Government borrowing in times of surplus

Nyhet 31 maj 2006

Charlotte Lundberg, chef för Skuldförvaltning, deltar i en paneldebatt vid Scaninavian Institutional Investerors Summit i Stockholm idag. Sammanfattningen är på engelska.

Since last year, Sweden has a surplus in the government budget. Our latest forecast, from February, is that the surplus will be SEK 16 billion this year and 6 billion in 2007. So far the 2006 forecast has been exceeded by SEK 11 billion. Although it is too early to assess what the effect of this good news will be for the totality of 2006, the overall budget outlook is favourable, not least seen in an international context. This is of course positive for the Swedish economy. At the same time, the surplus means that we will be borrowing in a partially different environment then at times of deficit. I will briefly discuss some of the challenges that this entails.

Strong central government finances are good for the state as well as for individual citizens. The budget surplus means that the government debt will decrease. From the perspective of the Debt Office, I can note that our funding is made easier: the highest credit rating in combination with a scarcity value for our bonds contributes to the high level of demand and favourable terms for our loans. This doesn't mean that there are no challenges: it is always possible to develop the debt structure, the borrowing techniques and market communication in order to borrow more efficiently, at lower costs and with less risk.

It is important for the market and the functioning of the market that you all - investors as well as primary dealers - understand and can interpret our borrowing policy and how we can alter it in order to deal with small or decreasing borrowing needs. We truly want to avoid situations where the market participants are surprised by our conduct.

Our overall objective is to borrow at the lowest possible cost while considering the risks involved. We allocate the debt to different types of debt and have a maturity target in order to achieve this overall objective. In addition to that, when accomplishing the objective, we try to make our contribution to an attractive and liquid market for government bonds. Our aim is to have a broad and international investor base and a well functioning market. To achieve this we concentrate our funding on a few and liquid benchmark loans. We try to reduce the uncertainty about our future conduct by being as predictable as possible about how we view our funding and by having an open and transparent communication with investors and banks.

We also support the market with a number of market maintenance activities. It is our firm belief that a liquid and efficient market with a broad investor base should contribute to reduce our borrowing costs in the long-term.

At first I want to stress the fact that today we can succeed with both funding and our commitments to keep liquid benchmark loans and markets without any major disruptions - this is despite our present surplus. This view is confirmed by the results in the survey that Prospera carried out on our behalf for both 2005 and 2006 with questions on how our funding activities are perceived by both domestic and international investors and banks. You can find the totality of the result on our home page.

What effects does the budget surplus have on our ability to achieve the objective with our borrowing policy?

Somewhat simplified you can say that we, at a budget surplus, are still borrowing in order to refinance maturing loans. Some of the surplus will be used in order to amortise the existing debt. If we assume that the budget surplus is so large that we could pay all redeeming loans we would still be issuing bonds. We need to issue bonds at all times as the maturity would otherwise be too short. The issuance of bonds will then be financed by a reduction in the volume of treasury bills.

What you can't avoid in times of surplus is that the borrowing in all instruments will be less and the outstanding amount of total debt as well as in particular loans will be less. This can, of course, mean that liquidity on the margin will suffer. Our task is then to focus and make priorities in our activities in order to minimise the effect on liquidity. We have several options.

It will become even more important to concentrate funding to newly introduced loans in order to build up sufficient outstanding volume. We can auction in the new maturities more frequently or in maturities that needs extra injection of liquidity. At present, approximately half of our auctions are in the ten-year. It is fully possible to increase this share more.

Today, we issue a new ten-year bond every year. This has been possible since the borrowing requirement over the last years has been sufficient to build up liquidity in a new bond every year. It is, of course, possible to introduce new issues less frequently. Something we have done in the past.

We use derivatives such as swaps to be able to issue ten-year bonds with sufficiently large volumes. Swaps make it possible to issue bonds without the average maturity in the debt becoming too long. Swaps can accordingly be used in situations of small borrowing requirements in order to keep up bond borrowing.

An important way of building up new liquid loans with a limited borrowing requirement is to exchange new loans for old. We repurchase older shorter loans at the same time as we sell new longer loans, normally a new ten-year loan. If necessary, we can, of course, consider making exchanges on a larger scale than is the case at present. Buybacks as a method of creating scope for new borrowing is in other words an important part or our borrowing policy. For example the Finnish Debt office has been using this technique in order to be able to issue new maturities on a regular basis. When I talk about the buybacks I want to highlight that it is an offer that builds on investor demand and therefore can be pursued without affect on market prices.

Recently, when speculating about the future borrowing requirements there have been a focus on potential privatisations. Today, I will not give you any hints about how these would eventually be handled. We know to little. It is difficult to describe how the income from potential privatisations could be dealt with. The prerequisites can look different from case to case and will also, of course, be dealt with differently. We will at a later stage come back with more information and or, at least some more concrete principles that can give you some guidance. Today, I will only make a few reflections on a more general basis.

In our perspective, income from privatisations is not different from tax revenues. Unexpectedly large incomes are treated the same way, regardless of the source of income. As an example you can just look at year 2005, where we had an outcome of borrowing that was SEK 52 billion less than the forecasted at the beginning of the year. Deviations of this magnitude means revised borrowing plans - but, we can handle them. With cautious planning we can adjust the borrowing plan not to provoke to large swings in sizes of auction volumes. One big difference between privatisations and tax revenues is that in the case of privatisations there can be large amounts during one single day. Incomes that we need to deal with in our liquidity management.

For example during 2000 the privatisation of Telia created an unexpected income of SEK 40 billion. At that time, we set out a buyback program of the same size in order to keep on with our regular auctions. In this case it was limitations in our liquidity management that was the primary cause of the buybacks. These buybacks were not very positive in the market. Both the government and we drew the conclusions that there were lessons to be learned in the case of future privatisations. The government pointed out that we could have been considering a more flexible liquidity management.

Nowadays we have more flexibility in our handling of large surpluses because we can invest liquidity in foreign currency. But of course one of the questions we will have to address in the future is what other alternatives we have to handle large surpluses.

As I already told you we will come back in this matter with more information and what I have said here is to be regarded as reflections in more general terms.

To conclude I would like to stress the fact that we, despite times of surpluses in the budget, so far have successfully achieved our funding as well as our objective of contributing to a liquid and well functioning market. And we intend to do so also in the future.