## 1criea2023002

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**Canonical URL:** [1criea2023002](https://www.imf.org/-/media/files/publications/cr/2023/english/1criea2023002.pdf)

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### Context and purpose
- A 36–month Extended Fund Facility (EFF) has been in place since March 2021 to support Costa Rica’s reforms toward strong, inclusive, and sustainable growth.
- IMF mission visited San Jose from November 15 to 22, 2022 to assist authorities in preparing a framework for consolidated Sovereign Asset and Liability Management (SALM).
- Five entity types considered in the consolidated SALM scoping review:
  - (i) the budgetary central government;
  - (ii) the social security system;
  - (iii) the Banco Central de Costa Rica (BCCR);
  - (iv) the four largest state-owned enterprises (SOEs);
  - (v) the state-owned banks (SOBs).

### Rationale for SALM
- Purposes and benefits:
  - Analysis of the financial characteristics of the whole sovereign balance sheet.
  - Identification of sources of costs and risks and quantification of correlations among those sources.
  - Development of a financial risk management strategy to manage exposures in a cost-efficient manner.
  - Support long-term macroeconomic and developmental objectives, including economic diversification, broadening the export base, reducing dependence on key imports, and identifying fiscal challenges (e.g., unfunded social security liabilities).

### Key observations from entity-level balance sheets
- Data availability and reporting:
  - Central government balance sheet incomplete; gaps particularly regarding property, plant, and equipment.
  - SOEs, SOBs, and the BCCR provide financial statements in line with international reporting standards.
- Entity-specific characteristics:
  - BCCR: negative equity for historic reasons; significant USD assets and liabilities related to dollarization.
  - SOEs: generally in reasonable financial health; can fund some investment from retained earnings.
  - SOBs: profitable and liquid; reflect dollarization.
- Interlinkages and risks:
  - Ownership stakes across financial and real sectors create extensive interlinkages that can transmit shocks and affect sovereign net worth.
  - Consolidated balance sheet highlights sovereign exposure to owned businesses and transmission of risk among them in times of stress.

### Consolidated balance sheet — headline findings
- FX position (consolidated):
  - As of December 31, 2021 liabilities exceed assets by CRC10,285 billion (or 25 percent of 2021 GDP).
- Market structure:
  - Presence of two sovereign debt issuers in the local market (central government and BCCR) fragments local currency debt issuance, impedes emergence of a government yield curve, and complicates having a single public debt management strategy and monetary policy implementation.
- Liquidity and debt:
  - Public debt is by far the largest government liability, underscoring the importance of strengthening debt management.

### Institutional and operational considerations
- Committee on Sovereign Assets and Liabilities (CSAL):
  - Establishment of CSAL is an important step toward consolidated SALM.
  - Recommendation to broaden CSAL’s scope to include the BCCR as a permanent member to ensure policy and operational coordination with monetary policy and to leverage BCCR’s understanding of financial sector risks and stability.
- Liquidity and cash management:
  - CSAL should establish a framework for cash and liquidity management, including a target for a liquidity buffer broken down between individual entities.
  - Builds on initiative to establish a Treasury Single Account (TSA, Caja Unica) for the budgetary public sector.
- System-wide risks to analyze:
  - Rollover risk, contingent liabilities, and other factors impacting the budget.

### Data and implementation challenges
- Two main implementation challenges for a full SALM framework:
  1. Obtaining data on all sovereign assets and liabilities.
  2. Institutional coordination across entities that may have statutory independence or operate under independent boards.
- Monitoring and comparability risks if accounting standards vary across entities included in the consolidated framework.

### SALM conceptual and international experience
- Many government assets are physical (land, buildings, plant) or represent natural resource wealth or taxing capacity, complicating financial-risk analysis.
- Coverage and objectives vary internationally:
  - Only a minority of SALM frameworks include central banks, state-owned pension funds, and banks.
  - Some countries manage sovereign liquidity risk explicitly (examples: Denmark, New Zealand, South Africa, Turkey, Uruguay).
  - Few countries have advanced SALM coordination across the sovereign balance sheet (examples: Canada, Denmark, Hungary, New Zealand, Norway, Turkey, Sweden, United Kingdom).
- Coordination mechanisms:
  - Oversight committee with broad mandate.
  - Limit central government interventions to support SALM without compromising independent governance.
  - Overlay strategies to reduce undue political interference via legislative and institutional structures.

### Toward a consolidated balance sheet — Central Government (selected metrics)
- Perimeter includes external and internal debt denominated in Colones (CRC) and U.S. dollar (USD) and CPI-indexed instruments.
- Total public debt: 68.2 percent of GDP at end-2021.
- Debt currency composition (as of December 2021):
  - 55.5 percent of total debt denominated in CRC.
  - 39.5 percent in USD.
  - 5 percent in CPI-indexed instruments.
- Maturity profile (2021):
  - Debt maturing in one year: 8.9 percent of total debt.
  - Debt maturing in one to 5 years: 39.4 percent of total debt.
  - Debt maturing in more than five years: 51.7 percent of total debt.
- Interest-rate profile (2021):
  - Fixed rate bonds: 72.9 percent of total debt.
  - Variable coupon bonds: 22.1 percent of total debt.
  - CPI-indexed bonds: 5 percent of total debt.
- Central Government balance sheet (December 31, 2021; in CRC billions) — selected items:
  - Financial Assets:
    - CPI-Indexed Local Currency: 0
    - Colones: 73
    - Foreign Currency (FX): 195
  - Financial Liabilities:
    - CPI Indexed Local Currency: 1,344
    - Nominal Colones bonds: 15,130
    - Foreign Currency (FX): 10,785
  - Net Financial Worth: (26,992)
- Medium-term financing projections and policy:
  - Government financing needs: peaked at 12.1 percent of GDP in 2021; expected to decline to 6.8 percent by end-2027.
  - Recent financing mostly by borrowing in the local market, averaging about 10 percent of GDP annually during 2018–21.
  - Debt management actions and targets:
    - Weight of debt denominated in CRC increased to 62.8 percent in 2022 from 60.6 percent in 2017.
    - Government benchmark range for share of debt denominated in CRC: between 60 percent and 80 percent.
    - Target share of fixed-rate bonds in the medium-term: 65 to 75 percent of the debt portfolio.
    - Share of debt maturing in one year declined to 8.9 percent in 2021 from 14.6 percent in 2017.
  - TSA established at the BCCR; pension funds, SOBs, SOEs that operate in the competitive sector, and local authorities excluded.

