Liability management operations in the external markets G-24 Technical group meeting Colombo, February 27-28, 2018 Rodrigo Cabral Senior Financial Officer Financial Advisory and Banking November 10, 2018

Table of Contents The rationale for LMO Exchanges, buybacks and beyond Financial derivatives Why are more sovereigns issuing EUR-denominated bonds? Strategy-anchored debt management

The rationale for LMO

The rationale for LMO in the external markets As explained before, quite similar to their use in the domestic market Change the cost-risk tradeoff Reduction of refinancing risk in particular No ‘market development’ function, but improving the yield curve and reinforcing benchmarks is usually an objective

Brazil: continuous buyback program improving the yield curve

Liability management operations external markets

Liability management operations in the external markets Traditional operations: Buybacks (tender offers) and exchanges More recent approaches: Discrete (secondary market) buybacks Accelerated switch tender offer Make-whole call and par-call Discussion on new CACs, pari pasu etc Should they be the object of LM?

New issue + accelerated switch tender offer

The use of financial derivatives

Why a DMO may want to use derivatives Separation of funding and risk management decisions Additional options for managing risks Achieve and stay on strategic benchmarks Widen the investor base Make use of potential cost advantage or particular markets

However… some issues require attention Derivatives can be efficient instruments to improve risk management, but bring additional challenges Some risks are mitigated, other risks are created… Credit risk (risk of counterparty) Liquidity management Accounting, systems, operational capacity considerations And, unfortunately, market may be limited for EM Deep market for international interest rates and hard currencies But may not be available for DX and credit charge may be costly

What do countries’ experiences tell us? Need of a robust governance framework in place Sweden Strategy matters! Very useful to improve risk management Belgium, Hungary, Morocco, The Netherlands, Portugal, Slovenia, Sweden First things first: full capacity and framework have to be developed Romania Market conditions matter The Netherlands, Portugal Political and reputational risks are real Belgium If not properly used, can go very bad! Orange County (US)

Country example: Hungary Strategy and execution Total debt: External debt: HUF: 60-75%; FX: 25-40% Currency mix: 100% EUR (5% fluctuation band) Domestic debt: Duration: 3 years +/- 0,5 years Fixed / floating rate composition: 66%-34% (5% fluctuation band) Fixed 61-83%, Floating 17-39% Before swaps After swaps 12

Why are more sovereigns issuing EUR-denominated bonds? A (very) brief summary.

A substantial increase in EUR-denominated EM bonds Newcomers beyond Poland, Romania, Bulgaria, Tunisia, largely in Latin America. Also Indonesia (1bn July 2014, 1.25bn July 2015 and 3bn June 2016), small EUR issuance in 2014 from South Africa and Korea. These are all middle income, better rated issuers

Hard not to associate with the Divergence in monetary policies

A (very) brief Summary The two markets have their own particularities Depth, tenors, acceptance of lower-rated issues Countries should avoid having a ‘view on the market’ Cross-currency swaps should be used to compare the cost Reasons to access the EUR market can go beyond cost Risk, investor base, branding But decisions should be anchored in a debt management strategy Ideally, targets for currency composition … and valid for all LMO!

Thank you.