Overview of advances in risk management of government bebt

This article is based on a new OECD study, "Advances in Risk Management of Government Debt", that provides an in-depth overview and analysis of risk management practices of OECD debt managers. The OECD publication provides an in-depth overview and analysis of risk management practices in OECD countries. It focuses on the technical problems and policy issues related to market-, credit-, and operational risk as well as the risks associated with contingent liabilities.It notes that risk management has become an increasingly important tool for achieving strategic debt targets, and is now an integral part of a wider strategic debt management framework based on benchmarks in most jurisdictions.

The article argues that:

• risk management should be seen as an integral part of a wider strategic debt management framework based on benchmarks, given that strategic benchmarks play a key role in the control of risk
• the benchmark in its function as management tool requires the government to specify its risk tolerance and other portfolio preferences concerning the trade-off between expected cost and risk
• debt managers need to have a view on the optimal structure of the public debt portfolio. Ideally, they should be able to assess how a portfolio should be structured on the basis of cost-risk criteria so as to hedge the government’s fiscal position from various shocks
• Emerging market debt managers are generally facing greater and more complex risks in managing their sovereign debt portfolio and executing their funding strategies, than their counter-parts managing sovereign debt in the more advanced markets. In view of these structural obstacles, debt and risk management need to be integrated into a broader policy reform framework

The article points out that:

• so far, most OECD debt managers have played only a small role in managing the risks associated with contingent liabilities. The use of recently developed risk management tools allows for a separation between considerations about the funding strategy and risk management targets
• a debt office needs to have a professional audit unit, since the demand for transparency and accountability about the riskprofile has increased
• A key challenge in emerging markets such as Brazil, China, Argentina and India is to develop meaningful benchmarks tools and related risk control procedures, that are at the same time relatively simple and robust to employ in a relatively more volatile environment