### Toward a consolidated balance sheet — Social Security System (selected metrics)
- Pension architecture:
  - Pillar I (1947): “defined benefit” scheme; main provider CCSS (RIVM).
  - Pillar II (2000): “defined contribution” scheme administered by six pension fund operators (OPCs).
  - Pillar III (2000): voluntary pension scheme with individual accounts.
  - Pillar 0: non-contributory pension for individuals below the extreme poverty line and some exceptions.
- RIVM statistics:
  - Around 1.5 million contributors.
  - 235,000 pensioners.
- RIVM sustainability concerns:
  - Actuarial reports suggest RIVM’s reserves are projected to be deployed around 2023 and exhausted around 2030.
  - Board of CCSS announced parameter changes in Pillar I effective January 2024: raising the minimum retirement age, a more conservative calculation of the reference salary, and additional monthly contributions required for receiving additional pension.
  - Updated actuarial report incorporating these measures recommended.
- CCSS balance sheet (December 31, 2021; in CRC billions) — selected items:
  - Current assets: 447
  - Investments: 2,825
  - CCSS reserves for pensions (LX): 3,139
  - Other liabilities: 133
  - Total assets: 3,272
  - Total liabilities and equity: 3,272
- Pillar II OPCs:
  - Six OPCs, four managed by SOBs and the CCSS.
  - Total assets under management of these four OPCs: US$11.7 billion as of end-2021.
  - As of December 2021, total investment abroad represented 31.3 percent of GDP for the consolidated sector.
  - OPC FX exposure limits: invest abroad up to 25 percent of assets; can increase to 50 percent if Corporate Governance ensures compliance with Investment Governance.
  - BCCR main supplier of USD to OPCs; large FX purchases may impact exchange rate and reserves.

### Toward a consolidated balance sheet — Banco Central de Costa Rica (BCCR) (selected metrics)
- BCCR objectives: control inflation; promote efficiency of payments systems; maintain normal operations.
- BCCR balance sheet (December 31, 2021; in CRC billions) — selected items:
  - Assets (selected):
    - Deposits and O/N (FX): 1,388
    - Securities (FX): 2,338
    - SDRs (FX): 395
    - Intl org contributions (FX): 859
    - Other assets: 352
    - Total assets: 6,184
  - Liabilities (selected):
    - Currency (LX): 1,529
    - Monetary deposits (LX): 1,514
    - Monetary deposits (FX): 2,227
    - CG deposits (LX): 306
    - Loans to banks and institutions (LX): 853
    - Debt issuance (LX): 1,893
    - Debt issuance (FX): 102
    - Liabs to international organizations (FX): 729
    - Other liabilities: 107
    - Equity: -2,223
    - Total liabilities and equity: 6,184
- Notable features:
  - Negative equity: equivalent of 5.6 percent of nominal GDP as of December 31, 2021 (down from an estimated 6.2 percent at end 2020).
  - Asset composition dominated by FX holdings: around 80 percent of total assets; official FX reserves around two thirds of total assets.
  - Reserve management: ~60 percent allocated to liquidity portfolio with a 1-2-month duration; investment portfolio benchmarked to a 1-3-year horizon.
  - Liability composition:
    - Currency issued: just under 20 percent of liabilities.
    - Deposits: about half of liabilities.
    - Debt issued (CDs max maturity two years): 23 percent of liabilities.
    - FX-denominated liabilities: just over CRC 3,000 billion, 36 percent of total liabilities and equivalent to one-half of total assets.
    - Reserve requirements: 15 percent of banks’ deposits; more than half of reserve requirements on December 31, 2021 were denominated in USD.
    - Borrowing from international organizations: around 8 percent of total liabilities.
  - January 2022: BCCR contracted a loan for US$1.1 billion from Fondo Latinoamericano de Reservas to bolster reserves.

### BCCR role in FX market and related reforms
- BCCR acts as intermediary for all public sector institutions; regulation requires central government and non-bank public sector to undertake all FX transactions with BCCR.
- Objective: smooth impact of public sector FX requirements on the exchange rate.
- Effect: places undue pressure on BCCR’s foreign reserves; expected to diminish as FX market develops.
- BCCR developing reforms, with IMF capacity development support, to reorganize FX operations, strengthen reserve position, and deepen FX market; reforms include incentivizing nonfinancial public sector entities to manage FX needs more efficiently and rely more on market-based transactions.

### State-Owned Enterprises (SOEs) — structure, exposures, and risks
- Mission focused on four largest SOEs: ICE, RECOPE, AYA, INCOFER.
- Table 6 (Consolidated Balance Sheet of SOEs; December 31, 2021; in CRC billions) — selected items:
  - Total assets 9,343
  - Financial assets 1,006
  - Inventories (RECOPE) 266
  - Property, plant, equipment 7,323
  - Other assets 748
  - USD debt 1,889
  - CRC debt 1,309
  - Accounts payable (RECOPE) 255
  - Other liabilities 1,190
  - Equity 4,700
- Composition:
  - Property, plant, and equipment ≈ 80 percent of total assets.
  - Aggregate equity ≈ half of total assets; heterogeneity across SOEs.
- ICE:
  - Accounts for over 90 percent of SOE debt.
  - Around 57 percent of ICE’s debt denominated in FX, mostly in USD (reduced from 72 percent in 2020).
  - ICE target: USD debt share of 48.5 percent by 2026.
- RECOPE:
  - Imports > US$2 billion annually (around 3 percent of GDP); exposed to oil price and exchange rate volatility.
  - Tariff-setting timing mismatch between USD purchase commitments and CRC sales price.
  - RECOPE exploring hedging; work at early stage.
- Tariff-setting and transfers:
  - Most SOE tariff/fee frameworks set on full cost recovery; government does not expect dividends; profits retained for investment.
  - INCOFER runs at a loss and depends on transfers from government ≈ a quarter of its revenues.
- Constraints:
  - BCCR requires SOEs to channel all FX transactions through BCCR.
  - SOEs required to bank only with SOBs and make investments only in government securities.
  - Lack of local derivatives market constrains risk management.
- TSA note:
  - Initial TSA draft included SOE liquidity; final bill excluded SOEs, SOBs and the CCSS; inclusion of SOEs in TSA would not be in line with international sound practices for non-budgetary entities and should be avoided.

### State-Owned Banks (SOBs) — size, indicators, and linkages (selected metrics)
- Banks comprise approximately 80 percent of total financial sector assets.
- SOBs accounted for 58 percent of banking sector assets as of December 2021 (56 percent in August 2022 based on latest data).
- Banking sector indicators (December 31, 2021) — selected figures:
  - Total system: Total deposits, billions of CRC 22,062; Total loans, billions of CRC 19,980; Capital adequacy ratio 13.1; Loans to deposits 90.6; Liquid assets to total assets 36.7; ROA 0.8; ROE 6.8; NPLs to total gross loans 2.4; Loan loss reserves to non-performing loans 173.7; FX-denominated loans to total private credit 43.3.
  - State-owned banks: Total deposits, billions of CRC 12,745; Total loans, billions of CRC 10,695; Capital adequacy ratio 13.1; Loans to deposits 83.9; Liquid assets to total assets 38.5; ROA 0.7; ROE 5.7; NPLs to total gross loans 2.8; Loan loss reserves to non-performing loans 152.6; FX-denominated loans to total private credit 23.9.
  - Private banks: Total deposits, billions of CRC 9,318; Total loans, billions of CRC 9,285; Capital adequacy ratio 13.2; Loans to deposits 99.6; Liquid assets to total assets 34.4; ROA 0.9; ROE 8.4; NPLs to total gross loans 1.9; Loan loss reserves to non-performing loans 211.5; FX-denominated loans to total private credit 66.8.
- SOB consolidated balance sheet (December 31, 2021; in CRC billions) — selected items:
  - Total assets 19,203; Cash and due from banks 2,069; Net loans & advances to banks 11,435; Securities and derivatives 4,879 (Gov. securities 3,820); Other assets 820.
  - Total liabilities and equity 19,203; Deposits and S-T funding 13,794; L-T funding 2,538; Other liabilities 533; Equity 2,337.
- Linkages and vulnerabilities:
  - About 20 percent of SOBs’ assets invested in domestic law government securities (private banks ≈ 12 percent).
  - SOBs hold SOE deposits and are their only source of domestic loanable funds as mandated by law.
  - SOBs provide fee-based services to government agencies via branch network.
  - As of end-December 2021, SOBs maintained total exposure of CRC1,435 billion to the BCCR.
  - SOBs rely heavily on short-term deposits.
- Dollarization and FX exposures:
  - Banking sector highly dollarized; share of FX loans to non-financial private sector has declined while deposit dollarization is high and growing.
  - Banks maintain large net FX exposures with relatively soft prudential guidance.

