## 2. Countries Applying Elements of SALM

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### Introduction: purpose and scope of SALM
- SALM focuses on identifying and managing financial risk exposures of the public sector to preserve a sound balance sheet in support of a sustainable policy path and economic growth.
- The sovereign balance sheet can include assets and liabilities of the general government (central government, municipalities, and public pension entities) or the public sector (general government, state owned enterprises, and the central bank); SALM can also encompass off-balance sheet instruments and policy commitments.
- SALM entails monitoring and quantifying impacts of movements in exchange rates, interest rates, inflation, and commodity prices on sovereign assets and liabilities and containing asset- and debt-related vulnerabilities in an integrated way.
- Advantages of a comprehensive SALM framework:
  - Allows analysis of financial characteristics of the balance sheet, identification of sources of costs and risks, and quantification of correlations among these sources.
  - Facilitates development of a financial risk management strategy to manage exposures in a cost-efficient manner.
  - When applied to the consolidated public sector portfolio, overall sovereign risk exposures can be effectively analyzed and managed.
- Preconditions for effective SALM:
  - Availability of relevant sovereign asset and liability data.
  - Political will to undertake coordination-intensive implementation.

### SALM framework and stylized sovereign balance sheet: interactions and practical challenges
- Policy interactions and potential conflicts:
  - Monetary policy affects SALM through market interest-rate and exchange-rate management and sovereign balance-sheet size.
  - Debt management aims to minimize debt service cost subject to prudent risk; strategic asset management aims to accumulate adequate net foreign assets.
  - Fiscal policy objectives (e.g., limiting volatility of annual debt service) can constrain SALM objectives (duration and currency composition).
  - Governance arrangements (central bank, SOEs, sovereign wealth funds) can both support and constrain SALM implementation.
- Practical challenges:
  - Most governments do not compile a full statement of financial position; accounting treatments differ across entities.
  - Many government assets are tangible or off-balance-sheet and do not lend themselves to financial risk analysis; the tax capacity is hard to quantify as an asset.
  - Granularity is often insufficient (assets/liabilities by currency, maturities, interest/revenue profiles).
  - Institutional coordination is complex where participating institutions have statutory independence.
- Common pragmatic approach:
  - Focus on major financial assets (international reserves, cash balances, sovereign funds, pension funds) and major financial liabilities; use incremental/sub-portfolio approaches when a full overview is lacking.
- Four common SALM operation categories observed in practice:
  - Coordinated management of foreign currency reserves and foreign currency debt.
  - Managing asset levels to provide buffers against adverse market conditions.
  - Transactions between central bank and government to strengthen policy outcomes, reduce cost, and reduce risk.
  - Analyzing variables driving government revenues and developing debt portfolios and instruments to reduce exposures.

### Country experiences and examples
- Survey finding: the number of countries with comprehensive SALM frameworks is limited; most produce accounting balance sheets primarily to monitor assets and liabilities rather than determine mismatches.
- Examples of coordination and practices cited:
  - Currency composition coordination of public debt and net international reserves: Canada, Denmark, Hungary, New Zealand, Turkey, Sweden, United Kingdom.
  - Offsetting domestic on-lending against domestic debt: Denmark and New Zealand.
  - Explicit sovereign liquidity risk policies: Denmark, New Zealand, South Africa, Turkey, Uruguay.
  - Central bank sterilization addressed via debt buybacks or prepayments financed by reserves: Brazil, Mexico, Russia.
  - Many sovereigns consider revenue-base risk when developing medium-term debt management; high shares of foreign-currency debt pose risks when revenues are largely local-currency.

