The Ministry of Finance and Economic Affairs has released the Medium-Term Debt Management Strategy (MTDS) for 2017-2021. Since 2011, the MTDS has been issued over a horizon of three years. In accordance with the new Act on Public Sector Finances, it is now presented on the basis of a fiscal plan, and the Government debt management objectives therefore cover a horizon of five years, from 2017 through 2021.
The principal objective of the strategy is to ensure that the Treasury’s financing need and payment obligations are met at the lowest possible cost that is consistent with a prudent risk policy.
The strategy lays down the authorities’ plans for debt financing during the period. It describes debt management objectives and guidelines, the current composition of the debt portfolio, inherent risk factors, and contingent liabilities. It also describes the institutional structure of debt management and explains how information disclosure to market agents and investors is carried out.
The new MTDS is based in large part on its predecessor but reflects changes in emphasis in accordance with the fiscal plan. There are also changes in liquidity management, debt management criteria, and execution. The main changes and innovations in the 2017-2021 MTDS are as follows:
1. According to the objectives of the fiscal plan, gross debt is assumed to decline, both in nominal terms and as a share of GDP, by at least 15% from the end-2016 position by the end of 2021. All irregular and one-off revenues will be used to pay down debt and reduce interest expense, including revenues from the failed banks’ stability contributions.
2. In view of the Treasury’s improved performance and plans to deleverage in coming years, the need for domestic market issuance has been reduced. In order to maintain unchanged build-up of benchmark bonds and ensure continued price formation with two-, five-, and ten-year benchmark issues, the outstanding maximum size of each series will be reduced from ISK 100 bn to ISK 70 bn.
3. The targeted average time to maturity will be at least five years and no more than seven years.
4. The loan portfolio structure will be as follows: non-indexed loans will comprise 60-80% of the portfolio, indexed loans 10-20%, and foreign-denominated loans 10-20%.
5. The objectives for Treasury foreign borrowing will be honed, and the aim will be to maintain 1-2 benchmark issues at any given time if the Treasury’s debt position and market conditions permit.
6. The foundations will be laid for effective liquidity management, and the Treasury’s targeted domestic deposit balance will be lowered from ISK 60-70 bn, on average, to ISK 40 bn.
7. Preparation will begin on the issuance of interest rate swaps in the domestic market, and the Treasury will be authorised to conclude such swap agreements for ISK 20-40 bn per year. The main objective of such issuance is to manage the Treasury’s interest rate risk.
8. According to the fiscal plan, total Treasury debt will amount to 32% of GDP by end-2021. The aim is to bring the ratio of total debt to GDP down to 30% by the end of the period and below 25% further ahead, and to reduce net debt to below 20% by end-2021. The long-term objective is for the Treasury’s net debt position to be in balance.
Further information can be obtained from Esther Finnbogadóttir at the Ministry of Finance, at tel: +354 545 9200, or by e-mail at esther.finnbogadottir@fjr.is.