### Consolidated public sector balance sheet — selected lines and observations
- Stylized consolidated sovereign balance sheet (December 31, 2021; in CRC billions) — selected asset and liability lines:
  - Assets:
    - FX reserves BCCR 4,121
    - SOB Net loans (FX) 2,744
    - Other assets (FX) 859
    - Government cash (FX) 195
    - LX assets BCCR 853
    - Government cash (LX) 73
    - Currency issued (LX) 1,529
    - SOB Cash and due from banks (LX) 2,069
    - SOB Net loans (LX) 8,691
    - SOB Securities and derivatives (LX) 4,879
    - SOE cash and investments (LX) 1,006
    - State bank deposits (LX) 14,055
    - CCSS investments (LX) 2,825
    - CCSS reserves for pensions (LX) 3,139
    - Property, plant, equipment (SOEs) 7,323
    - Other assets (BCCR, SOBs, SOEs, CCSS) 2,633
  - Liabilities:
    - CG & SOE debt (FX) 12,674
    - BCCR Monetary deposits (FX) 2,422
    - BCCR debt issuance (FX) 102
    - State bank deposits / funding (FX) 2,277
    - Other liabilities (FX) 729
    - CG & SOE debt (LX) 15,131
    - BCCR Monetary deposits (LX) 1,625
    - BCCR debt issuance (LX) 1,893
    - Other liabilities (LX) 1,963
  - Note: Cross holdings between entities have not been netted to show interlinkages.
- Key observations:
  - Central government information gap on property, plant, equipment and other items leaves balance sheet incomplete.
  - Interlinkages expose sovereign net worth to commercial and real-economy risks: SOBs lend to SOEs and CG; SOEs invest liquidity in CG and SOBs; CCSS holds government securities.
  - Two sovereign debt issuers fragment local market; BCCR interest on its securities contributes to BCCR’s negative capital position.
- Balance-sheet realignment and liquidity:
  - Realignment between BCCR and CG balance sheets (e.g., transfer of debt to CG) could consolidate borrowing under one entity and enable unified public debt management.
  - Liquidity assessment: most liquid public-sector assets exceed BCCR Monetary Deposits in both currencies and FX State bank deposits by CRC1 billion — indicating liquidity risk in entire public sector as of end 2021 was moderately low.
- FX risk and contingent liabilities:
  - Consolidated FX liabilities exceed FX assets by CRC10,285 billion.
  - Considering liquid component of FX assets, international reserves cover the FX BCCR Monetary deposits and an additional 15 percent of FX CG and SOE debt stock — foreign currency risk remains low by this measure.
  - Latent FX risks: potential USD needs of MoF to pay down Eurobond maturing January 2023 together with potential purchases of foreign exchange by pension funds and SOEs in upcoming months could lead to pressure on BCCR reserves.
  - Recommendation: incorporate off-balance sheet exposures, particularly contingent liabilities related to SOEs and social security Pillars I and II, into risk analysis.

### MTDS (2022–27), market structure, and preferred borrowing strategy
- Main objective: provide cost and risk assessments of various debt issuance strategies.
- MoF preferred borrowing strategy:
  - target securities denominated in local currency to reach 74 percent of total debt in the medium term.
  - target share of fixed-rate securities is 84 percent of total debt.
  - maintain issuance of CPI-linked bonds to lengthen maturity profile due to increasing demand from institutional investors.
  - propose issuance of securities with over 5 and 7 year maturity to mitigate rollover risk.
- Implementation bottlenecks:
  - Government requirement to seek parliamentary authorization for external borrowing causes time lags and scale limits.
  - Example: Parliament’s recent authorization may not permit timely launch to roll over US$1 billion Eurobond maturing in January 2023.
  - Interim financing response: MoF may use deposits at the BCCR (converted to FX using foreign reserves) and new borrowing from multilaterals and private sector.
- Parliamentary authorization parameters (as described):
  - issuance by executive branch up to US$5 billion through 2025 conditioned on macroeconomic objectives.
  - issuances in tranches of US$1.5 billion for first and second issuances (timed for first and second halves of 2023) and tranches of US$1 billion for third and fourth issuance.
  - minimum maturity of 5 years for each tranche.
  - law established a maximum yield for the first tranche, 750 basis points above the relevant US Treasury bond yield at issuance time.
  - requirement for MoF to publish—no later than March 31st of each year—a report informing about CG’s fiscal and debt conditions.
- Domestic issuance practices:
  - Both MoF and BCCR issue fixed-rate CRC and USD-denominated securities domestically.
  - BCCR issuance: short-term CDs up to one month (CRC); bonds up to 2-year maturity (CRC); recently USD bonds with 3- and 5-year maturities.
  - MoF issuance maturities: CRC 3, 5, 7, 15, 30 years; USD 3, 5, 7, 10, 20 years.
- SALM and market development rationale:
  - Deep and liquid domestic government bond market expected to compress yields, lengthen yield curve, reduce rollover risk, enable SOEs to obtain more competitive and longer-term funding, and build cushion against foreign market cut-offs.

### Coordination, investor relations, and operational inefficiencies
- Current responsibility: National Treasury handles investor relations.
- Recommended practices:
  - DGGDP (if established) should obtain inputs for quarterly issuance calendars (QICs) through regular communication with investors.
  - Annual Borrowing Plan (ABP) combined with MTDS and annual budgets for predictability.
- Operational inefficiency:
  - Joint issuance by BCCR and MoF increases operational risk.
  - MTDS recommendation: BCCR should limit issuance to the very short segment of the curve to avoid conflicting signals and better distribute liquidity and FX risks (e.g., via Liability Management Operations, LMOs).
- Illustrative Uruguay example: LMOs and coordinated issuance achieved reduced currency mismatches, increased average maturity, and developed local market benchmarks.

### Financial stability and fiscal–monetary coordination
- Strong two-way links between financial sector soundness and fiscal/debt conditions.
  - Excessive government borrowing and heightened sovereign risk can affect financial sector profitability, funding costs, capitalization, and liquidity.
  - Financial sector distress can constrain its ability to lend to government.
- Policy consideration: debt managers should be aware of measures (e.g., risk weights on debt issued by distressed sovereigns consistent with Basel III recommendations) and coordinate with central banks and regulators.