### The case of Uruguay — objectives, progress, and main challenges
- Policy objectives and macrofinancial context:
  - Active debt-management objectives: reduce share of government debt denominated in foreign currency, lengthen average maturity, smooth redemption profile.
  - Central bank has maintained high levels of international reserves, currently well above prudential international norms.
  - Basel regulatory implementation supported financial stability; banking sector has high capital and adequate liquidity buffers.
- Remaining challenges:
  - High financial dollarization and widespread indexation; lack of dollar-peso hedging markets.
  - Inflation: returned to central bank’s 3.0-7.0 percent target range in 2017; climbed around 8 percent in 2018–2019 and strayed outside the range in early 2018.
  - Bank-deposit dollarization rates remain around 80 percent.
  - Approximately 30 percent of government debt is indexed to CPI inflation.
  - Institutionalized wage indexation of pension payments; many labor wage contracts remain indexed to past inflation.
- Recent progress:
  - In 2017, government issued its first-ever nominal fixed rate bonds in global markets.
  - A new wage setting guideline reduces backward indexation of wages in the private sector.
  - A nominal yield curve has been generated from government instruments, aiding development of hedging markets (forwards and swaps).
- Main policy challenges going forward:
  - (1) Continuing de-dollarization and affirming stability in demand for the peso.
  - (2) Ensuring monetary policy can anchor inflationary expectations and control peso interest-rate movements.
  - (3) Developing robust and liquid yield curves in local currency to promote derivatives markets to hedge currency exposure.
  - (4) Increasing internationalization of local sovereign bond markets to diversify investor base and broaden access to domestic currency financing.
- Uruguay’s SALM focus: currency exposure in agents’ balance sheets, distribution of risks across the economy, reducing aggregate vulnerability while redistributing and mitigating risk within the economy.

### Identified balance-sheet exposures (Uruguay, end-December 2017 simplified reported entries)
- Central Government (USD billions):
  - Financial Assets: 2.9
  - Financial Liabilities: 28.7
  - CP-Indexed Local Currency (LC-UI) Assets: 0
  - CP-Indexed Local Currency (LC-UI) Liabilities: 9.7
  - Nominal Uruguay Pesos (UYU) Assets: 0.8
  - Nominal Uruguay Pesos (UYU) Liabilities: 3.7
  - Wage-Indexed Local Currency (LC-UW) Assets: 0.0
  - Wage-Indexed Local Currency (LC-UW) Liabilities: 1.1
  - Foreign Currency (FX) Assets: 2.1
  - Foreign Currency (FX) Liabilities: 14.1
  - Net Financial Worth: -25.8
  - Note: Property, Plant and Equipment; Investment in SOEs, BSE and the BCU; Other Liabilities present but not valued in the simplified presentation.
- Central Bank of Uruguay (BCU) (USD billions; end-December 2017):
  - Financial Assets: 23.3
  - Financial Liabilities: 21.1
  - CP-Indexed Local Currency (LC-UI) Assets: 6
  - CP-Indexed Local Currency (LC-UI) Liabilities: 0.6
  - Nominal Uruguay Pesos (UYU) Assets: 0
  - Nominal Uruguay Pesos (UYU) Liabilities: 11.8
  - Wage-Indexed Local Currency (LC-UW) Assets: 0
  - Wage-Indexed Local Currency (LC-UW) Liabilities: 0.0
  - Foreign Currency (FX) Assets: 17
  - Foreign Currency (FX) Liabilities: 8.8
  - Net Financial Worth: 2.2
- Public enterprises (SOEs) (USD billions; end-December 2017):
  - Financial Assets: 1.9
  - Financial Liabilities: 2.5
  - CP-Indexed Local Currency (LC-UI) Assets: 0.0
  - CP-Indexed Local Currency (LC-UI) Liabilities: 0.5
  - Nominal Uruguay Pesos (UYU) Assets: 1.2
  - Nominal Uruguay Pesos (UYU) Liabilities: 0.2
  - Wage-Indexed Local Currency (LC-UW) Assets: 0.0
  - Wage-Indexed Local Currency (LC-UW) Liabilities: 0.1
  - Foreign Currency (FX) Assets: 0.7
  - Foreign Currency (FX) Liabilities: 1.6
  - Net Financial Worth: -0.5
  - Other Assets: 12.4
  - Other Liabilities: 4.1
  - Property, Plant and Equipment: 7.6
  - Other: 4.8
  - Total Assets: 14.4
  - Total Liabilities and Net Worth: 14.4
- State-Owned Insurance Bank (BSE) (USD billions; end-December 2017):
  - Financial Assets: 3.8
  - Financial Liabilities: 3.6
  - CP-Indexed Local Currency (LC-UI) Assets: 1.37
  - CP-Indexed Local Currency (LC-UI) Liabilities: 1.02
  - Nominal Uruguay Pesos (UYU) Assets: 0.85
  - Nominal Uruguay Pesos (UYU) Liabilities: 0.16
  - Wage-Indexed Local Currency (LC-UW) Assets: 1.34
  - Wage-Indexed Local Currency (LC-UW) Liabilities: 2.23
  - Foreign Currency (FX) Assets: 0.26
  - Foreign Currency (FX) Liabilities: 0.17
  - Net Financial Worth: 0.2
  - Other Assets: 0.49
  - Other Liabilities: 0.19
  - Property, Plant and Equipment: 0.38
  - Other: 0.10
  - Total Assets: 4.20
  - Total Liabilities and Net Worth: 4.20
- Consolidated public sector (partial, end-December 2017):
  - Financial Assets: 20.3 (USD billions)
  - Financial Liabilities: 48.4 (USD billions)
  - CP-Indexed Local Currency (LC-UI) Assets: 0.8 (USD billions)
  - CP-Indexed Local Currency (LC-UI) Liabilities: 10.2 (USD billions)
- Key consolidated exposures and quantified dynamics:
  - Central government short in U.S. dollars by around USD 12 billion (government balance sheet in isolation).
  - Central government short CP-Indexed Local Currency (LC-UI) by around USD equivalent 10 billion.
  - Central government short Wage-Indexed Local Currency (LC-UW) by around USD equivalent 1 billion.
  - Specific quantified exposures noted: 8.2 billion in foreign currencies (mostly USD; other currencies are close to flat), long UI by USD equivalent 5.4 billion, and short UYU by USD equivalent 11.8 billion.
  - SOE debt: USD 0.8 billion equivalent in local currencies and 1.6 billion in USD.
  - SOEs’ equity is 60 percent of total assets.
  - BSE invests most assets under management in CPI-indexed securities, generating a growing exposure to nominal wages and inflation.
  - The two largest SOEs continuously need to purchase foreign currencies (largely to finance purchases of oil).
- Data limitations highlighted:
  - No formal statement of financial positions compiled under generally accepted accounting standards for some central government entries.
  - Substantial property, plant, and equipment and other assets/liabilities may exist but are unvalued or incompletely reported.
  - More granular information on liabilities, flow items, and classification of BCU liabilities is required for a full SALM assessment.

