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Definitions and Main Concepts on Public Debt


  • Debt is defined as a financial claim that requires payment(s) of interest and/or principal by the debtor to the creditor at a date, or dates in the future.
  • Public debt refers to the obligations that result from credit operations contracted by institutions that make up the public sector.

According to Law 6-06, the following constitute public credit operations:

  1. The contracting of loans with bilateral, multilateral or other financial institutions that operate in national or international credit markets.
  2. The issuance and placement of securities, bonds and other financial obligations.
  3. The issuance of Treasury bills with maturity that exceeds the budget year in which they were issued.
  4. The execution of contracts of goods, works or services whose total or partial payment is stipulated to be made in more than one financial year after the accrual of the expense has been made.
  5. The contingent debt that may result from the granting of guarantees whose maturity exceeds the fiscal year.
  6. Any operation of renegotiation, consolidation or conversion of the public debt that has the purpose of refinancing or restructuring public liabilities.

The Public Sector is divided into Non-Financial Public Sector (NFPS) and Financial Public Sector (FPS).

The NFPS includes:

  1. Central Government.
  2. Decentralized and autonomous non-financial institutions.
  3. Social security institutions.
  4. Non-financial public enterprises.
  5. Municipal governments, including the National District.

The FPS includes:

  1. Monetary public financial institutions.
  2. Non-Monetary public financial institutions.

According to the provisions of Article 3 of Law 6-06 on Public Credit, the agencies that make up the non-financial public sector are subject to the regulations set forth in said law and its regulations.

The Public Debt Office is the governmental entity in charge of the public debt management. Its main functions include:

  1. Propose the Central Government financing policy to the debt council for approval. Design and implement the Debt Management Strategy.
  2. Be the only recipient of financing offers, evaluate them and recommend rejection or approval.
  3. Carry out the process of negotiation, contracting and / or issuance of Central Government financing.
  4. Register and manage all public credit operations carried out in the scope of the Non-Financial Public Sector; as well as the public debt service they generated, through the issuance of payment orders.
  5. Maintain up-to-date statistics on the NFPS debt, including projections of the public debt service.

This refers to the debt that one government institution has with another; for example: the bonds issued by the Government for the recapitalization of the Central Bank, by virtue of Law 167-07.

Consolidated public debt refers to debt contracted by the public sector with the rest of the economic agents, both local and international, thus discounting the debt between two governmental institutions (intragovernmental debt).

According to the consolidation methodology set forth in Chapter 3, Accounting Rules, Section 6 of the IMF’s Government Finance Statistics Manual, consolidated Public Debt is calculated as:

CPD=NFPS Debt+FPS Debt-Intragovernmental Debt

A public credit operation becomes a debt once the contracted resources are disbursed, since at that moment the obligation to pay the creditor is created and, therefore, this amount is part of the balance owed.

In the case of a guarantee granted by the Central Government, it would become a debt of the Central Government only in case the original debtor cannot meet the payments and the creditor executes the guarantee, with which it becomes an obligation of the Central Government.

Debt can be classified by:

  1. Source: Internal (domestic) or External.
  2. Type of Creditor: Multilateral, Bilateral, Bonds, Commercial Banks and Suppliers
  3. Interest: Fixed, Floating, Indexed.
  4. Currency: Local or Foreign
  5. Maturity: Short, Medium and Long-Term..

The debt can be classified as internal (domestic) and external in accordance with the following criteria or methodologies:

  1. By Jurisdiction: Domestic debt is considered to be obligations contracted/issued in the Dominican Republic under local laws and whose payment is required within the national territory. The external debt is contracted/issued with another country or international financial organization under international laws and whose payment is required outside the Dominican Republic.

    Under this methodology, a bond issued in the international market is considered external debt, just as a bond issued in the local market is internal debt, regardless of the holder’s residence.

  2. By Residence: Domestic debt is considered obligations contracted/issued with natural or legal persons resident in the Dominican Republic. The external debt is contracted with another country or international financial organization or with any other natural or legal person with residence outside the Dominican Republic whose payment may be due outside the Dominican Republic
  3. Under this methodology, a bond issued in the international market in the hands of a resident , is considered as internal debt , as well as a bond issued in the local market in the hands of a non-resident , is considered external debt .

The relationship between the nominal value of the debt and the gross domestic product of a country (GDP) is the most commonly used indicator to measure a country's level of indebtedness:

  1. Allows comparison of the level in different periods.
  2. Allows comparison between countries.

In the context of debt sustainability, the main condition to be met is solvency. This implies that the government can meet its credit obligations without recourse to debt restructuring, high inflation to dilute the value of the debt or non-payment (default). A fiscal and sustainable debt policy is one that can be maintained indefinitely, without affecting the solvency of the government, that is, its ability to pay.