### Policy recommendations and prioritized next steps (summary, including Table 1 items)
- Include the BCCR as a permanent member of the CSAL
  - Priority: High
  - Timeframe: ST
  - Responsible Agency: MoF
- Consider broadening the Central Government’s financial reporting to include a statement of financial position, consistent with international accrual accounting standards
  - Priority: High
  - Timeframe: ST
  - Responsible Agency: MoF
- Establish a framework for analyzing system-wide liquidity risk, rollover risk, contingent liabilities, and other shocks to the budget
  - Priority: High
  - Timeframe: ST
  - Responsible Agency: National Treasury and CSAL
- Consider a realignment of balance sheets of the CG and the BCCR so as to make the former the sole issuer of sovereign debt
  - Priority: Medium
  - Timeframe: MT
  - Responsible Agency: MoF/ BCCR
- Consistent with MTDS, continue reducing the FX exposure of the consolidated balance sheet
  - Priority: Medium
  - Timeframe: MT
  - Responsible Agency: MoF
- Implement a planned liberalization of SOE access to FX via transactions with the private sector and improve market transparency by informing the market of daily FX transactions, including OTC
  - Priority: Medium
  - Timeframe: MT
  - Responsible Agency: BCCR
- Advance capacity development on operational issues, such as international debt issuance and investor relations program aimed at attracting nonresident investors to the local market
  - Priority: Medium
  - Timeframe: MT
  - Responsible Agency: DGGDP, MoF
- Note on timeframes:
  - Short term (ST): < 12 months
  - Medium term (MT): 12 to 24 months
- Additional recommended actions highlighted in the report:
  - Broaden CSAL remit to explicitly include the asset side of the sovereign balance sheet.
  - CSAL and National Treasury to establish and monitor a framework for cash and liquidity management, including a liquidity buffer and TSA implementation follow-through.
  - Support development of a deep and liquid FX market to enable hedging opportunities; BCCR to promote hedging market development.
  - Continue capacity development on debt management and investor relations to attract non-resident participation in the local market.

*Source: Executive Summary and selected sections, "1criea2023002."*

### Executive Summary ......................................................................................................

### Executive Summary

### Context and Purpose
- A 36–month Extended Fund Facility (EFF) has been in place since March 2021 to support Costa Rica’s reforms toward strong, inclusive, and sustainable growth.
- The mission visited San Jose from November 15 to 22, 2022 to assist the authorities in preparing a framework for consolidated Sovereign Asset and Liability Management (SALM).
- Five types of entities are considered for a consolidated SALM scoping review: (i) the budgetary central government; (ii) the social security system; (iii) the Banco Central de Costa Rica (BCCR); (iv) the four largest state-owned enterprises (SOEs); and (v) the state-owned banks (SOBs).

### Rationale for SALM
- A comprehensive SALM framework allows:
  - Analysis of the financial characteristics of the whole sovereign balance sheet.
  - Identification of sources of costs and risks and quantification of correlations among those sources.
  - Development of a financial risk management strategy to manage exposures in a cost-efficient manner.
- SALM can be adapted to support long-term macroeconomic and developmental objectives, including economic diversification, broadening the export base, reducing dependence on key imports, and identifying fiscal challenges (e.g., unfunded social security liabilities).

### Key Observations from Entity-level Balance Sheets
- Data availability and reporting:
  - The central government’s balance sheet remains incomplete, with gaps particularly regarding property, plant, and equipment.
  - SOEs, SOBs, and the BCCR provide financial statements in line with international reporting standards.
- Entity-specific characteristics:
  - BCCR balance sheet: has negative equity for historic reasons and significant USD assets and liabilities related to dollarization.
  - SOEs: for the most part in reasonable financial health and can fund some investment from retained earnings.
  - SOBs: profitable and liquid, and reflect dollarization.
- Interlinkages and risks:
  - Ownership stakes across financial and real sectors create extensive interlinkages that can transmit shocks and affect sovereign net worth.
  - The consolidated balance sheet highlights the sovereign’s exposure not only to owned businesses but also to the transmission of risk among them in times of stress.

### Consolidated Balance Sheet Findings
- FX position (consolidated):
  - As of December 31, 2021 liabilities exceed assets by CRC10,285 billion (or 25 percent of 2021 GDP).
  - Confirms importance of the government’s strategy to reduce FX risk of its debt portfolio in the medium term and the need for a deep and liquid FX market to provide hedging opportunities.
- Market structure:
  - Presence of two sovereign debt issuers in the local market (central government and BCCR) fragments local currency debt issuance, impedes emergence of a government yield curve, and complicates having a single public debt management strategy and monetary policy implementation.
- Liquidity and debt:
  - Public debt is by far the largest government liability, underscoring the importance of strengthening debt management.

### Institutional and Operational Considerations
- Committee on Sovereign Assets and Liabilities (CSAL):
  - Establishment of CSAL is an important step toward consolidated SALM.
  - Recommendation to broaden CSAL’s scope to include the BCCR as a permanent member to ensure policy and operational coordination with monetary policy and to leverage BCCR’s understanding of financial sector risks and stability.
- Liquidity and cash management:
  - CSAL should establish a framework for cash and liquidity management, including a target for a liquidity buffer broken down between individual entities.
  - This would build on the initiative to establish a Treasury Single Account (TSA, Caja Unica) for the budgetary public sector.
- System-wide risks to analyze:
  - Rollover risk, contingent liabilities, and other factors impacting the budget.

### Data and Implementation Challenges
- Two main implementation challenges for a full SALM framework:
  1. Obtaining data on all sovereign assets and liabilities.
  2. Institutional coordination across entities that may have statutory independence or operate under independent boards.
- SALM applications internationally have varied in scope and objectives but have been used to manage currency risk, liquidity risk, asset allocation, and debt composition.

### Recommendations (from Table 1)
- Include the BCCR as a permanent member of the CSAL
  - Priority: High
  - Timeframe: ST
  - Responsible Agency: MoF
- Consider broadening the Central Government’s financial reporting to include a statement of financial position, consistent with international accrual accounting standards
  - Priority: High
  - Timeframe: ST
  - Responsible Agency: MoF
- Establish a framework for analyzing system-wide liquidity risk, rollover risk, contingent liabilities, and other shocks to the budget
  - Priority: High
  - Timeframe: ST
  - Responsible Agency: National Treasury and CSAL
- Consider a realignment of balance sheets of the CG and the BCCR so as to make the former the sole issuer of sovereign debt
  - Priority: Medium
  - Timeframe: MT
  - Responsible Agency: MoF/ BCCR
- Consistent with MTDS, continue reducing the FX exposure of the consolidated balance sheet
  - Priority: Medium
  - Timeframe: MT
  - Responsible Agency: MoF
- Implement a planned liberalization of SOE access to FX via transactions with the private sector and improve market transparency by informing the market of daily FX transactions, including OTC
  - Priority: Medium
  - Timeframe: MT
  - Responsible Agency: BCCR
- Advance capacity development on operational issues, such as international debt issuance and investor relations program aimed at attracting nonresident investors to the local market
  - Priority: Medium
  - Timeframe: MT
  - Responsible Agency: DGGDP, MoF

- Note on timeframes:
  - Short term (ST): < 12 months
  - Medium term (MT): 12 to 24 months

*Source: Executive Summary, "1criea2023002 - Executive Summary."*

### 9.      Many governments’ assets are physical in nature (e.g., land, buildings, and

### 1criea2023002 - 9.      Many governments’ assets are physical in nature (e.g., land, buildings, and plant)

### SALM conceptual and data challenges
- Many governments’ assets are physical in nature (e.g., land, buildings, and plant) and do not readily lend themselves to an analysis of financial risk.
- Governments’ main asset in some cases is the country’s natural resource wealth and its capacity to tax, and the financial features of this asset may not be easy to define.
- Even if consistent financial reporting is available across sectors, they may not be of sufficient granularity to be used in an SALM framework.
- Monitoring the performance of SALM may be difficult if the accounting standards vary across the entities included in the consolidated framework.

