Government Debt Issuance and Management

Sovereign Debt Risk Management

Risk Management of Sovereign Debt in Emerging Market Economies

Technical Assistance Program
The objective of this technical assistance program is to teach risk management and risk measurement at a level suited to the needs and capacity of the country debt management team. This program provides training in risk management relevant to many sovereign debt issuers. Although each country program is tailored to its individual debt management group, all steps build toward an eventual complete sovereign risk management system.

The risk structure of government debt can improve the economy of the country or it can make the country's business cycles more severe and contribute to debt crises.

Improvements can take the form of ensuring adequate financing available for businesses and homeownership that comes from well functioning capital markets. These are fostered if government debt has predictable local currency debt servicing and debt refunding needs, well-distributed debt maturities that help underpin up-to-date market yield curves, and appropriate instruments for the central bank to conduct monetary policy operations. On the other hand, there are examples of economic downturns that turn into sovereign debt crises when government debt was too concentrated, such as in a foreign currency or on a specific maturity date.

Even those sovereigns who are just beginning to issue debt benefit from learning the thinking of risk management. It helps them to develop a framework for choosing the kind of debt to issue. It also helps them to understand the debt rating agencies and to communicate their debt management decisions to their legislators and constituents. Those sovereigns who are more sophisticated in their debt management practices learn about optimal debt strategies and managing contingent obligations.

The process of risk management is another aspect of this training program. The responsibilities, authority and staffing of the risk management function are discussed. In many cases, this is a new function to be established and the experience of others who have already done this proves helpful. Performance measurement is developed, consistent with the strategic risk and goal framework.

Risk management requires risk measurement. Risk measurement requires data and analytical tools, including a model to perform 'what if' and stress testing exercises. These aspects of debt risk management also are included in the training program, attuned to the resources and capacity of the debt management team.

Technical Assistance Approach
Depending upon the needs of the debt management team and the topic, the program uses high-level seminars, working-level sessions, and informal discussions led by experienced U.S. Treasury technical assistance advisors. Relevant examples are used. The approach is to build confidence in the debt management team, reaching a point where they do the work. The model building is done by the debt management team and their technical support group, as an important step in the transfer of technical capacity so that in the end, the debt management team 'owns' the model. If information and data structure of the debt management function is wanted as part of the work program, interactive sessions are facilitated that create a 'map' detailing all users and creators of debt data.

Technical Assistance Advisors
There are two highly experienced principal advisors for this technical assistance program. One has years of experience performing financial institution policy and risk management, including establishing the risk management function, presenting to the rating agencies, developing the strategy and designing the measurement tools. The other is experienced at building and maintaining the information technology and large-scale data management that supports risk management. These advisers have implemented this risk management program in countries in North Africa, Asia and Eastern Europe.

Topics
This program offers a complete sovereign debt risk measurement and management framework but it is offered to countries in the components, and at a level of complexity, tailored to the needs and capacity of the debt management team.

The complete list of risk management topics include:

Risk Management Framework
Setting the Goal and Establishing Constraints
Classes of Risk
Risk as a Macroeconomic Problem
Risk Management of Contingent Obligations
Risk Tolerance and Performance Measurement
Procedures for Managing Market Risks and Returns
Organization Structure for Risk Management

Risk Measurement Tools and Data Needs
Dynamic Simulation Model for Risk Measurement
Simple Example in EXCEL
A Structured Approach to Organization and Information Architecture

Sovereign Debt Analytical Database Detailed Specifications
Complete Database Definition
Complete Data Dictionary

Part I
Preface - Risk Management
Chapter 1 - Risk Management for Sovereign Debt
Chapter 2 - Dynamic Simulation Model for Sovereign Debt Risk Measurement
Chapter 2 - Annex: Simple example in Excel, Equations for Dynamic Simulation Model

Part II
Introduction - Information System Planning and Information Architecture
Chapter 3 - Overview of the System Architecture
Chapter 3 - Annex: Sample Commercial Borrowings Database and Sample Snapshot Reports
Chapter 4 - Sovereign Debt Analytical Database - Database Definition
Chapter 5 - Data Dictionary

Contact and Additional Information For additional information or to request technical assistance in sovereign risk management, please contact:

Debra C. von Koch
Associate Director/Govt. Debt Issuance & Management
U.S. Treasury Office of Technical Assistance
740 15th Street, 4th Floor
Washington, D.C. 20220
(202) 622-1535 Phone
(202) 622-5879 Fax