Subnational Debt & Fiscal Management in Asia-Pacific Outline Current stage of subnational borrowing...
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Transcript of Subnational Debt & Fiscal Management in Asia-Pacific Outline Current stage of subnational borrowing...
Permission to reprint or distribute any content from this presentation
requires the prior written approval of Standard & Poor’s. Copyright © 2015
by Standard & Poor’s Financial Services LLC. All rights reserved.
Subnational Debt &
Fiscal Management in
Asia-Pacific
YeeFarn PHUA
Associate Director
Sovereign & International Public
Finance Ratings
June 4, 2015
Presentation Outline
Current stage of subnational borrowing in Asia: where is Asia on the global map?
Pros and Cons of subnational borrowing
Debt management
• Best practices in managing capital investments and funding sources, debt structure, transparency
• EM Asia: the range of policies and practices
Development of subnational borrowing in Asia – moving forward
Subnational ratings – a useful barometer of development
The US remains by far the most developed municipal bond market.
10,000+ rated public-sector entities
$3.63 trillion of municipal debt outstanding (as of end of third quarter 2014)
>50% of funds used for infrastructure projects comes from municipal bond
proceeds
Outside US, S&P rates more than 305 LRGs in 33 countries.
Asia-Pacific LRGs accounts for 13% of all ratings
Number of ratings is a good indicator of the stage of development and depth of
capital markets
Asia Pacific, 13
Mexico & other LatAm, 20
Canada, 16
Europe(& Russia), 51
S&P ratings on LRG globally (ex-US) (%)
Asia public sector borrowing – market overview
Currently 40 Asia-Pacific LG ratings
Many LGs in Asia would like to borrow. Some roadblocks include:
• debt restrictions; off-balance sheet borrowing for some
• lack of debt management capacity, discipline, transparency and credit culture; unsupportive national institutional frameworks
• insufficient size/scale – especially for bond issuance
Most developed: Australia, New Zealand, Japan
Outside the big 3: Some small domestic LGs issuance
Potential: Philippines, India, Indonesia, China, Vietnam, Thailand
Central governments dominate LCY issuance
Size & Composition of Asian LCY Bond Dec 2014Source: Asian Bonds Online, ADB
Local Government Borrowing restrictions – a snapshot
China
LRGs are generally not allowed to borrow commercially except for the construction of roads. Some
LRGs are allowed to issue bonds through MoF or even by themselves, with size and tenor
approved by MoF, repayment made through MoF, and thus implicitly guaranteed by the central
government. LRGs also borrow extensively via investment companies, though subject to tightened
regulation and restriction since 2010.
India
The states are entitled to borrow, but they need approval from the central government. States
cannot borrow abroad, but can receive external funding indirectly from multilaterals and
development banks via on-lending from the central government.
Indonesia
The government moved to allow LRG bond issuance in 2007, but to date there have been no local
government issues: most LRGs fail to meet the minimum conditions set out by the central
government for doing so.
JapanCurrently 54 LRGs--out of some 1,800 total--are allowed to access capital markets, including
foreign exchange borrowings. The rest either borrow from the central government or from banks.
Malaysia
Peninsular (west) Malaysia states are not allowed to borrow commercially. East Malaysian states
have access to capital markets (including foreign exchange borrowings) albeit requiring federal
government approval.
Philippines
LRGs can borrow in local currency only. For foreign currency they need central bank approval. In
local currency they tend to borrow from government-owned banks. Only a small number/amount of
local bonds has been issued so far, and these are primarily guaranteed by the LGU Guarantee
Corp.
South KoreaLocal governments allowed to access capital market in local currency, but need additional approval
from the Ministry of Finance and Economy (MOFE) to borrow in foreign currency.
TaiwanLRGs can access capital markets for both local currency and foreign exchange. Thus far such
borrowing has only been in local currency.
ThailandLRGs can borrow commercially in local currency, but require central government approval for any
foreign exchange borrowings.
Vietnam
LRGs can borrow commercially in local currency, but require central government approval for any
foreign exchange borrowings. A few large cities have issued domestic bonds. Issuance is subject
to strict monitoring and approval by the central government. Ceiling rates are defined by MoF.
