Anderson, Phillip R. D.; Silva, Anderson Caputo; Velandia-Rubiano, Antonio
Description:
Despite the scale of the global
financial crisis, to date it has not resulted in a sovereign
debt crisis among emerging market countries. Two significant
factors in this outcome are the improved macroeconomic
management and public debt management in these countries
over the past decade. This paper reviews the improvements in
macroeconomic fundamentals and the composition of public
debt portfolios in emerging market countries prior to the
crisis and concludes that the policies and strategies
pursued by governments provided them with a buffer when the
crisis hit. Nevertheless, with the international capital
markets effectively closed for over three months and
domestic borrowing in many cases impacted by extreme risk
aversion, government debt managers were required to adapt
their strategies to rapidly changing circumstances. The
paper reviews the impact of the crisis and the responses of
debt managers to the drying up of international capital,
decreased liquidity in markets, and sharply increased term
premia. Three categories of response are identified: (i)
funding from other sources to reduce pressure on market
borrowing; (ii) adapting funding programs to changes in
demand in the different types of securities; and (iii)
implementing liability management operations to support the
market. Most governments were willing to accept temporarily
greater risk in their portfolios, often reversing long
established strategies, at a time when financial markets
were under stress. These actions contributed to the measures
taken by governments to stabilize markets and prevent
economies from stalling. Looking to the future, government
debt managers will need to consider how they can increase
the resilience of public debt portfolios for the uncertain
times that lie ahead.