government securities market Washington, Sovereign Debt Management - PowerPoint PPT Presentation

ROMANIA Development of local government securities market Washington, Sovereign Debt Management Forum, 2014

Romania’s Public Debt Remains Moderate Relative to GDP Public Government Debt Service Projection, RON bn  Romania’s debt-to-GDP ratio remains one of the lowest in the EU and CEE regions  General government debt was 39,7% of GDP at end September 2014 and is forecasted to stay below 40% of GDP in the medium term  As of 30 Sept 2014, average remaining maturities of government securities were:  Total public debt - 4.9 years  RON papers - 2.9 years  Eurobonds - 7.1 years Source: Ministry of Public Finance Note: Data based on outstanding debt at end of August 2014 according to national legislation General Government Debt / GDP, % General Government Debt / GDP Q2 2014, % Domestic government debt (% of GDP) External government debt (% to GDP) EU 28 87,0% Austria 82,6% 39,7% 37,9% 37,3% 34,2% Slovenia 78,3% 29,9% 19,0% Denmark 17,3% 45,3% 18,3% 17,4% 15,3% Chech Republic 44,2% Sweden 38,8% 20,6% 20,7% 19,0% 16,8% 14,6% Romania 38,5% Latvia 41,1% 2010 2011 2012 2013 sep..14 Luxembourg 23,1% Estonia 10,5% Source: Eurostat – release 23 October 2014, Government Debt Source: Ministry of Public Finance - Public Debt Bulletin - annex "Government Debt according to EU Methodology” 2

Public Government Debt Profile as of September 2014 By Type of Initial Maturities, RON bn By Instrument Short term Medium and long term Bonds 235,2 40,2% 222,6 T-bills 4,0% 183,4 Loans from 142,6 surplus of State 118,4 Treasury account 67,8 3,4% 64,1 43,4 29,5 Eurobonds 18,7 23,1% Loans 29,3% 2010 2011 2012 2013 sep..14 Public Government Debt By Initial Maturity By Interest Type By Currency Variable; EUR 18,5% 46.5% SDR Under 1 year; 7,40% 0.6% Other 0.9% Over 5 years; 58,30% 1 to 5 years; 34,30% USD RON Fixed; 9.4% 42.6% 81,5% Source: Ministry of Public Finance Note: Calculations based on national legislation 3

Romanian Credit Has Strong Market Performance 5-year USD CDS Dynamics, bps  Romanian yields have shown resilience to the Russia-Ukraine conflict 750 Bulgaria Romania Hungary Latvia 650  Confirmation in 2014 by all three rating agencies of investment grade status with stable outlook 550  Spread compression and improving international ratings underline the 450 the ongoing convergence of Romania towards EU countries 350  The historically low yield environment has allowed Romania to extend 250 its average debt duration at advantageous cost 150  Established credit curves out to 10 years in EUR and 30 years in USD 50 Jan12 Apr12 Jul12 Oct12 Jan13 Apr13 Jul13 Oct13 Jan14 Apr14 Jul14 Oct14 Source: Bloomberg EMU Convergence Criterion – 10-year Bond Yields, % Bid Yields of Romanian EUR Eurobonds, % 10,0 Time Period High: 9,0 9.05% (Jan 2010) 8,0 7,0 Time Period Low: 4.16% (Jul 2014) 6,0 5,0 4,0 ian.10 iul.10 ian.11 iul.11 ian.12 iul.12 ian.13 iul.13 ian.14 iul.14 Source: Bloomberg Source: Eurostat 4

Milestones for the Development of the Government Securities Market: Looking Back  2008 - First debt management strategy – explicit objective – developing the government securities market  Starting with 2008 - Introduction of benchmark bonds (now 27 outstanding bonds across different maturities – up to 12 years remaining maturity)  2009 - Implementation of the private pension system (pillar II and III) – developing the domestic institutional investor base  2009 – Financial and economic crisis hit Romanian economy – the road from hell to heaven – from 2009 domestic funding policy based on short term T-bills issuance (edging up to Lombard rate of 14,25%) to the 2013-2014 liquid benchmark bonds of medium-long-term maturity 2011-2012  2010 – Building up a hard currency buffer in the treasury (to cover 4 months of gross funding needs) – buying protection while preserving flexibility  2011-2012 - New regulation to support increased competitiveness among PDs – new set of appraisal criteria focusing on PDs performance on the primary and secondary market (underwriting commitment of 2% of the total volume of government securities in the primary market auction and 3% including the amounts acquired for clients, incentives: non-competitive auctions, favorable treatment for bond issuances on the foreign markets)  2013 - Inclusion of Romanian benchmark bonds in international indices (JP Morgan and Barclays) followed by sharp increase in the non-residents appetite to our domestic government bond market (May 2013 – non-resident increased to 25% of the total outstanding volume of government securities)  May 2014 – regaining the full investment grade status from all rating agencies (the last in line – S&P’s 5 upgrade)

