PERU: Coordination between debt management and monetary policy - PowerPoint PPT Presentation

PERU: Coordination between debt management and monetary policy Carlos Linares Peñaloza General Director of Debt and Public Treasury Ministry of Economy and Finance

FINANCIAL MARKET PARTICIPANTS MINISTRY OF ECONOMY AND FINANCE (MEF) CENTRAL BANK (BCRP)  Monetary stability (inflation targeting, use of  Funding and debt rollover monetary tools)  Minimize debt cost at prudential risk levels  Financial Stability (acting as a lender of last  Debt Local market development. resort and ensuring a fluent functioning of the  Appropriate distribution of public resources payments system.  Exchange Rate stability (direct and indirect interventions) PERUVIAN ECONOMY MARKET DEVELOPMENT Regulatory Financial Entities Agencies Investors

MINISTRY OF ECONOMY AND FINANCE : ALM OBJECTIVES STRATEGY FOR GLOBAL ASSET AND LIABILITY MANAGEMENT LIABILITY MANAGEMENT ASSET MANAGEMENT STRATEGY FOR GLOBAL ASSET AND LIABILITY MANAGEMENT MARKET STRUCTURE CASH MANAGEMENT Sustainable and responsible management of public finance, aiming to (i) reduce MAIN the cost of government liabilities and increase the return on the government assets, and (ii) deepen the development of government securities market in OBJECTIVE local currency as the main tool to meet financial requirements associated with the management of the debt, savings and cash balances.

MINISTRY OF ECONOMY AND FINANCE : ALM STRATEGY STRATEGY FOR GLOBAL ASSET AND LIABILITY MANAGEMENT LIABILITY MANAGEMENT ASSET MANAGEMENT Maintain liquid reserves to deal with financial instability Reduce dollarization of government gross debt Improve asset management promoting competition, and Diversify the investor base increasing diversification and transparency Mitigate liquidity risk arising from the excessive Buyback facility for government securities available when concentration of debt redemptions market liquidity dries up MARKET STRUCTURE CASH MANAGEMENT Increase return on savings through collateralized deposits Optimize the functioning of the infrastructure of the and repo operations with government securities government securities market in local currency Minimize the impact of treasury auctions on the liquidity of Increase the level of competition, transparency and liquidity the financial system in pricing of contestable markets Facilitate access to the public debt market for retails Collect tax obligations directly on the Treasury’s account investors Establish a sovereign index fund

MINISTRY OF ECONOMY AND FINANCE : Evolution of the Government Debt Profile Public Debt Structure by Currencies Public Debt Structure by interest rate (% gross public debt) (% gross public debt) 5 11 34 46 63 45 76 49 56 54 51 37 41 24 10 * 2003 2008 2014 2014 * 2004 2009  Variable  Fixed  PEN  USD  Others Average Life Public Debt Structure by tenor (years) (% GDP) 60 40 11.9 10.2 20 7.2 0 * * 1999 2002 2005 2008 2011 2014 2004 2009 2014  Short Term  Medium and long term Source: BCRP, MEF. *Data as of 30-jun-14

CENTRAL BANK: Main objective and policy instruments CENTRAL BANK INFLATION TARGET BAND : 1% - 3% OBJECTIVE: OPERATIVE TARGET: Interbank Interest Rate MONETARY STABILITY High reserve requirements on FX obligations to:  Moderate credit cycles associated with capital inflows. Measures to  Keep adequate FX liquidity in the banking system. control risks FX market intervention to: from financial  Reduce extreme exchange rate volatility, particularly dollarization associated with domestic agents' transitory portfolio shifts. Central bank has been adjusting reserves rates according to economic cycle Local Currency : Boost credit on expectations of slow economic activity and contract when there are signs of overheating. Foreign Currency: Pursue financial de-dollarization: reduce growth of dollar loans by making its short-term funding more expensive.