To determine if the debt is sustainable, the evolution of the projected debt as a percentage of GDP is analyzed under different scenarios, evaluating if the debt maintains the solvency condition even in the presence of unfavorable events (Ex .: contraction of economic activity, unanticipated increase in international fuel prices, etc.). While the path of the Debt-GDP ratio, in the medium and long term, is decreasing, or stabilizes around some value, it can be considered that the debt is sustainable. However, if the debt (as a % of GDP) maintains a growing trajectory in an explosive manner, where stabilization of its growth rate is not expected, this could jeopardize the payment of the debt service and the debt would be considered unsustainable..

The public debt service includes the principal, interest and fee payments made by the state to honor the public debt obligations. The payments schedule includes all payments during the life of the debt instrument.

The interest rate is a percentage that the creditor periodically charges the debtor for the money borrowed, that is, it is the cost of the debt.

The SPNF's debt portfolio accrues interest at different types of rates, which are determined in the contract. The portfolio it is composed mainly of debt at a fixed interest rate, that is, it does not change during the life of the loan or bond. Also the Government as debt at variable interest rate, which may change quarterly or semiannually, the most relevant being Libor and Euribor 6 months (London and Euro interbank interest rates), as well as rates calculated by multilateral organizations (IDB based on Libor, among others).

Information on the composition of the debt by interest rate type of can be found in the statistics section of the Public Debt Office website:

www.creditopublico.gov.do/test/english/home/statistic

  1. Public Debt Office
  2. General National Comptroller
  3. National Treasury
  4. Agent Banks of the Government

The Government's financing needs are determined mainly by the Government's budget balance, that is, the revenues to be received minus the expenses to be incurred, as well as by the estimation of financial applications for the year (includes amortizations / principal payment of the debt).

The process begins with the identification of the needs of resources of all the institutions of the public sector given their different functions, which is the expenses estimation for the year. In addition, the Government estimate of tax and non-tax revenue for the same period. When operating with a deficit (revenues lower than expenditures), the difference as to be financed in order to obtain the resources needed by the various State agencies to provide the different services to the population.

Funding for investment projects is mostly obtained through the contracting of loans whose resources, as the name implies, are used for the execution of investment projects such as the construction of highways, schools, hospitals, hydroelectric, among others. The financing contracts are for each specific project, and the Government receives the resources as the project execution progresses.

Funding for budget support can come from bond issues or the contracting of loans with bilateral or multilateral agencies, and the resources go to the National Treasury to cover expenditure under the State Budget of any sector (eg education, health, citizen security).

The Dominican Government has several financing sources:

  1. External Financing:
    1. Loans from Multilateral Organizations
    2. Loans from Bilateral Organizations
    3. International Commercial Banking Loans
    4. Bond Issuances in the International Capital Markets
  2. Domestic Financing:
    1. Local Commercial Banking Loans
    2. Bond Issuances in the Local Capital Market

Having various financing sources means having the availability of resources through the contracting / issuance of different financial instruments, with different terms, currencies and interest rates. These conditions, together with the available amount of each source, are considered when choosing the mix of sources to meet the annual financing needs of the Government.

The main instruments that the Government uses for financing purposes are bonds and loans. In the case of bonds, the Dominican Republic uses fixed rate bonds denominated in Dominican pesos and US dollars. On the loans side, the Government contracts loans with fixed or variable rate, in different currencies, being the main ones the Dominican peso, the US dollar and the euro.

Bonds are market instruments, meaning that creditors (holders) can sell and exchange the bond in different markets (stock exchanges, electronic trading mechanisms, directly with stock exchanges, etc.) in the same way as any other assets (eg cars, houses, goods in general). In this sense, bonds can have multiple creditors (commonly hundreds or thousands), while loans are facilities that are contracted with one or several commercial entities (eg commercial banks) and these creditors cannot exchange this debt in the markets mentioned above. Repayment of the principal (amortization) of the bonds is usually done at maturity, while the loans usually have a capital repayment scheme over the life of the loan.

It is the debt contracted with a bilateral creditor, i.e. direct debt from one government to another, either contracted or guaranteed by a government agency (for example: export credit agencies).

It is the debt contracted with the International Financial Institutions such as the World Bank, the Inter-American Development Bank, the International Monetary Fund and others, whose capital is made up of capital participations of multiple countries.

It refers to the process of creating, offering and distributing securities by the government in order to obtain financial resources. One or more financial institutions carry out the placement in the market (local or abroad) of these securities.

Bonds are the main source of financing for governments because of their flexibility in execution and nature of the market. This means that the volumes that can be accessed in the markets are much higher than the volumes of financing with a bilateral or multilateral institution.