### Institutional arrangements, transactions, and instruments used in Uruguay
- Institutional coordination:
  - PDCC Public Debt Coordination Committee established in April 2016 to coordinate debt management strategies of the BCU and the government; headed by the Manager of Economic Policy and Markets from the BCU.
  - PDCC responsibilities: development of domestic markets, management of the public sector consolidated balance sheet, potential risk-mitigating strategies for publicly-owned companies.
  - PDCC has met every 3 months since April 2016 and publishes a summary of main issues discussed.
- Market segmentation of issuances:
  - BCU issues LRM up to one year to meet monetary targets (30, 90, 180, and 360 days).
  - MEF issues directed to provide government financing for longer tenors, including fixed rate bonds and CPI inflation-indexed bonds.
  - MEF six-month issuance plans factor in information from BCU market operations on demand and liquidity.
- Liability management operation (July 2015 coordinated operation):
  - Two-stage coordinated issuance and exchange operation by the government and BCU.
    - Stage 1: Government issued medium-term bonds in local currency via auction; market participants could buy with cash (pesos or dollars) or exchange holdings of short-residual-maturity central bank securities and/or central government securities.
    - Stage 2: BCU and MoF exchanged BCU securities delivered in Stage 1 for pesos and/or USD from the central bank.
  - Government placed a Peso equivalent of US$960 million; investors largely bought bonds by tendering holdings of shorter-dated central bank securities.
  - The government exchanged tendered BCU securities for dollars from the central bank, creating “new money” for the central government and allowing the BCU to cancel its own securities (reducing BCU balance sheet).
  - Outcomes:
    - Reduced currency mismatches for the central government by increasing local-currency liabilities and increasing dollar assets via exchanged central bank securities.
    - BCU mitigated its long-in-dollars balance-sheet currency mismatch by swapping high-coupon local-currency liabilities in exchange for dollar reserves, offsetting part of sterilization cost-of-carry.
    - Increased average time to maturity of consolidated public sector debt.
    - Contributed to local market development by enabling investors to switch from several small-volume securities into fewer, more liquid benchmarks.
- Hedging foreign-exchange risk in SOEs (2017 off-market dollar forward transactions):
  - BCU (long USD position) sold dollar forwards to ANCAP and UTE (short USD positions) at market prices with standard counterparty-risk clauses to avoid implicit subsidy perceptions.
  - Transactions enabled public enterprises to mitigate exchange-rate fluctuations where local hedging markets were limited, redistributing FX risk toward entities better able to absorb it.
- Development of new instruments (April 2018 legislation):
  - Creation of a daily accounting unit tracking nominal wage index changes (Índice Medio de Salario Nominal - IMSN).
  - Government intends to issue medium and long-dated Treasury Notes in local currency tied to nominal wage changes to help BSE match asset and liability composition for retirement annuities.
  - Policy trade-offs:
    - Instruments reduce insurance-company risk but transfer those risks to the central government (making government the residual public-sector balance-sheet risk manager).
    - Support debt dedollarization and broaden local financing sources.
    - Potential downsides: may detract from conventional securities issuance and liquidity; purchases concentrated in BSE could limit secondary-market benefits and fragment the domestic government bond market.
  - Future market development goal: a yield curve in the new unit of account would facilitate an efficient swap market between the new accounting unit and CP-Indexed Local Currency (LC-UI).

