A recent paper by Fatos Koc discusses the benefits and challenges of adopting a sovereign asset and liability management (SALM) framework in debt management. The paper draws on the experience of countries such as New Zealand, Denmark and Turkey, all of which have adopted the SALM approach, in various forms.
The SALM framework is based on a balance-sheet approach. It is designed to identify and effectively manage the key financial exposures of the public sector as a whole. SALM entails monitoring and quantifying the impact of movements in exchange rates, interest rates, inflation, and commodity prices on both sovereign assets and liabilities in a coordinated way. On the liability side, the aim is to minimize debt service costs subject to a prudent level of risk. On the asset side, the aim is to accumulate an adequate level of net foreign assets, including foreign exchange reserves, in order to conduct effective monetary and foreign exchange policies, and provide a buffer against external shocks.
Uncoordinated management of sovereign assets and liabilities may cause significant mismatches on the government’s balance sheet. For example, balance sheet risk will increase if foreign currency reserves are invested in short-term dollar deposits and financed with long-term borrowing in local currency. This in turn will cause maturity and currency mismatches on the balance sheet. SALM provides comprehensive data on a government’s assets and liabilities, together with methods to detect ...Повеќе