### Institutional coordination for SALM
- Adequate coordination and institutional arrangements are important for the implementation of an SALM framework.
- Some institutions included in the consolidated balance sheet enjoy statutory independence or operate under independent boards (e.g., state-owned enterprises and banks, public pension funds, with specific investment mandates), complicating coordination.
- Possible coordination mechanisms:
  - Establishing an oversight committee with a broad mandate to seek a more systematic analysis of the public-sector balance sheet and a consolidated approach to risk management.
  - Limiting central government interventions strictly to support the SALM framework (without compromising independent governance arrangements).
  - An overlay strategy: develop mechanisms at the sovereign level to lessen the risk of undue political interference in investment mandates (for example, for particular asset classes) through legislative and institutional structures that set limits and require transparency.
- The more comprehensive the SALM framework aspires to be, the more challenging it will be to secure data and have the appropriate institutional and/or policy coordination setup for its proper functioning.

### International experience with SALM
- Countries differ in terms of the scope and policy objectives of their SALM frameworks.
- Several governments apply some form of SALM, identifying risks and vulnerabilities of sovereign assets and liabilities without necessarily establishing formal SALM objectives.
- Coverage varies: only a minority of SALM frameworks includes central banks (in some cases only international reserves) and state-owned pension funds and banks.
- Some countries have developed simple SALM frameworks focused on integrated management of the net position of central government; compiling full statements of financial position (aggregate balance sheets) is a relatively recent practice.
- A common SALM objective: management of sovereign liquidity risk—defined as the minimum level of cash balances that ensures meeting day to day cash requirements of the government—to ensure sufficient funds for current expenditure and debt amortization during periods when market access is impaired or prohibitively expensive, and to manage volatility and forecast errors.
  - Countries with explicit policies for liquidity risk include Denmark, New Zealand, South Africa, Turkey, and Uruguay.
- Few countries have advanced SALM coordination across the sovereign balance sheet; examples include Canada, Denmark, Hungary, New Zealand, Norway, Turkey, Sweden, and the United Kingdom.
- Illustrative country practices (selected excerpts):
  - Canada: The Ministry of Finance has decision-making authority for both assets and liabilities with day-to-day management delegated to the Central Bank; coordination via regular meetings.
  - Denmark: Manages the consolidated position of government debt by considering assets of government funds and guidelines for government guaranteed entities.
  - New Zealand: Manages local currency and foreign currency assets and provides derivative transactions for government entities.
  - Norway: Coordination through net transfers from oil revenues plus return on assets to the fiscal budget; issuance of public debt as a market benchmark.
  - Mexico: Reduced external debt in 2006 through issuing domestic securities and using proceeds to acquire FX from the central bank, improving the composition of the sovereign balance sheet.

### Toward a consolidated balance sheet — A. Budgetary Central Government (Costa Rica)
- Perimeter of Central Government (CG) includes both external and internal debt denominated in Colones (CRC) and the U.S. dollar (USD) as well as those indexed to consumer price index (CPI).
- Total public debt: 68.2 percent of GDP at end-2021.
- Debt currency composition (as of December 2021):
  - 55.5 percent of total debt denominated in CRC.
  - 39.5 percent in USD.
  - 5 percent in CPI-indexed instruments.
- Maturity profile (2021):
  - Debt maturing in one year: 8.9 percent of total debt.
  - Debt maturing in one to 5 years: 39.4 percent of total debt.
  - Debt maturing in more than five years: 51.7 percent of total debt.
- Interest-rate profile (2021):
  - Fixed rate bonds: 72.9 percent of total debt.
  - Variable coupon bonds: 22.1 percent of total debt.
  - CPI-indexed bonds: 5 percent of total debt.
- Central Government balance sheet (December 31, 2021, in CRC billions) — selected items:
  - Financial Assets:
    - CPI-Indexed Local Currency: 0
    - Colones: 73
    - Foreign Currency (FX): 195
  - Financial Liabilities:
    - CPI Indexed Local Currency: 1,344
    - Nominal Colones bonds: 15,130
    - Foreign Currency (FX): 10,785
  - Net Financial Worth: (26,992)
- Medium-term financing projections and policy:
  - Authorities foresee a reduction in government financing needs driven by a fiscal consolidation plan: after peaking at 12.1 percent of GDP in 2021, government financing needs are expected to decline to 6.8 percent by end-2027.
  - In recent years, financing needs were covered mostly by borrowing in the local market, amounting on average to about 10 percent of GDP annually during 2018–21.
  - Debt management actions:
    - The weight of debt denominated in CRC increased to 62.8 percent in 2022 from 60.6 percent in 2017.
    - Government benchmark range for share of debt denominated in CRC: between 60 percent and 80 percent.
    - Target share of fixed-rate bonds in the medium-term: 65 to 75 percent of the debt portfolio.
    - Share of debt maturing in one year declined to 8.9 percent in 2021 from 14.6 percent in 2017.
  - On assets, the Ministry of Finance established a TSA at the BCCR in which all institutions of the CG are ordered to maintain deposits; pension funds, SOBs, and SOEs that operate in the competitive sector and local authorities were excluded from TSA.
  - TSA objectives: reduce transaction costs, allow building a liquidity buffer, and permit settlement in various currencies.