### Lessons learned, implementation experience, and steps forward
- Adoption and scope:
  - Uruguay’s broad definition of “gross public sector debt” (including BCU, most SOEs, and two financial entities) enables portfolio-level risk addressing and use of natural hedges within the consolidated balance sheet.
  - Lack of local FX hedging markets both constrains and motivates intra-sovereign solutions.
- Institutional coordination and accountability:
  - SALM operations evolved from informal cooperation to institutional arrangements; DMU and BCU pivotal in implementation; PDCC improved systematic analysis and decision-making.
  - Negotiation across entities with differing legal requirements and policy objectives is necessary; accountability must remain with delegated authorities.
  - Residual risk management should preserve incentives for individual entities to manage their own balance sheets efficiently; PDCC provides informal decisions requiring state approval when Treasury becomes residual risk manager.
- Valuation and reporting:
  - Accounting conventions (mark-to-market vs historical cost) critically affect valuation and perceived volatility and can create misleading combined reporting outcomes; supplementary position and performance reporting is recommended.
- Risk mitigation and market development:
  - Consolidated balance-sheet analysis enables policy changes at source (risk avoidance, retention, transfer).
  - Domestic capital market depth and structure shape SALM implementation; lack of hedging instruments encourages sovereign-provided hedges.
  - Market and instrument development (e.g., IMSN-linked securities) can help match insurance-company liabilities but transfer risks to the sovereign.
- Implementation sequencing:
  - Recommended analytical stages:
    - Stage 1: Identify scope and relevant entities.
    - Stage 2: Analyze financial risk across entities to reveal natural hedges and net risk positions (tools: mean-variance, VaR, CaR, stress tests).
    - Stage 3: Develop SALM strategy considering sovereign risk-bearing capacity and cost-risk tradeoffs (risk avoidance, retention, transfer).
    - Stage 4: Implement strategy and evaluate outcomes, including instrument choices and policy changes.
- Data and monitoring:
  - Granular data (currency composition, maturity profile, asset allocation, duration) are needed for net currency and interest-rate exposure analysis.
  - Static balance-date information can provide an initial approximation; time-variation analysis and ad hoc stress testing should complement monitoring.
- Institutional enablers:
  - Clear institutional structure, close coordination, information sharing, and strong leadership may be required to align incentives and translate SALM analysis into implementable strategies.

### Appendix highlights: liability management and country cases (selected operations and practices)
- Liability management operations to address common risks:
  - Refinancing risk/rollover risk: smooth maturity profile via primary market issuance; regular use of buybacks and exchanges; use of amortizing bonds.
  - Funding liquidity and market liquidity risk: cash buffers; contingency credit lines; issuance in key maturity segments; market makers and securities lending facilities.
  - Interest-rate risk: targets for fixed/floating issuance; interest-rate derivatives; changes in portfolio composition.
  - Exchange-rate risk: limits for overall FX risk and benchmark composition; bond exchanges to achieve targeted local/foreign currency mix; cross-currency swaps and FX derivatives where available.
  - Counterparty and legal risks: counterparty credit limits; collateral; standard legal agreements; sound internal processes.
  - Operational risk: clear internal responsibilities; documented processes; four-eye principle; trained staff.
- Selected SALM country cases (coordination examples summarized):
  - Canada, New Zealand, Australia, Hungary, Mexico, Denmark, Turkey, Finland — varying coordination mechanisms, delegation arrangements, and use of ALM principles to manage consolidated positions, reserve composition, and market development.

