Best Practice in Sovereign Debt

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United Kingdom, New Zealand, Ireland and Sweden are countries that have managed to set the highest sovereign debt management standards. They achieved this through systematic best practices and track record system. It took them approximately fifteen years to establish a point of reference for other countries.

Following in the footsteps of these leading countries, U.S, Austria, Australia, Canada, Finland, Belgium, Netherlands, Hungary, Denmark, Spain and Portugal have also developed an office responsible for public debt management.

Some best practices adopted by these countries and some OECD countries include the following:

Australia

The Australian Office of Financial Management (AOFM) was formed in 1999. Its objective is to manage and retreat from Commonwealth debt with the least possible risk and long-term cost. Till date the AOFM has been focused on liability management. This is also the approach that was adopted by the OECD countries. Through the approach, central banks manage financial assets which also include foreign exchange reserves. At the same time, the approach ensures compliance with cash management across several government entities.

It is normal in such a setup that emphasis and focus should be on risks associated with budget debt service costs. Therefore, the AOFM succeeded with establishing a risk management framework with a balance between public debt and the cash flow.

The AOFM is reviewing it orientation of cost and risk to match the benchmark that has been set.

New Zealand

The New Zealand Government setup the New Zealand Debt Management Office (NZDMO) in 1988. Its goal is to maximize economic returns from the new government’s financial assets. Moreover, its objective is to ensure aversion of government’s sovereign debt through compliance with best practices. This challenge this means that NZDMO will have to minimize the exposure of government policies to currency fluctuations.

The NZDMO works with best practices like transparency and neutrality which facilitates evenhandedness in the entire setup. Ensuring compliance with these principles with reduce government borrowing because uncertainty will lessen. The NZDMO has developed a strong approach towards management of liabilities and assets. However, this strategy has not yet been adopted by other governments.

OECD Countries

Most of the OECD countries have adopted compliance with the Australian approach. That means their primary focus is budgetary cost of debt and liability management. The benchmark and limits define the fine lines within which debt management systems should operate. Therefore, some innovations had to be made to facilitate debt management best practices. These include:

As a conclusion, it is fair to say that by increasing focus and emphasis on risk management best practices, sovereign debt management can be successful.

Further reading: Corporate Governance | Audit | Performance Improvement

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