Why do local governments borrow?
Borrowing by LGs is important because it:
• Leads to equitable funding of infrastructure
• Provides additional sources of funding – more can be accomplished
• Has a positive effect on public finance management due to scrutiny
• Leads to more transparent funding strategies (i.e. moving off-balance sheet to on-balance sheet)
• Means a more flexible funding strategy
And also:
• Helps deepen domestic bond markets, as it provides assets and benchmarks for investors
Central Governments’ concerns about subnational risks…
Can be addressed by:
• Improved institutional frameworks, including balancing and monitoring mechanisms;
• Differentiation approach to LGs and other subnational entities;
• Building financial management quality and capacity at subnational level
rankings, ratings, risk-to-government products, financial management assessments etc.
technical assistance
Analytical Framework For Rating International LGs
The analytical framework to rate LGs consists of combined quantitative and
qualitative analysis around eight major factors:
Institutional Framework – the only LG rating factor that S&P assess on a
country basis for each level of government.
7 factors are based on the individual characteristics of an LG:
Economy
Financial management
Budgetary flexibility
Budgetary performance
Liquidity
Debt burden
Contingent liabilities
Quality Financial Management is KeyExtended FMA = Extended Financial Management Assessment is a
comprehensive assessment of the financial management sophistication and quality
of Local & Regional Governments.
How can FMA help?
• Increasing focus on building financial management capacity at sub-national levels
• Growing demand for public sector transparency and accountability in emerging
markets
• Continuing public finance reforms across emerging markets
• Growing need for global benchmarking of public finance quality
• Need to enhance information provided by a credit rating/credit report
• Need to assess LGs which are not yet ready for capital markets
S&P’s work with the World Bank;
- Russian Cities 2001-2004, 2006-2008
- Philippines LGUs 2008-2011
- China UDICs 2008-2009
- Indonesian LGs 2009 to 2012
Good practices in Debt Management – what we look for
Link to long-term and annual planning/budgeting
Transparency – timeliness, detail, frequency
Liquidity – linked to debt servicing needs among other demands on
liquidity; overdraft arrangements
Managing SOEs – debt as a contingent liability; guarantees
Management quality at the local level - Asia
Philippines LGUs:
• Weak intergovernmental system; key-man risk factor and lack of institutionalized
policies
• Short-term focused planning framework, weak debt management; But
• Sound to intermediate revenue & cash management
• Moderate financial flexibility
China LGFPs:
• Highly leveraged; liquidity shortages
• Challenging industry environments and/or broad policy mandates with ad hoc
projects;
• Benefited from government fiscal stimulus plans
• Of late, focused on improving financial management practices
• Support from the central government to refinance its existing obligations
Management quality - Indonesian Cities
Indonesian Cities:
• Relatively weak credit culture, mismatch between decentralization of
revenues and expenditures;
• Manual procedures, lack of qualified staff at local level;
• Procurement rules are onerous, capex execution rates remain low;
• Generally weak financial policy framework, no institutionalized debt, liquidity
or risk management practices;
• Management of local SOEs – from basic to adequate. PDAMs – often in
arrears;
• Reporting quality varies – many audits with qualifications.
But also:
• Overall still low direct debt levels and some reserves;
• Ongoing computerization & focus on program-based budgeting, KPIs;
• Fiscal guidelines are better defined now;
• Jakarta DKI and Surabaya City: among the stronger LGs in developing Asia; mix of
basic and sound practices in financial management
Management quality – Indonesian Cities
Moving forwardAt the national level:
• transparent borrowing frameworks for LGs/SOEs;
• educating investors, issuers and developing credit culture at all levels;
• developing credit benchmarks
• municipal funding vehicles for smaller LGs
At the subnational level:
• medium-term fiscal frameworks and visibility beyond political cycles
• improved transparency, financial discipline and debt management capacity
• clear link to capital investments/infrastructure projects
What's next?
• LGs/SOEs will borrow directly in the current environment => develop the
necessary prerequisites
• Later: engage capital markets and increase financial capacity at LG level to
implement more infrastructure projects
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