### Toward a consolidated balance sheet — B. Social Security System (Costa Rica)
- Pension sector is multi-pillar with large customer assets under management:
  - Pillar I (1947): “defined benefit” scheme with three providers; main provider is CCSS (Caja Costarricense del Seguro Social) providing the RIVM (Régimen de Invalidez Vejez y Muerte).
  - Pillar II (2000): “defined contribution” scheme administered by six pension fund operators (OPCs), covering over 2.9 million participants.
  - Pillar III (2000): voluntary pension scheme with individual accounts administered by OPCs.
  - Pillar 0: non-contributory pension for individuals below the extreme poverty line and some other exceptions.
- RIVM statistics:
  - Around 1.5 million contributors.
  - 235,000 pensioners.
- RIVM sustainability concerns:
  - Actuarial reports suggest RIVM’s reserves are projected to be deployed around 2023 and exhausted around 2030.
  - Pillar I is under stress and requires urgent parametric changes.
- Policy measures:
  - In January 2022, the Board of the CCSS announced parameter changes in Pillar I, effective January 2024: raising the minimum retirement age, a more conservative calculation of the reference salary, and additional monthly contributions required for receiving additional pension.
  - An updated actuarial report of the RIVM (incorporating recently announced measures) should be carried out to gauge the impact on contingent liabilities.
- CCSS balance sheet (December 31, 2021; in CRC billions) — selected items:
  - Current assets: 447
  - Investments: 2,825
  - CCSS reserves for pensions (LX): 3,139
  - Other liabilities: 133
  - Total assets: 3,272
  - Total liabilities and equity: 3,272
- Pillar II OPCs:
  - Six OPCs, four managed by SOBs and the CCSS.
  - Total assets under management of these four OPCs: US$11.7 billion as of end-2021.
  - As of December 2021, total investment abroad represented 31.3 percent of GDP for the consolidated sector.
  - OPC FX exposure:
    - OPCs can invest abroad up to 25 percent of assets; can increase to 50 percent if Corporate Governance ensures compliance with Investment Governance.
    - SUPEN empowered to review documentation at any time for regulatory compliance.
    - BCCR has been the main supplier of USD to OPCs; large FX purchases may impact exchange rate and reserves.

### Toward a consolidated balance sheet — C. Banco Central de Costa Rica (BCCR)
- BCCR main policy objective: control inflation; also promotes efficiency of internal and external payments system and maintaining normal operations.
- BCCR balance sheet (December 31, 2021; in CRC billions) — selected items:
  - Assets (selected):
    - Deposits and O/N (FX): 1,388
    - Securities (FX): 2,338
    - SDRs (FX): 395
    - Intl org contributions (FX): 859
    - Other assets: 352
    - Total assets: 6,184
  - Liabilities (selected):
    - Currency (LX): 1,529
    - Monetary deposits (LX): 1,514
    - Monetary deposits (FX): 2,227
    - CG deposits (LX): 306
    - Loans to banks and institutions (LX): 853
    - Debt issuance (LX): 1,893
    - Debt issuance (FX): 102
    - Liabs to international organizations (FX): 729
    - Other liabilities: 107
    - Equity: -2,223
    - Total liabilities and equity: 6,184
- Notable balance-sheet features:
  - Negative equity position: equivalent of 5.6 percent of nominal GDP as of December 31, 2021, down from an estimated 6.2 percent at end 2020.
    - The negative equity originated many years ago and was primarily driven by quasi-fiscal activities of the BCCR to finance public institutions and sterilized FX interventions.
    - The reduction in negative equity has been due to changes in the mix of assets, a reduction in liabilities that have a cost, and the growth of nominal GDP.
  - Asset composition dominated by FX holdings: around 80 percent of total assets.
    - Most FX holdings are official FX reserves (around two thirds of total assets), apart from SDR holdings mostly denominated in USD.
    - Reserves management: around 60 percent allocated to the liquidity portfolio with a 1-2-month duration; investment portfolio benchmarked to a 1-3-year horizon, mostly US treasuries; investment-grade multi-currency mandates permitted with non-USD exposures hedged; four external managers engaged including the World Bank Treasury.
  - Liability composition:
    - Currency issued: just under 20 percent of liabilities.
    - Deposits (required reserves of banks and central government account): about half of liabilities.
    - Debt issued (certificates of deposits with maximum maturity two years): 23 percent of liabilities.
    - FX-denominated liabilities: just over CRC 3,000 billion, representing 36 percent of total liabilities and equivalent to one-half of total assets.
    - Reserve requirements: 15 percent of banks’ deposits, payable in the currency of the deposits; more than half of reserve requirements on December 31, 2021 were denominated in USD.
    - Borrowing from international organizations: around 8 percent of total liabilities.
  - In January 2022, the BCCR contracted a loan for US$1.1 billion from Fondo Latinoamericano de Reservas to bolster reserves levels.

*Italic: Source: IMF staff compilation from the provided content.*

### 33.      The BCCR plays an active role in the foreign currency market, including as the

### 1criea2023002 - 33.      The BCCR plays an active role in the foreign currency market, including as the

### BCCR role in FX market
- The BCCR acts as the intermediary for all public sector institutions; regulation requires the central government and the non-bank public sector to undertake all FX transactions with the BCCR.
- Objective: smooth the impact of public sector FX requirements on the exchange rate.
- Effect: this role places undue pressure on BCCR’s foreign reserves and is expected to diminish as the FX market develops.
- The BCCR is developing a package of reforms, with IMF capacity development support, to reorganize its FX operations aimed at strengthening its reserve position and deepening the FX market; reforms include incentivizing nonfinancial public sector entities to manage FX needs more efficiently and rely more on market-based transactions. (IMF Staff Report “Third Review Under the Extended Arrangement Under the Extended Fund Facility”, November 2022).

### State-Owned Enterprises (SOEs) — structure and risks
- Mission focused on four largest SOEs: ICE, RECOPE, AYA, and INCOFER.
- ICE: largest balance sheet — assets around five times larger than the next highest, RECOPE.
- RECOPE: larger annual revenues and expenses than ICE.
- Table 6 (Consolidated Balance Sheet of SOEs; December 31, 2021; in CRC billions):
  - Total assets 9,343
  - Financial assets 1,006
  - Inventories (RECOPE) 266
  - Property, plant, equipment 7,323
  - Other assets 748
  - USD debt 1,889
  - CRC debt 1,309
  - Accounts payable (RECOPE) 255
  - Other liabilities 1,190
  - Equity 4,700
- Composition:
  - “Property, plant, and equipment” ≈ 80 percent of total assets.
  - Aggregate equity ≈ half of total assets, with heterogeneity: AYA and INCOFER funded almost entirely by equity; ICE equity ≈ 40 percent of assets.
- ICE debt:
  - ICE accounts for over 90 percent of SOE debt.
  - Around 57 percent of ICE’s debt is denominated in FX, mostly in USD (reduced from 72 percent in 2020).
  - Offsets: around 8 percent of ICE revenues are from tariffs set in USD; ICE holds some financial assets in USD.
  - ICE strategy: target a USD debt share of 48.5 percent by 2026.
- RECOPE exposure and tariff/timing risks:
  - RECOPE imports > US$2 billion annually (around 3 percent of GDP), exposed to oil price and exchange rate volatility.
  - Current tariff-setting arrangements cause timing mismatch between USD purchase commitments and sales price set in CRC.
  - RECOPE examining a hedging framework; asked by government to consider hedging from consumer point-of-view; work at an early stage.
- Tariff-setting and fiscal transfers:
  - Most SOE tariff/fee frameworks based on full cost recovery; government does not expect dividends; profits retained for investment.
  - Exception: INCOFER runs at a loss and depends on transfers from government ≈ a quarter of its revenues.
- Constraints on SOE financial management:
  - BCCR requires SOEs to channel all FX transactions through BCCR, smoothing volumes over time.
  - SOEs required to bank only with SOBs and make financial investments only in government securities.
  - Lack of local derivatives market (e.g., forward FX) constrains risk management even when BCCR permits direct market access.
- Treasury Single Account (TSA) note:
  - Initial TSA draft included SOE liquidity within perimeter; final bill excluded SOEs, SOBs and the CCSS. Including SOEs in the TSA would not be in line with international sound practices for non-budgetary entities and should be avoided.