The capital markets are financed by multiple creditors worldwide who provide resources, while financing with bilateral or multilateral agencies is limited by cooperation agreements, the country strategy, resources defined by the agency, to the capital shares that the country has in the multilateral institution, among others.

On the other hand, price formation (obtaining the rate on which interest is paid) is more transparent and less costly for issuers that the ones of loans with commercial banks. This means that all nations with access to markets (international and / or local) use this source of financing more than multilateral organizations or commercial banks.

The debt management strategy is the main tool that the Public Debt Office has, to manage the Non-Financial Public Sector debt portfolio. It outlines the guidelines guiding the government's financing policy for each fiscal period, with the objective of meeting its financing needs at the lowest possible cost given a prudent level of risk. The current strategy has an implementation period of 5 years, and is reviewed annually.

The government's medium-term debt management strategy is available in the following link: www.creditopublico.gov.do/test/english/home/public_debt_strategy

The Medium-Term Public Debt Management Strategy describes the main strategic guidelines that will guide the management of public debt, among which we can highlight:

  1. Development of the Domestic Capital Market, with the objective to increase the proportion of local currency financing within the total financing of the Government, thus mitigating the exchange rate risk, and reducing the cost of such financing.
  2. Diversification of Financing Sources: Access to different markets and instruments, with the objective of having different options when designing the government's financing policy, allowing choosing the most cost and risk efficient financing sources combination.
  3. Maintain long terms of domestic and external bonds, thus managing the refinancing risk.
  4. Structure smoother debt maturities profile, to reduce the fiscal pressures due to debt service in a specific year and/or month, using customized repayment profiles, including bullet payments.
  5. Proactive debt portfolio management through the execution of liability management operations that reduce the cost of debt service, re-structure the maturity profile, and others.

An important financing source of government is through the local capital market, which provides resources in local currency, thereby reducing exchange rate risk (risk of increasing the balance and / or service of public debt due to volatility in the exchange rate).

A developed local capital market, with more participants, transactions, and therefore liquidity, allows the Government to have greater access to funds in local currency, at a lower cost, which is particularly important at a time of international financial crisis when liquidity in external markets can be low.

It refers to a process of organized sale through which the Ministry of Finance sells Public Debt Securities. (Auction Normative 58-12). That is, a mechanism through which the government, through the Ministry of Finance, places and issues public debt. This mechanism is beneficial for both investors (individuals, brokerage firms, multiple banks, pension fund managers) and for the issuer (the Dominican State), since it is a transparent form of price discovery.

The Ministry of Finance publishes an annual auction calendar, which details the exact dates for each auction of the year. Ordinary auctions are held on the first working Tuesday of each month.

The main players in the auctions of the Ministry of Finance are the Public Debt Office (CP) and investors. On the one hand, CP organizes the auction and invites the investors to participate in it, detailing which instruments and how much of them will be offered. The target of the Ministry of Finance auctions is the general public, so that individuals and institutional investors (brokerage firms, banks, pension fund managers, insurers, etc.) can participate. However, only institutional investors that are part of the Market Makers Program have access to the platform in which the auctions are carried. Therefore, individuals and institutional investors who do not belong to the program, must submit their positions through a brokerage firm that is part of the program.

The risk rating assesses the risk of default and the solvency of an issuer. There are several rating agencies being the main ones: Standard and Poor's, Moody's and Fitch Ratings.

Investors take into consideration these ratings in their decision to invest/purchase government securities, it may influence their decision to acquire or not the instruments offered, as well as the amount, and the rate of interest / yield at which would they will be willing to buy them for.

The ratings are divided into two groups: investment grade (BBB or higher), speculative grade (BB or lower). An investment grade rating indicates that the government has the capacity to sustain a coherent policy framework, with good economic, financial and institutional strength, and without concern about its ability to repay its debt.

Rating agencies evaluate the credit quality of a sovereign by combining both quantitative and qualitative factors. Each agency publishes a report explaining the reasons for the assigned rating and identifies issues or circumstances that improve or limit credit quality.

Among the factors analyzed to determine the credit rating of a country, we can mention:

  1. Economic recovery capacity of the country. Economic strength, measured by GDP per capita, diversification of the economy (sectors), among others.
  2. Financial solidity of the Government. Analysis of public finances. Analyzing the repayment schedule (and how "tolerable" is the debt compared to their resources) and the government's ability to mobilize resources: increase taxes, cut spending, sell assets, and earn foreign exchange.
  3. Susceptibility to risk events. Determining whether debt repayment capacity is highly affected in jeopardy in the event of adverse economic, financial or political events.
  4. Institutional strength (transparency, effectiveness, predictability of government action, control of corruption, political stability).


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