*Source: wpiea2019290-print-pdf — “2. Countries Applying Elements of SALM” (IMF).*

### 1. Central Government’s Balance Sheet ..................................................................................

### 1. Central Government’s Balance Sheet

### Major sections listed
- 1. Central Government’s Balance Sheet ..................................................................................15
- 2. Central Bank’s Balance Sheet ..............................................................................................17
- 3. Public Enterprises’ Balance Sheet .......................................................................................18
- 4. State-Owned Insurance Bank’s Balance Sheet ....................................................................19
- 5. Consolidated Public Sector Balance Sheet ..........................................................................20

### Figures enumerated in the source
- 1. Balance Sheet Currency Mismatches across Public Sector Sub-Portfolios .........................20
- 2. Stage 1: Coordinated Issuance and Liability Management Operation by the MoF and the Central Bank ..................................................................................................................24
- 3. Stage 2: Coordinated Issuance and Liability Management Operation by the MoF and the Central Bank .................................................................................................................24
- 4. Hedging Foreign Currency Risk in State-Owned Non-Financial Enterprises .....................26

### Appendices
- 1. Liability Management Operations .......................................................................................38

*Source: wpiea2019290-print-pdf - 1. Central Government’s Balance Sheet (IMF).*

### 2. Countries Applying Elements of SALM..............................................................................40

### 2. Countries Applying Elements of SALM

### I. Introduction
- SALM focuses on the identification and management of the financial risk exposures of the public sector as a whole so that a sound balance sheet is preserved in support of a sustainable policy path and economic growth.
- The sovereign balance sheet includes assets and liabilities of the general government (central government, municipalities, and public pension entities) or the public sector (general government, state owned enterprises, and the central bank). The SALM approach can encompass also off-balance sheet instruments and policy commitments.
- SALM entails monitoring and quantifying the impact of movements in economic and financial variables, including exchange rates, interest rates, inflation, and commodity prices, on sovereign assets and liabilities, and containing other asset- and debt-related vulnerabilities in an integrated way.
- Advantages of a comprehensive SALM framework:
  - Allows analysis of the financial characteristics of the balance sheet, identification of sources of costs and risks, and quantification of the correlations among these sources.
  - Facilitates development of a financial risk management strategy to manage exposures in a cost-efficient manner.
  - When applied to the consolidated public sector portfolio, overall sovereign risk exposures can effectively be analyzed and managed.
- SALM can be adapted to support long-term macroeconomic and developmental objectives (economic diversification, broadening export markets, reducing dependence on key imports) and can help identify long-term fiscal challenges (e.g., unfunded social security liabilities).
- Conceptual and operational challenges to implementing a comprehensive SALM:
  - Many governments do not compile a full statement of financial positions.
  - Many government assets are tangible (land, buildings, plant) or off-balance-sheet positions that do not lend themselves to analysis of financial risk.
  - A government’s main asset is its ability to tax, which relates to discretionary fiscal policy rather than on-balance-sheet financial assets.
  - Responsibility for parts of the public sector balance sheet is typically divided across institutions.
- Preconditions for effective SALM: availability of relevant sovereign asset and liability data; political will to undertake coordination-intensive implementation.
- The lessons and recommendations in this chapter mainly reflect the experience of Uruguay, generalized from local conditions.

