Improving Public Debt Management
In the OIC Member Countries
14
 Making prudent borrowing decisions based on an analysis of costs and risks
 Facilitating intragovernmental and creditoraddressed communication and coordination
to reduce uncertainty
 Giving debt managers a clear mandate, thereby ensuring good governance and
accountability
 Fostering the development of a domestic debt market by making the government’s debt
goals transparent to market participants
Overall, a sound risk management is essential for fiscal sustainability. The most important
risks to be taken into account are the following:
 Refinancing risk or rollover risk, i.e. the risk that the government is unable to refinance
maturing debt. The shorter the maturity of debt is, the higher is the amount of debt to be
rolledover in a given year and the higher the refinancing risk.
 Interest rate risk or refixing risk, i.e. the risk that borrowing costs increase due of
unfavorable developments in interest rates. Interest rate risk is higher if contracts are
based on variable interest rates. With fixed interest rates, it covers the risk that refinancing
of maturing debt is realized at higher interest rates.
 Exchange rate risk, i.e. the risk that a devaluation of the exchange rate increases the value
of debt expressed in domestic currency. Hence, exchange rate risk is relevant for debt
denoted in foreign currency.
Additionally, debt managers face operational risks that should be managed through
governance and control functions (see Table 12). Indicators to be assessed in the debt
management strategy also include projections of the total debt service and the maturity
structure under different scenarios.
Table 1-2: Risks Relevant for Public Debt Management
Risk Description Refinancing
risk or rollover
risk Refers to the risk that debt will have to be refinanced at a higher cost or cannot
be refinanced at all. To the extent that refinancing risk is limited to the risk that
debt might have to be financed at higher interest rates, including changes in
credit spreads, it may be considered a type of interest rate risk. However, it is
often treated separately, because the inability to refinance maturing debt
and/or exceptionally large increases in government funding costs are likely to
give rise to a debt crisis. Additionally, bonds with embedded put options may
potentially exacerbate refinancing risk.
Measures of refinancing risk include the share of debt maturing within one,
two and three years to total debt the average time to maturity (ATM), the share
of shortterm to longterm debt, or the redemption profile.
Interest rate
risk or refixing
risk Refers to the risk of increases in the cost of debt arising from changes in
interest rates. For both domestic and foreign currency debt changes in interest
rates influence debt servicing costs on new issuances when fixed rate debt is
refinanced, and on existing and new floatingrate debt at the rate reset dates.
Generally, shortterm and floating rate debt is considered to be the subject to a
higher risk than longterm, fixedrate debt.
Measures of interest rate risk include the average time to maturity (ATM), the
share of fixedrate to floatingrate debt and the average time to interest rate
refixing (ATR).