PREM Notes

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This note series is intended to summarize good practices and key policy findings on poverty reduction and economic management (PREM) topics.

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    Financing Development Through Future-Flow Securitization
    (World Bank, Washington, DC, 2002-06) Ratha, Dilip
    Securitization of future hard currency receivables, that is, converting them into tradable securities, can allow developing country borrowers with good credit to overcome sovereign credit ceilings, and raise financing in international capital markets. The note examines the case of PEMEX, Mexico's state-owned oil and gas company, which in 1998 issued oil export-backed securities that received higher ratings from international credit rating agencies than Mexico's sovereign debt. Relative to unsecured debt, securitization lowered interest rates on PEMEX borrowing by 50-338 basis points (0.50-3.38 percentage points). Another example offered is the case of Banco de Credito in Peru, whose overseas Master Trust in the Bahamas (an offshore account) makes principal, and interest payments, forwarding excess collections to its headquarters in Peru. To increase investor confidence, the amount of future-flow receivables transferred to the trust was set at 2.5 times debt service requirements. In 1998 this transaction setup received an AAA credit rating from Standard & Poor's - higher than Peru's sovereign credit rating.
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    Does Debt Management Matter? YES
    (World Bank, Washington, DC, 1999-02) Kiguel, Miguel A.
    Debt management can reduce financial vulnerability by limiting liquidity, and rollover risks. This note reviews Argentina's debt management strategy, towards improving the country's credit rating to an investment grade, providing flexibility, liquidity, and opportunity. However, the risks of refinancing can be larger for domestic currency debt, than for foreign currency debt. Lessons from Argentina's experience suggest that volatile flows can be dealt with, through prudential regulation in the banking sector, and overall sound policies in capital markets. Furthermore, avoiding the conversion of private debt into public debt, also helped Argentina overcome the crisis; but perhaps, the biggest challenge is to develop new indicators of financial vulnerability, which should put more weight on stocks of debt, and other financial assets, rather than on flow indicators, such as the current account deficit.
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    Reducing Vulnerability to Speculative Attacks
    (World Bank, Washington, DC, 1999-02) Calvo, Sara
    The note focuses on the speculative attack on domestic assets, which can occur irrespective of country's fiscal situation, suggesting political economy considerations may be the reason. However, recent events have reopened the debate on how to reduce vulnerability to capital outflows in developing countries, though other risk factors have been identified, which if minimized, can still reduce vulnerability to speculative attacks. It addresses the perils of inconsistent macroeconomic policies, as evidenced in Argentina, where the Central Bank was financing the government's budget deficit by creating money, while trying to keep the exchange rate fixed. Moreover, a speculative attack on bonds, instead of currency, can also lead to a devaluation, such as a sudden shift in perceptions about macroeconomic stability, may lead to a loss in reserves, as in Mexico's 1994 crisis, when high interest rates associated with a currency defense was perceived as intolerable. This is substantiated through case studies, which further include the expectation of realized contingent liabilities, a drop in tax revenues associated with business cycles driven by capital inflows, and investor refusal to roll over debt in countries other than the crisis country, know as contagion. Recommendations include the adoption of consistent macroeconomic policies; reduction of debt rollover risks; strengthening financial regulation; and, capital flows regulation.