Public Debt Management in Turkey:

An Overview

8th MEETING OF THE COMCEC FINANCIAL COOPERATION WORKING GROUP

March 30th, 2017

Ankara

Republic of Turkey

Undersecretariat of Treasury

H. Hakan Yavuz

Head of Market Risk Management Department

2

NOTES

This presentation exclusively addresses the questions raised by

COMCEC Coordination Office for `Member Country

Presentations ̀Session

3

OUTLINE

Organizational Structure and Legal Framework

Main Principles of Public Debt Management

Government Debt Securities

Risk Management

Debt Indicators

4

1. Organizational Structure and Legal Framework

Law No 4749 : Regulation on Public Finance and Debt Management

Defines Treasury as the sole borrowing entity

Specifies the borrowing limits and Treasury guarantees

Defines procedural rules

Domestic borrowing

External borrowing

Guarantee issuance and undertakings

On-lent loans

Collection of financial receivables

Assures transparency and accountability in debt

management

Re-structures debt management organization

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1. Organizational Structure and Legal Framework

Debt and Risk Management

Committee

Deputy Prime Minister

Front Office Middle Office

Undersecretary

Public Finance Dept.

For. Econ. Rel. Dept.

Back Office

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2. Main Principles of Public Debt Management

Regulation on the Principles and Procedures of Coordination and Execution of Debt and Risk Management

Article 4 - The execution of public debt and risk

management shall be based on the following principles:

a) to follow a sustainable, transparent and accountable

debt management policy that conforms to

monetary/fiscal policies and takes macroeconomic

balances into account

b) to meet financing requirements at the lowest possible

cost in the medium and long term, based on the level

of risk which is determined regarding the cost factors

as well as conditions at the domestic and international

markets

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2. Main Principles of Public Debt Management

Accountability, Transparency and Predictability: Regular

Announcement of ‘Annual Financing Program’ for the following

year, at the end of each year

Announcement of ‘Domestic Borrowing Strategy’ and ‘Auction

Calendar’ for the next three months

Weekly announcements for the details of the auctions

Regular briefings to the Parliament about the latest developments

in debt management

Regular disclosure of debt statistics

Monthly and yearly ‘Public Debt Management Reports’

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2. Main Principles of Public Debt Management

Accountability, Transparency and Predictability:Primary

and Secondary Markets

Investor relations are developed via regular meetings with primary

dealers on a monthly basis within the framework of ‘Primary

Dealership System’

Regular meetings with local and foreign investors are conducted to

broaden the investor base

Efficient yield curve is generated by implementing security

benchmarking policy

Financial instrument set is diversified by developing new borrowing

instruments

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3. Government Debt Securities

Instrument Types

TL Denominated:

Zero-Coupon Bonds /Bills (up to 2 years)

Fixed Couponed Bonds (2,5,10 years)

Floating Rate Notes (7 year)

CPI Indexed Bonds (up to 10 years)

Lease Certificates (Sukuk) (2, 5 years)

CPI Linked Lease Certificates (Sukuk) (5 years)

FX Denominated:

Eurobonds (USD, EUR, JPY, up to 31 years)

Lease Certificates (Sukuk) (USD, 5,10 years)

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3. Government Debt Securities

Islamic Finance

Islamic Banks constitute almost 5 percent in total banking sector in

Turkey

However, they have a big potential to grow fast in a short period of

time. The government has an agenda of increasing its share from 5

percent to 15 percent in 2025

Treasury issues ijara sukuk for islamic banks in domestic markets and

in international capital markets since 2012

Turkish Treasury raised TL 6.3 billion via five sukuk issuances in

domestic market and USD 1 billion via one sukuk issuances in

external market in 2016

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4. Risk Management

Identification of Relevant Risks

Contingent

Liabilities

Credit Risk Market Risk

Liquidity

Risk

Refinancing

Risk

Liquidity

Risk

Operational

Risk

Direct

Liabilities

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4. Risk Management

Management of Contingent Liabilities

Contingent liabilities are explicit or implicit liabilities that

may or may not be incurred depending on the outcome of

a future event

Explicit Credit guarantees

PPP related guarantees

Pension savings

Deficit of ‘Unemployment

Insurance Fund’

Payments made by Turkish

Eximbank

Losses of SOEs

Implicit Bank bailouts

Bailouts of public enterprises

National security

Legal claims

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4. Risk Management

Credit Risk Management Measures

Guarantee and On-lent Limit (USD 4 Billion in 2017 budget law)

Debt Assumption Commitment Limit (USD 4 Billion in 2017 budget law)