 Macroeconomic fundamentals supported rapid market developments and a smooth implementation of the debt management strategy Government securities issued between Distribution by investor type (end of September 2014) January 1 – October 31, 2014 (initial maturity) 6M T-bills 15 Y bonds Others 10% 2% 10 Y bonds 36,70% 1Y T-bills 33% 21% Commercial banks 53,10% Pension funds 7 Y bonds 3 Y bonds 10,20% 3% 10% 4 Y bonds 5 Y bonds 3% 18%  Total outstanding local (end of September 2014) government securities Ron 112.2 bn (equiv. EUR 24.9bn) - o/w: RON 96.97 bn and RON 15.22 bn (EUR).  Since 2011 yield curve moved gradually downwardly while the maturities were extended supported by the complementarity of the non- residents’ demand on the long-end of the curve  As of September 2014 the domestic debt market continued being dominated by commercial banks that held 53.1 % in total outstanding government securities; next in importance were the non-residents with holdings that amounted to 19.4%, while pension funds` holdings reached 10.2%. 6

Macroeconomic fundamentals supported rapid market developments and a smooth implementation of the debt management strategy 7

Most tradable government securities in the last 6 months JPM Index 23.114,33 25000 20.685,23 20.494,31 19.684,78 20000 15.292,41 14.679,47 mln. 15000 12.387,40 11.849,80 10.738,21 10.215,90 10000 5000 0 T-bills in mn RON Benchmark bonds in mn RON Benchmark bonds in mn EUR 8

Milestones for the Development of the Government Securities Market: Looking Forward  Setting basis for a liquid, transparent, secure and efficient debt market through:  Enhancing the primary auction system developed by NBR (electronic transfer of the bids) – in place starting with March 1st, 2014; ;  Establish electronic trading platform (ETP) * – additional benefits for government securities - price discovery, monitoring and compliance by PDs with price quoting obligation for the selected bonds => enhance market liquidity;  Primary dealer agreement and PD Code – consolidate provisions governing the PD status in one single contractual arrangement (duties, responsibilities and privileges regarding the primary and secondary government securities market);  Liability management operations and a more active cash management * (buy backs, bond exchanges, repos ) in order to manage the refinancing risk, repurchase of low and illiquid issuances distorting the yield curve and build greater liquidity for new bonds (on-the-run) – legal and operational framework as well as technical infrastructure, envisaged for 2015;  Creating the framework for financial derivatives (IRS and CCY swaps) for hedging purposes  Moving to an active cash management (short-term T-bills and reverse repo) while fine tuning the forecasting function ;  Gradual lowering of the face value of the bonds in order to reach out a more diversified investor base (retail investors). 9

Debt Management Strategy 2014 - 2016 Debt Management Targets Levels as of Levels as of Dec Indicative targeted min / Parameters (1) September 2014 31, 2013 max ranges (2014- 2016)  35 – 50 Share of domestic currency debt, % of total 40.6 39.8 Currency Risk  75 – 90 Share of EUR debt out of total foreign-currency denominated debt, % 80.9 83.0  10 – 20 Debt maturing in one year, % of total 18.0 19.0  25 – 35 Local currency debt maturing in one year, % of total 24.0 33.0 Refinancing Risk  4.5 – 6.5 ATM for total debt, years 4.9 4.4  2.5 – 4.5 ATM for local currency debt, years 3.0 2.7  20 – 30 Debt re-fixing in one year, % of total 25.0 26.0  25 – 35 Local currency debt re-fixing in one year, % of total 24.0 31.0 Interest Rate Risk  4 – 6 ATR for total debt, years 4.9 4.3  2.5 – 4.5 ATR for local currency debt, years 3.0 2.7 Source: Ministry of Public Finance. (1) Exclusive of loans of the State Treasury related to the General Current Account Strategic Guidelines During 2014-2016  Favoring a net financing in local currency to develop the domestic debt market and mitigate foreign currency exposure  Pursuing a smooth redemption profile  Mitigating refinancing risk by maintenance of a foreign currency buffer  Controlling the exposure to interest rate risk  Maintaining presence in the euro and access to the US dollar market or to other foreign currency markets on an opportunistic basis  Selecting the longest possible maturities, considering also extension costs  Gradually reducing the issuance of domestic government securities in EUR  Financing of the foreign currency debt will be mainly in EUR  Continuation of the partnership with the IFIs 10