CENTRAL BANK: interventions to control exchange rate volatility Exchange Rate and Central Bank net Purchases of USD 4.00 4000 3.50 3000 3.00 2000 Net Purchases (USD MM) Exchange Rate USDPEN 2.50 1000 2.00 0 1.50 Central bank has avoided sharp fluctuations of exchange rate -1000 1.00 -2000 0.50 0.00 -3000 Net Purchases (USD MM) Exchange Rate (USDPEN)

CENTRAL BANK: Sterilization of increase in FX reserves and Net Income Gross Public Debt and Central Bank Liabilities (PEN MM) 200,000 190,790 150,000 PEN MM 100,000 99,207 70,246 50,000 0 2007 2008 2009 2010 2011 2012 2013 Gross Public Debt Central Bank Liabilities FX Deposits in CB Net Income Central Bank BCRP Organic Law (PEN MM) In the case of a loss, the Central Bank will use a 1831 2,000 reserve fund to cover it. If the reserve is insufficient, within thirty days of the approval of 724 1,000 615 the BCRP Balance Sheet, the Public Treasury shall issue and deliver to the Bank nonnegotiable 22 0 and interest-bearing debt titles equivalent to the outstanding amount. -203 (1,000) -892 As of December 31, 2013, the reserve fund was -1163 (2,000) zero. 2007 2008 2009 2010 2011 2012 2013

COORDINATION BETWEEN DEBT MANAGEMENT AND MONETARY POLICY Controversial issues between MEF and BCRP: FX financing under capital inflows Incentives for cheap foreign exchange funding Expectations of Sterilization Positive NPV MEF Pressures from Debt Operations BCRP Sterilization monetary MEF policy can generate such ≠ Foreign Exchange Inflows losses that they will force Environment the central bank to ask Treasury capital contributions, increasing the quasi fiscal cost. Lower Future Increase Cash Flows Liabilities for Exchange Rate stability MEF Quasi-Fiscal BCRP Cost Increase MEF

COORDINATION BETWEEN DEBT MANAGEMENT AND MONETARY POLICY Controversial issues between MEF and BCRP: Potential Competition in the Primary Market Treasury Bills Objective : Develop short term government securities market Outstanding: PEN 547 MM (31-oct) Target: Mainly retail investors Slow pace Frequency: According to an issuance schedule. development of Others: capital markets Government budget cap bills outstanding for this fiscal year at PEN 600 MM Concentration limits at issuance Affects the Market Existence of two sovereign domestic debt issuers transmission of Fragmentation monetary policy Central Bank Certificates Objective: Ensure adequate levels of liquidity Less liquidity of Outstanding: PEN 16,450 MM (31-oct) securities Target: Resident Entities linked to financial activities Frequency: According to the need for intervention Others: Fees for ownership transfer

COORDINATION BETWEEN DEBT MANAGEMENT AND MONETARY POLICY Controversial issues between MEF and BCRP Controversial issues MEF Focus BCRP Focus Debt management strategy focus on Avoid higher volatility in exchange long term macroeconomic stability rates through direct and indirect FX goals. market interventions. Exchange rates and interest rates Avoid financial instability by matching Target rate management according to affect debt management assets and liabilities economic cycle Continue avoiding volatility of exchange rate due to higher dollarization of the economy Recent strong efforts to deep Main objective is to manage the government market securities and financial liquidity rather than diversify holdings developing public debt market Poor structure and lack of liquidity of public debt market Establish joint efforts for the development of government securities market. Coordinated actions when issuing bills that don’t affect monetary policy Central Bank issue its own Limited use of Bills and bonds due instruments for only monetary regulations purposes instead of government bills. Single instrument with single issuer International experience suggests using Treasury instruments for monetary policy. There is an open discussion under development.

COORDINATION BETWEEN DEBT MANAGEMENT AND MONETARY POLICY  Reduce financial dollarization of financial system through coordinated actions between Treasury and Central Bank and keep the current strategy to the de-dollarization of the government debt.  Development of local public debt market is a priority for the Treasury: it is a policy approved by the government to reform the Peruvian Capital Market. ACTIONS TO IMPROVE  The fragmentation of public debt with two issuers hinders the development COORDINATION BETWEEN of the domestic debt market: it inhibits the formation of a single yield curve DEBT MANAGEMENT AND and segregates the investor base as banks prefer BCRP securities. MONETARY POLICY  A consolidated market would emerge if BCRP could use government securities for its monetary operations rather than their own.  A committee of MEF and BCRP could be appointed to define the mechanisms to transition to BCRP using government securities for its monetary operations.  Adequate rate of return on local currency public deposits, according to market rates.  Better offer yields on foreign currency public deposits, through tight the ONGOING NEGOTIATIONS spread near to market offer rates WITH BCRP  Improvements on negotiation process with the active participation of both entities.  Initial conversations aiming to use Peruvian treasury bills for monetary purposes.

PERU: Coordination between debt management and monetary policy Carlos Linares Peñaloza General Director of Debt and Public Treasury Ministry of Economy and Finance