OECD Sovereign Borrowing Outlook 2019

Editorial

The outlook for sovereign debt is diverse across OECD countries

More than a decade on from the Global Financial Crisis, while debt-to-GDP ratios are back around pre-crisis levels in some countries, debt burdens have continued to climb in others, exceeding 100% of GDP in some cases. The challenges sovereign debt managers are confronting in an environment of high debt burdens and relatively tighter financial conditions have been compounded by recent political uncertainties. OECD governments will also need to refinance around 40% of their outstanding marketable debt over the next three years.

This means that most countries are focused on mitigating refinancing risk, maintaining flexibility in funding programmes, and broadening the investor base. In countries where financing requirements are limited and declining, sovereign debt managers face a “positive” set of challenges. For example, the minimal optimal size of outstanding sovereign debt required to maintain a vibrant government bond market and facilitate the implementation of monetary policy is currently under discussion in a few countries.

Understanding the investor landscape is critical

Significant shifts in both the investor base and investor behaviour have occurred in the past decade. This can be attributed in part to quantitative easing programmes and regulatory changes. Funding challenges in the post-crisis environment mean that a broad and diverse investor base is more essential than ever to support liquidity, depth and stability in government securities markets. This edition of the Outlook provides insights into access to investor-base information and key trends in the investor base. It analyses the implications of these changes for debt management strategies, in particular with respect to issuance plans and communication practices.

Sovereign issuers need granular and timely investor-base data to be able to better understand changes in the investor base, to make informed decisions on issuance plans and to adapt their investor relations programmes. A survey of primary market developments reveals that a majority of OECD countries receive detailed information on domestic investors, but not necessarily on foreign investors. For example, the foreign non-bank category usually covers a wide range of investors with significantly different investment mandates, including hedge-funds and pension funds. Sovereign issuers would benefit from reinforcing their investor monitoring capabilities, as well as engaging in frequent and consistent dialogue with investors.

A role for sovereigns in catalysing sustainable finance

Demographic changes and climate change are likely to have a significant impact on the long-term prosperity of nations but unlocking finance for sustainable development is a challenge of our times that needs to be addressed head-on. The number of investors and governments demonstrating their commitment to the transition towards a more environmentally-friendly economy is on the rise. Bond issuances for green projects, for example, have gained momentum in recent years. In the OECD area, the total issuance of sovereign green bonds exceeded EUR 24 billion as of December 2018. This indicates that the sovereign green bond market, although still nascent, can be expected to keep growing.

The integration of environmental, social, and governance (ESG) factors by governments has implications for sovereign creditworthiness and ultimately for bond prices. Sovereign issuers have a role to play by improving the flow and the use of information on government initiatives and actions to promote sustainable finance. Some sovereign debt management offices are starting to adopt a holistic approach in their investment relations and communications strategies. For example, the State Treasury of Finland presented government initiatives to promote sustainable development through budget allocations to investors in its most recent debt management report.

Strategies from the European sovereign debt crisis remain valid today

Borrowing conditions for sovereign issuers can become extremely challenging when rising funding pressures coincide with sudden shifts in sentiment and perceptions of sovereign risk. This publication has discussed in the past how the occasional destabilising dynamics of government securities markets create huge policy problems, including loss of market access. Identifying good practices helps policy makers to develop and deliver better strategies across policy areas. With this in mind, this edition of the Outlook reviews the challenges faced during the European sovereign debt crisis, highlighting useful tools to address stressed market conditions.

The sovereign debt management offices of Greece, Iceland, Ireland and Portugal, which were at the epicentre of a multi-year European sovereign debt crisis, grappled with significant refinancing risk and loss of investor confidence. Their experiences suggest the relevance of being a transparent and predictable issuer, building contingency funding tools for flexibility, a solid relationship with the investor base, as well as two-way communication with wider market participants. In terms of policy responses, public debt managers aimed at mitigating refinancing risk and regaining investor’ confidence. This meant making use of liability management operations; boosting investor-relation programmes; enhancing the organisational structure of debt management; and, building contingency funding tools. These strategies remain equally valid today.

Greg Medcraft

Director, OECD Directorate for Financial and Enterprise Affairs