imulation Module created in S IAD. In 2004 there was an institutional decision to develop quantitative tools in order to: Evaluate the effect of management operations in the Peruvian debt portfolio. Analyze the sensitivity of public debt service to int erest rat es and exchange rat e shocks. Find optimal composition of the public debt in order t o reduce market risks and refinancing risk. Determine stress scenarios for public debt service. Ministry of Economy and Finance 5
THE SECOND STEP S upport ing risk analysis and t he design of t he Debt Management S t rat egy We decided t o build a model for assessing Cost and Risk of the debt portfolio and to find an Efficient Frontier because: There were no models that would handle the complex structure of our debt portfolio. • Citibank: Did not incorporate the fiscal requirements. • ABN-AMRO: Only took into account interest rate risk High cost and dependency for its maintenance. Lack of flexibility to undertake future changes in the model. Ministry of Economy and Finance 6
THE SECOND STEP S upport ing risk analysis and t he design of t he Debt Management S t rat egy The S imulation Module offers the flexibility to work with two type of models: Stochastic Monte Carlo Simulations Allows for more complex analyses. It allows the calculation of any percentile (90% , 95%and 99% ). It incorporates the effect of correlations and volatilities. Flexibility to incorporat e other st ochastic models f or the financial variables (exchange rates and interest rates). Deterministic model S impler to design and use. Individual analysis of changes in the financial variables and their effect on the public debt portfolio. No dependency of parameters, except for the magnitude of the eff ect (that is selected previously). Ministry of Economy and Finance 7
THE SECOND STEP S upport ing risk analysis and t he design of t he Debt Management S t rat egy Challenges in developing the model S oftware: difficult to do in excel S trong mathematical background needed to develop stochastic models Iterative process, learning by doing Lack of data for estimating the volatility and correlations of some financial variables Lack of support f or implementing this model. S ome authorities do not understand the importance and difficulties of doing this task Ministry of Economy and Finance 8
THE SECOND STEP S upport ing risk analysis and t he design of t he Debt Management S t rat egy I Averages Initial Database N Volatilities Financing Requirements P U Correlations PAEAD T S S Stochastic Scenarios I M (Financial Modified Database U Variables) L A T I Simulation O N Year 1 Year 2 O U T P U T Ministry of Economy and Finance 9
THE SECOND STEP S upport ing risk analysis and t he design of t he Debt Management S t rat egy Service at Risk 1.2% Pesimistic Density Optimistic Density Reference quantitative goals as of the closing of 2012 Pesimistic Service 1.0% Optimistic Service December Item Worst Case Pesimist 2012 Relative frecuency 0.8% Percentage of Nuevos Soles in the portfolio 48.1% - 53.7% Worst Case Optimist Percentage of fixed rate debt in the portfolio 74.4% - 76.3% Average life (years) 12.7 - 13.4 0.6% Average life to refix (years) 11.3 - 12.2 Concentration of amortizations in the next 12 months 1_/ 4.1% - 3.7% Annual amortization payment concentration rate 2_/ 8.9% - 3.9% 0.4% 346 Percentage of financing flow with local currency 3_/ 52.7% - 70.9% 324 397 1 _/Indicator that measures the most immediate pressure on payments 0.2% 2_/Measures the deviation of the portfolio ’ s amortizations payments over and above predetermined maximum levels. This indicator allows for an evaluation of the payments pressure for the next 5 years (refinancing risk), representing an additional element to define policy over the terms for the new debt to be contracted. 0.0% 3_/Includes the financing of the debt management transactions . 9 000 9 500 10 000 10 500 11 000 11 500 12 000 Values of Service (Mills. de soles) Ministry of Economy and Finance 10
THE SECOND STEP S upport ing risk analysis and t he design of t he Debt Management S t rat egy Con S n Ser ervicio en R o en Ries esgo go Ministry of Economy and Finance 11
THE SECOND STEP S upport ing risk analysis and t he design of t he Debt Management S t rat egy Ministry of Economy and Finance 12
THE SECOND STEP S upport ing risk analysis and t he design of t he Debt Management S t rat egy Ministry of Economy and Finance 13
THE SECOND STEP S upport ing risk analysis and t he design of t he Debt Management S t rat egy ACHIEVEMENTS OF SIAD Efficient and effective Administration and Control of Public Debt information. R eliable and timely information about Outstanding Debt, Disbursements, Debt service (executed and proj ected payments). Allowed for more efficient integration with S IAF (S istema de Administración Financiera). Offer the possibility to calculate risk debt indicators. S ervice at Risk Model to evaluate the impact of funding and liability management operations in the debt portfolio structure and the redemption profile. 14 Ministry of Economy and Finance
Agenda The first step – Developing t he syst em t o regist er t he debt and t he debt service The second step – S upport ing risk analysis and t he design of t he Debt Management S t rat egy “In house” or Buying a Software – Thingst o t ake int o account Ministry of Economy and Finance 15
“IN HOUSE” OR BUYING A SOFTWARE Things t o t ake int o account Off the shelf Concept “In house” systems Y ou can adapt t he syst em t o your current needs x Updat e t he syst em according t o your new specific x needs IT st aff in charge of t his act ivit y in t he ent it y x Time for developing t he soft ware x Cost ? ? Ministry of Economy and Finance
“IN HOUSE” OR BUYING A SOFTWARE Things t o t ake int o account Institutional decision and support Need to plan in advance Obj ect ives Analysis of t he requirement s Modeling Design Applicat ion Development Test ing Be aware of Operational Risk !!!!!!!!! S t aff t urnover Programming language Document at ion Ministry of Economy and Finance 17
R E P U B L I C O F P E R U Development of Debt Management IT Systems in Peru Mini nistry of of Econo nomy and and Fina nance Present ed t o: “ S overeign Debt Management Forum” World Bank Washington DC, October 2012
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