### II. SALM framework and the stylized sovereign balance sheet
- SALM and economic policy
  - Objective: improve efficiency of policy implementation by reducing risk and/or cost consistent with monetary and fiscal policies, public debt management, SOEs, and publicly managed financial-asset portfolios.
  - Effective SALM requires coordination at policy level (e.g., levels and composition of foreign-currency reserves and foreign-currency debt).
  - Policy interactions and potential conflicts:
    - Monetary policy affects SALM through market interest rate and exchange rate management and sovereign balance sheet size. Debt management aims to minimize debt service cost subject to prudent risk. Strategic asset management aims to accumulate adequate net foreign assets (including foreign exchange reserves) for monetary and FX policy and shock buffers. Excess foreign currency assets may be managed via investment portfolios or sovereign wealth funds.
    - Fiscal policy objectives (limiting size/volatility of annual debt service) can affect SALM objectives (constraints on duration and currency composition).
    - Debt management objectives provide the basis for integrating public debt management (PDM) and SALM strategies; a well-articulated PDM strategy is essential.
    - International and domestic capital market structure affects SALM implementation (illiquid/shallow domestic markets, lack of reliable local investor base, restrictions on foreign investors, lack of hedging instruments).
    - Governance of publicly managed financial asset portfolios emphasizes board/manager independence to pursue agreed objectives; this independence could constrain SALM scope but the central government may have legitimate interest where concentration risk or offsetting asset allocations arise.
    - Governance of SOEs emphasizes arm’s-length relationships; nonetheless the central government may have interest in SOE financing activities, especially where guarantees exist.
- Practical challenges of applying SALM
  - Data requirements and contours of sovereign balance sheet:
    - ALM is well understood in financial intermediaries; application to sovereigns faces conceptual differences and practical difficulties.
    - Most governments do not compile a full statement of financial position; accounting treatments differ across entities.
    - Many government assets are tangible and do not readily lend themselves to financial risk analysis; the tax capacity as an asset is hard to quantify.
    - Even with consistent reporting, granularity may be insufficient (e.g., assets/liabilities by each foreign currency, maturities, interest/revenue profiles).
    - Common pragmatic approach: consider major financial assets (international reserves, cash balances, sovereign funds, pension funds) alongside major financial liabilities.
  - Institutional coordination:
    - Implementation depends on policy objectives and institutional arrangements; participating institutions may have statutory independence (central bank, SOEs, sovereign wealth funds), complicating coordination.
    - Example: foreign reserves managed by the central bank while the Ministry of Finance manages government foreign-currency debt — objectives and horizons may differ.
    - Potential coordination approaches:
      - Limit central government interventions to support SALM while respecting independent governance.
      - Use an overlay strategy: center aggregates positions and offsets inconsistent risks without interfering in fund management — incurs transaction costs and may be limited to liquid asset classes.
    - Legislative and institutional frameworks can set limits and require transparency to lessen undue political interference when aligning investment mandates with aggregate SALM objectives.
- Country experiences in applying SALM
  - Many governments apply SALM principles without a full economic form of the sovereign balance sheet or formal SALM objectives; they often determine specific debt or reserve management strategies to reduce exposures without quantifying risks.
  - Cangoz, Boitreaud and Dychala (2018) survey: the number of countries with comprehensive SALM frameworks is limited; most produce an accounting balance sheet primarily to monitor assets and liabilities rather than determine mismatches.
  - Observed differences across countries: most include SOEs in the sovereign balance sheet; only a minority include central banks (sometimes only international reserves and sovereign funds).
  - Challenges cited: inadequate institutional arrangements, uncertain or lacking mandates, coordination between institutions, data availability, and valuation of assets.
  - Incremental/sub-portfolio approaches commonly used where full overview is lacking; four common operation categories:
    - Coordinated management of foreign currency reserves and foreign currency debt.
    - Managing asset levels to provide buffers against adverse market conditions.
    - Transactions between central bank and government to strengthen policy outcomes, reduce cost, and reduce risk.
    - Analyzing variables driving government revenues and developing alternative debt portfolios and market instruments to reduce exposures.
  - Examples of countries coordinating currency composition of public debt and net international reserves: Canada, Denmark, Hungary, New Zealand, Turkey, Sweden, United Kingdom (some match duration as well).
  - Examples of offsetting domestic on-lending against domestic debt: Denmark and New Zealand.
  - Explicit sovereign liquidity risk policies: Denmark, New Zealand, South Africa, Turkey, Uruguay.
  - Central bank sterilization and resulting balance sheet mismatches addressed via debt buybacks or prepayments financed by reserves: Brazil, Mexico, Russia.
  - Many sovereigns account for revenue base risk characteristics when developing medium-term debt management; high shares of foreign-currency debt pose risks given most revenues are in local currency.