### State-Owned Banks (SOBs) — size, indicators, and linkages
- Banks comprise approximately 80 percent of total financial sector assets.
- SOBs (Banco Nacional de Costa Rica, Banco de Costa Rica, Banco Popular y de Desarrollo Comunal) accounted for 58 percent of banking sector assets as of December 2021 (56 percent in August 2022 based on latest data).
- Table 7 (Selected Financial Indicators of the Banking Sector; December 31, 2021):
  - Total system: Total deposits, billions of CRC 22,062; Total loans, billions of CRC 19,980; Capital adequacy ratio 13.1; Loans to deposits 90.6; Liquid assets to total assets 36.7; Return on assets (ROA) 0.8; Return on Equity (ROE) 6.8; Nonperforming loans (NPLs) to total gross loans 2.4; Loan loss reserves to non-performing loans 173.7; FX-denominated loans to total private credit 43.3.
  - State-owned banks: Total deposits, billions of CRC 12,745; Total loans, billions of CRC 10,695; Capital adequacy ratio 13.1; Loans to deposits 83.9; Liquid assets to total assets 38.5; ROA 0.7; ROE 5.7; NPLs to total gross loans 2.8; Loan loss reserves to non-performing loans 152.6; FX-denominated loans to total private credit 23.9.
  - Private banks: Total deposits, billions of CRC 9,318; Total loans, billions of CRC 9,285; Capital adequacy ratio 13.2; Loans to deposits 99.6; Liquid assets to total assets 34.4; ROA 0.9; ROE 8.4; NPLs to total gross loans 1.9; Loan loss reserves to non-performing loans 211.5; FX-denominated loans to total private credit 66.8.
  - Source: SUGEF.
- SOB consolidated balance sheet (Table 8; December 31, 2021; in CRC billions):
  - Total assets 19,203; Cash and due from banks 2,069; Net loans & advances to banks 11,435; Securities and derivatives 4,879 (of which, Gov. securities 3,820); Other assets 820.
  - Total liabilities and equity 19,203; Deposits and S-T funding 13,794; L-T funding 2,538; Other liabilities 533; Equity 2,337.
  - Source: FitchRatings; and Fund staff calculations.
- Linkages and vulnerabilities:
  - About 20 percent of SOBs’ assets invested in domestic law government securities (private banks ≈ 12 percent).
  - SOBs hold deposits of SOEs and are their only source of domestic loanable funds as mandated by law.
  - SOBs provide fee-based services to government agencies via branch network.
  - As of end-December 2021, SOBs maintained total exposure of CRC1,435 billion to the BCCR.
  - SOBs rely heavily on short-term deposits, retail and corporate/SOE.
- Dollarization and FX exposures:
  - Banking sector remains highly dollarized; share of FX loans to non-financial private sector has declined over time while deposit dollarization is high and growing.
  - Banks maintain large net FX exposures with relatively soft prudential guidance from BCCR and constraints on changing position above threshold amounts per period (day or month).
  - Premium on developing FX market to reduce pressure on BCCR to provide foreign exchange at times of stress.

### Consolidated Public Sector Balance Sheet — findings and gaps
- Stylized consolidated sovereign balance sheet (Table 9; December 31, 2021; in CRC billions) — selected lines:
  - Assets: FX reserves BCCR 4,121; SOB Net loans (FX) 2,744; Other assets (FX) 859; Government cash (FX) 195; LX assets BCCR 853; Government cash (LX) 73; Currency issued (LX) 1,529; SOB Cash and due from banks (LX) 2,069; SOB Net loans (LX) 8,691; SOB Securities and derivatives (LX) 4,879; SOE cash and investments (LX) 1,006; State bank deposits (LX) 14,055; CCSS investments (LX) 2,825; CCSS reserves for pensions (LX) 3,139; Property, plant, equipment (SOEs) 7,323; Other assets (BCCR, SOBs, SOEs, CCSS) 2,633.
  - Liabilities: CG & SOE debt (FX) 12,674; BCCR Monetary deposits (FX) 2,422; BCCR debt issuance (FX) 102; State bank deposits / funding (FX) 2,277; Other liabilities (FX) 729; CG & SOE debt (LX) 15,131; BCCR Monetary deposits (LX) 1,625; BCCR debt issuance (LX) 1,893; Other liabilities (LX) 1,963.
  - Note: Cross holdings between entities have not been netted to show interlinkages.
- Key observations:
  - Balance sheet remains incomplete due to lack of central government information on property, plant, equipment and other assets/liabilities; central government is largest public-sector entity — significant gap.
  - Recommendation: produce full statements of financial position in line with International Public Sector Accounting Standards Board (IPSASB) to support transparency and long-term fiscal policy.
  - Interlinkages expose sovereign net worth to commercial and real-economy risks: SOBs lend to SOEs and GC; SOEs invest liquidity in CG and SOBs; CCSS holds government securities.
  - Presence of two sovereign debt issuers in the local market fragments local currency debt issuance and impedes emergence of a government yield curve; dual issuers have created market confusion and anomalous pricing; interest paid by BCCR on its securities contributes to BCCR’s negative capital position.
- Balance sheet realignment and liquidity:
  - A realignment between BCCR and CG balance sheets (e.g., transfer of debt to CG) could consolidate borrowing under one entity and enable unified public debt management; current BCCR borrowing is through short-tenor instruments with greater refinancing and interest-rate risk.
  - Liquidity assessment: most liquid public-sector assets (FX reserves BCCR, LX assets BCCR and LX SOB Cash and due from banks) exceed BCCR Monetary Deposits in both currencies and FX State bank deposits by CRC1 billion — indicates liquidity risk in entire public sector as of end 2021 was moderately low.
- FX risk and contingent liabilities:
  - Consolidated FX liabilities exceed FX assets by CRC10,285 billion — driver of government and some SOE (especially ICE) strategy to reduce FX risk over the medium term.
  - Considering liquid component of FX assets, international reserves (mainly owned by BCRR) cover the FX BCCR Monetary deposits and additional 15 percent of FX CG and SOE debt stock — foreign currency risk remains low by this measure.
  - Latent FX risks: potential USD needs of MoF to pay down Eurobond maturing January 2023 together with potential purchases of foreign exchange by pension funds and SOEs in upcoming months could lead to pressure on BCRR reserves.
  - Recommendation: incorporate off-balance sheet exposures, particularly contingent liabilities related to SOEs and social security Pillars I and II, into risk analysis.

### Policy considerations and next steps (summary of actions underway)
- Institutional steps taken:
  - CSAL established April 2021 to coordinate public debt management, cash management, and financial programming of the Budget.
  - TSA established to reduce costs and strengthen transparency in administration of CG funds; a Bill tabled with Parliament to improve public sector liquidity management.
  - A Bill tabled proposing consolidation of debt management functions under a General Directorate of Public Debt Management (DGGDP) — if adopted, would contribute to risk management, debt servicing, accountability, and reporting.
  - A Bill to liberalize entry of nonresident investors into Costa Rican debt market approved by Parliament — likely to deepen markets and compress spreads for sovereign and private/public borrowers.
- SALM and MTDS: the remainder of the section discusses policy areas critical for formation of an SALM framework.