Guarantee/On-lent Fee

A fee of up to 1% of the total guaranteed/on-lent amount is charged to

the beneficiary institution

Partial Guarantee

The guarantee amount provided by the Treasury is limited to 95% of the

total amount

Risk Account

A Risk Account was established for the redemption of the undertaken

guarantees in 2003

External Debt Payment Account

Municipalities have to establish an external debt payment account in

commercial banks for the debt service of guaranteed and on-lent credits

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4. Risk Management

Management of Direct Liabilities

Debt

Portfolio

MARKET RISK

LIQUIDITY RISK

REFINANCING

RISK

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4. Risk Management

Management of Direct Liabilities

Full coverage of financing requirement determined by cash and debt management operations

Consistency among the short and medium/long-term objectives with long term perspective

Applicable set of instruments fitting the market structure, be awaring of the market dynamics

Aiming market development

Balancing cost – risk trade off

Be realistic by avoiding strict assumptions

Simple tools, understandable by both decision makers and market participants

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4. Risk Management

Strategic Benchmarks

Forward looking medium-long term borrowing policy to guide front offices in the context of debt management’s overall risk/cost preferences

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4. Risk Management

Strategic Benchmarks for 2017-2019

To borrow mainly in TL

To use fixed rate TL instruments as the major source of domestic borrowing and decrease the share of debt which has interest rate re-fixing period less than 12 months

To increase the average maturity by taking market conditions into consideration and decrease the share of debt maturing within 12 months

To keep a certain level of cash reserve

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General Government Gross Debt Stock (% GDP)

57,7

50,8

38,1

43,8

40,0

36,4

32,631,3

28,627,5 27,1 27,0 27,4

44,7

38,2

72,1

65,7

25

30

35

40

45

50

55

60

65

70

75

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Q1

2016

Q2

2016

Q3

Source: Undersecretariat of Treasury

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General Government Debt Stock (% GDP)

2009 2010 2011 2012 2013 2014 2015

Euro area (17 countries) 78,6 84,1 86,3 89,7 91,7 92,3 90,7

European Union (27 countries) 72,9 78,5 81,2 83,8 85,7 86,7 85,0

Greece 126,7 146,2 172,1 159,6 177,4 179,7 177,4

Italy 112,5 115,4 116,5 123,3 129,0 131,9 132,3

Portugal 83,6 96,2 111,4 126,2 129,0 130,6 129,0

Belgium 99,5 99,7 102,3 104,1 105,4 106,5 105,8

Spain 52,7 60,1 69,5 85,7 95,4 100,4 99,8

France 78,9 81,6 85,2 89,5 92,3 95,3 96,2

United Kingdom 64,5 76,0 81,6 85,1 86,2 88,1 89,1

Austria 80,1 82,8 82,6 82,0 81,3 84,4 85,5

Hungary 77,8 80,5 80,7 78,2 76,6 75,7 74,7

Germany 72,6 81,0 78,7 79,9 77,5 74,9 71,2

Netherlands 56,9 59,3 61,6 66,4 67,7 67,9 65,1

Turkey 43,8 40,0 36,4 32,6 31,3 28,6 27,5

Source: Eurostat, (Updated: 25-10-2016 ); Undersecretariat of Treasury, (As of Dec. 30, 2016)

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Interest Composition of Central Government Gross Debt (%)

48,953,9 50,2 54,0 55,8 57,0 53,5 56,0 59,2 59,8 61,5 65,2 67,6 69,8 71,4

51,146,1 49,8 46,0 44,2 43,0 46,5 44,0 40,8 40,2 38,5 34,8 32,4 30,2 28,6

0

25

50

75

100

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7 J

an

ua

ry

Fixed Floating

Source: Undersecretariat of Treasury

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Currency Composition of Central Government Gross Debt (%)

Source: Undersecretariat of Treasury

53,658,4 62,3 62,7

68,6 66,170,8 73,3 70,3 72,5 68,7 67,7 64,9 61,7 59,2

46,441,6 37,7 37,3

31,4 33,929,2 26,7 29,7 27,5 31,3 32,3 35,1 38,3 40,8

0

25

50

75

100

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Jan

ua

ry

TL Foreign Exchange

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Average Maturity of Domestic Borrowing (Months)

9,411,6

14,8

28,0

34,031,7

35,3

44,1 44,7

60,8

74,3

68,571,8

67,4

27,7

0

10

20

30

40

50

60

70

80

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20152016**As of December 2016

Source: Undersecretariat of Treasury

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Sensitivity of General Government Debt to GDP

2001 2015

Change in real exchange rate app/dep

by 5 percent

+ / - 2.2 points + / - 0.6 points

Change in TL interest rate by 500bp + / - 1.7 points + / - 1.0 points

Change in GDP growth rate by

2 percentage points + / - 1.6 points + / - 0.6 points

Note: The effects of scenarios on “General Government Debt Stock/GDP” ratio (as defined by ESA standards) are

measured by deviations from baseline scenarios based on end-2001 and end-2015 stock realizations.

Source: Undersecretariat of Treasury

For further information

http://www.treasury.gov.tr

mpkd@treasury.gov.tr