### III. The case of Uruguay
- Policy objectives and macrofinancial context
  - Over the past decade and a half, Uruguay authorities have worked toward strengthening macroeconomic and financial stability.
  - Active debt management objectives: reduce share of government debt denominated in foreign currency, lengthen average maturity, smooth redemption profile.
  - To support external stability, the central bank has maintained high levels of international reserves, currently well above prudential international norms.
  - Prudential implementation of the Basel regulatory framework has supported financial stability; the banking sector shows sound indicators including high capital levels and adequate liquidity buffers.
  - Remaining challenges:
    - Still high financial dollarization and widespread indexation; lack of dollar-peso hedging markets.
    - Inflation dynamics: returned to central bank’s 3.0-7.0 percent target range in 2017; climbed around 8 percent in 2018–2019 and strayed outside the range in early 2018.
    - Bank-deposit dollarization rates remain around 80 percent.
    - Approximately 30 percent of government debt is indexed to CPI inflation.
    - Institutionalized wage indexation of pension payments; large share of labor wage contracts (mostly public sector) remain indexed to past inflation.
  - Recent progress:
    - In 2017, government issued its first-ever nominal fixed rate bonds in global markets.
    - A new wage setting guideline reduces backward indexation of wages in the private sector.
    - A nominal yield curve has been generated from government instruments and the investor base has been developed, aiding development of hedging markets (forwards and swaps).
  - Main policy challenges going forward:
    - (1) Continuing de-dollarization and affirming stability in demand for the peso.
    - (2) Ensuring the ability of monetary policy to anchor inflationary expectations and control peso interest rate movements.
    - (3) Developing robust and liquid yield curves in local currency to promote derivatives markets to hedge currency exposure.
    - (4) Increasing internationalization of local sovereign bond markets to diversify investor base and broaden access to domestic currency financing.
  - Uruguay’s SALM focus: currency exposure in agents’ balance sheets, distribution of risks across the economy, reducing aggregate vulnerability while redistributing and mitigating risk within the economy.
- Identifying exposures in the consolidated public sector balance sheet
  - Uruguay’s SALM framework uses a wide perimeter of consolidation: Central Government, Central Bank of Uruguay (BCU), four major non-financial SOEs, and State Insurance Bank (BSE).
  - Uruguay reports headline debt figures on a consolidated basis for the whole public sector, including the central bank and non-financial and financial public enterprises.
  - The government and the IMF have analyzed the consolidated public-sector balance sheet and extended ALM analysis; simplified entity balance sheets were prepared and consolidated with inter-entity transactions netted out.
  - Central Government balance sheet (end-December 2017, in USD billions) — simplified reported financial entries:
    - Financial Assets: 2.9
    - Financial Liabilities: 28.7
    - CP-Indexed Local Currency (LC-UI) Assets: 0
    - CP-Indexed Local Currency (LC-UI) Liabilities: 9.7
    - Nominal Uruguay Pesos (UYU) Assets: 0.8
    - Nominal Uruguay Pesos (UYU) Liabilities: 3.7
    - Wage-Indexed Local Currency (LC-UW) Assets: 0.0
    - Wage-Indexed Local Currency (LC-UW) Liabilities: 1.1
    - Foreign Currency (FX) Assets: 2.1
    - Foreign Currency (FX) Liabilities: 14.1
    - Net Financial Worth: -25.8
    - Other asset/liability categories (Property, Plant and Equipment; Investment in SOEs, BSE and the BCU; Other Liabilities) were noted as present but not valued in the simplified presentation.
  - Data limitations:
    - No formal statement of financial positions compiled under generally accepted accounting standards for some central government entries.
    - Substantial property, plant, and equipment and other assets/liabilities may exist but are unvalued or incompletely reported.
  - Net positions and exposures (government balance sheet in isolation):
    - Short foreign currency (primarily U.S. dollars) by around USD 12 billion.
    - Short CP-Indexed Local Currency (LC-UI) by around USD equivalent 10 billion.
    - Short Wage-Indexed Local Currency (LC-UW) by around USD equivalent 1 billion.
    - Apart from returns from investment in SOEs, debt is serviced by the “tax asset”; ALM relevance is the sensitivity of tax revenues to the level of the USD, CPI, and UW.
  - Government policy response in debt composition:
    - Policy of reducing exchange rate risk by reducing share of foreign currency debt in favor of UI, reflecting tax revenues denominated in Uruguayan Peso (UYU) and expected to rise with the price level.
  - Central Bank of Uruguay (BCU) balance sheet note:
    - BCU balance sheet assets: USD 23.3 billion, equivalent to almost 40 percent of GDP (table noted; detailed BCU breakdown follows in source).