*Source: Costa Rican authorities; Fund staff calculations; IMF mission report excerpts as provided in the source content.*

### 58.      In April 2022, the MoF issued an updated MTDS document for 2022-27, a key

### 1criea2023002 - 58.      In April 2022, the MoF issued an updated MTDS document for 2022-27, a key

### MTDS (2022–27) and preferred borrowing strategy
- Main objective: provide cost and risk assessments of various debt issuance strategies.
- MoF preferred borrowing strategy:
  - target securities denominated in local currency to reach 74 percent of total debt in the medium term.
  - target share of fixed-rate securities is 84 percent of total debt.
  - maintain issuance of CPI-linked bonds to lengthen the maturity profile because of increasing demand from institutional investors (such as pension and investment funds).
  - propose issuance of securities with over 5 and 7 year maturity to mitigate rollover risk.

### Implementation bottlenecks and recent parliamentary authorizations
- Main bottleneck: government requirement to seek parliamentary authorization for external borrowing, which is often limited in scale and comes with a time lag.
- Example constraint: Parliament’s recent authorization would not give the MoF enough time to launch a new bond to roll over $1 billion Eurobond maturing in January 2023.
- Expected interim financing response: MoF will potentially use its deposits at the BCCR (converted to FX using foreign reserves), together with new borrowing from multilateral institutions and private sector, to pay down the bond.
- Parliamentary authorization parameters (as described in the text):
  - issuance by the executive branch of debt in the international markets up to US$5 billion through 2025 conditioned on a set of macroeconomic and other objectives.
  - issuances can be in tranches of US$1.5 billion for the first and second issuances (timed for the first and second halves of 2023, respectively) and in tranches of US$1 billion for the third and fourth issuance.
  - minimum maturity of 5 years for each tranche.
  - law established a maximum yield for the first tranche, 750 basis points above the relevant US Treasury bond yield, at the time of the issuance.
  - requirement for the MoF to publish—no later than March 31st of each year—a report informing about CG’s fiscal and debt conditions.

### Domestic issuance practices and market structure
- Both MoF and BCCR issue fixed-rate CRC and USD-denominated securities in the domestic market.
- BCCR issuance:
  - short-term CDs up to one month maturity (in CRC).
  - bonds up to 2-year maturity (in CRC).
  - until recently issued USD-denominated bonds with 3- and 5-year maturities to mop up occasional excess FX liquidity.
- MoF issuance maturities:
  - in CRC: 3, 5, 7, 15, and 30 years.
  - in USD: 3, 5, 7, 10, and 20 years.

### SALM and domestic market development rationale
- A deep and liquid domestic government bond market is a key ingredient for an integrated SALM framework.
- Expected benefits:
  - compress yields and lengthen the yield curve.
  - reduce rollover risk and contain sovereign risk.
  - enable SOEs to reduce reliance on banks and obtain more competitive and longer-term funding.
  - build a cushion for the financial sector (and ultimately the government) against cut-offs from foreign markets and sudden stops.
- Market development requires concerted efforts from debt managers, central bankers, and regulators.

### Coordination, investor relations, and operational inefficiencies
- Current responsibility: National Treasury handles investor relations.
- Recommended practices:
  - soon-to-be established DGGDP should obtain inputs for quarterly issuance calendars (QICs) through regular communication with investors.
  - Annual Borrowing Plan (ABP), used with MTDS and annual budgets, to provide predictability and strengthen investor relations.
- Operational issue: joint issuance of debt securities by BCCR and MoF generates inefficiencies and increases operational risk.
  - MTDS recommendation: BCCR should limit issuance to the very short segment of the curve to avoid giving conflicting signals and to better distribute liquidity and FX risks (e.g., through Liability Management Operations, LMOs).

### Illustrative example: Uruguay coordinated issuance and LMOs
- Two-stage joint LMO example outcomes:
  - total of US$960 million equivalents involved.
  - US$810 million equivalents were sold to CB at prevailing FX rates and yields.
  - remaining US$150 million were shorter Treasury Notes delivered in exchange for new benchmark securities.
- Results achieved in Uruguay:
  - reduced currency mismatches (increased share of domestic currency in liabilities and USD assets).
  - increased average time to maturity of consolidated public sector debt.
  - contributed to development of the local market by adding a new peso-denominated benchmark and retiring small illiquid domestic securities.
  - CB improved balance sheet by replacing CDs with a combination of lower holdings of USD assets and higher holdings of pesos on its liability side.

### SALM, fiscal–monetary coordination, and institutional arrangements
- Composition of sovereign balance sheet is driven by fiscal policy, monetary policy, and public debt management; high-level coordination is important.
- Recommendation: broaden the remit of CSAL to explicitly include the asset side of the sovereign balance sheet and permanently include the BCCR.
  - Decree referenced: Decree 42964-H (sets out terms of reference of CSAL).
- Benefits of including BCCR in CSAL:
  - supports coordination between liquidity/reserves management and fiscal/debt management.
  - provides BCCR with frequent and up-to-date information on debt payments and cash flows of the sovereign and large SOEs to better implement liquidity operations.
- Suggested broadened CSAL role: establish and monitor a framework for cash and liquidity management, including a liquidity buffer; analyze rollover risk, contingent liabilities, and other system-wide risks.

### Financial stability considerations
- Links between financial sector soundness and fiscal/debt conditions are strong and two-way:
  - excessive government borrowing and heightened sovereign risk can affect financial sector profitability, funding costs, capitalization, and liquidity.
  - financial sector distress can constrain its ability to lend to government.
- Policy consideration: debt managers should be aware of measures (e.g., risk weights on debt issued by distressed sovereigns consistent with Basel III recommendations) and coordinate with central banks and regulators to minimize adverse implications.

### Key policy recommendations and next steps
- Broaden CSAL membership to include BCCR as a permanent member to strengthen coordination with monetary policy.
- Consider broadening financial reporting to include a statement of financial position, consistent with IPSASB’s accrual accounting standards, to improve risk management and transparency.
- CSAL and National Treasury should establish and monitor a framework for cash and liquidity management, including a liquidity buffer and TSA implementation follow-through.
- Consider realignment of MoF and BCCR balance sheets so the government becomes the sole issuer of sovereign debt instruments:
  - potential benefits: support securities market development, allow a unified public debt management strategy, and strengthen monetary policy.
  - implementation guidance: could be implemented gradually to avoid abrupt changes; from a consolidated public sector balance sheet perspective the move would be neutral.
- Continue reducing FX exposure of public debt consistent with MTDS and domestic market development; note some SOEs aim to reduce FX risk in the medium term.
- Support development of a deep and liquid FX market to enable hedging opportunities (e.g., forward transactions); BCRR has a role in promoting hedging market development.
- Continue capacity development on debt management, prioritize preparation for international debt issuance and an investor relations program aimed at attracting non-resident participation in the local market to bolster SALM development.

*Source: 1criea2023002 (IMF country report excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1criea2023002.pdf_