*Source: Extracted and summarized from “2. Countries Applying Elements of SALM” (wpiea2019290-print-pdf).*

### 8.2 billion in foreign currencies (mostly USD; other currencies are close to flat), long UI by

### wpiea2019290-print-pdf - 8.2 billion in foreign currencies (mostly USD; other currencies are close to flat), long UI by

### Central themes: balance-sheet structure and currency exposures
- Central Bank (BCU) balance-sheet features:
  - Financial Assets: 23.3 (USD billions)
  - Financial Liabilities: 21.1 (USD billions)
  - CP-Indexed Local Currency (LC-UI) Assets: 6 (USD billions)
  - CP-Indexed Local Currency (LC-UI) Liabilities: 0.6 (USD billions)
  - Nominal Uruguay Pesos (UYU) Assets: 0 (USD billions)
  - Nominal Uruguay Pesos (UYU) Liabilities: 11.8 (USD billions)
  - Wage-Indexed Local Currency (LC-UW) Assets: 0 (USD billions)
  - Wage-Indexed Local Currency (LC-UW) Liabilities: 0.0 (USD billions)
  - Foreign Currency (FX) Assets: 17 (USD billions)
  - Foreign Currency (FX) Liabilities: 8.8 (USD billions)
  - Net Financial Worth: 2.2 (USD billions)

- Public enterprises (SOEs) balance-sheet highlights (end-December 2017):
  - Financial Assets: 1.9 (USD billions)
  - Financial Liabilities: 2.5 (USD billions)
  - CP-Indexed Local Currency (LC-UI) Assets: 0.0 (USD billions)
  - CP-Indexed Local Currency (LC-UI) Liabilities: 0.5 (USD billions)
  - Nominal Uruguay Pesos (UYU) Assets: 1.2 (USD billions)
  - Nominal Uruguay Pesos (UYU) Liabilities: 0.2 (USD billions)
  - Wage-Indexed Local Currency (LC-UW) Assets: 0.0 (USD billions)
  - Wage-Indexed Local Currency (LC-UW) Liabilities: 0.1 (USD billions)
  - Foreign Currency (FX) Assets: 0.7 (USD billions)
  - Foreign Currency (FX) Liabilities: 1.6 (USD billions)
  - Net Financial Worth: -0.5 (USD billions)
  - Other Assets: 12.4 (USD billions)
  - Other Liabilities: 4.1 (USD billions)
  - Property, Plant and Equipment: 7.6 (USD billions)
  - Other: 4.8 (USD billions)
  - Total Assets: 14.4 (USD billions)
  - Total Liabilities and Net Worth: 14.4 (USD billions)

- State-Owned Insurance Bank (BSE) balance-sheet highlights (end-December 2017):
  - Financial Assets: 3.8 (USD billions)
  - Financial Liabilities: 3.6 (USD billions)
  - CP-Indexed Local Currency (LC-UI) Assets: 1.37 (USD billions)
  - CP-Indexed Local Currency (LC-UI) Liabilities: 1.02 (USD billions)
  - Nominal Uruguay Pesos (UYU) Assets: 0.85 (USD billions)
  - Nominal Uruguay Pesos (UYU) Liabilities: 0.16 (USD billions)
  - Wage-Indexed Local Currency (LC-UW) Assets: 1.34 (USD billions)
  - Wage-Indexed Local Currency (LC-UW) Liabilities: 2.23 (USD billions)
  - Foreign Currency (FX) Assets: 0.26 (USD billions)
  - Foreign Currency (FX) Liabilities: 0.17 (USD billions)
  - Net Financial Worth: 0.2 (USD billions)
  - Other Assets: 0.49 (USD billions)
  - Other Liabilities: 0.19 (USD billions)
  - Property, Plant and Equipment: 0.38 (USD billions)
  - Other: 0.10 (USD billions)
  - Total Assets: 4.20 (USD billions)
  - Total Liabilities and Net Worth: 4.20 (USD billions)

### Key observations on currency mismatches and exposures
- Overall salient features of individual public sector entities’ balance sheets:
  - (i) Central government’s balance sheet is short in U.S. dollars (USD) as it contains the most foreign currency debt.
  - (ii) The BCU’s balance sheet is large, with long USD and CPI-linked positions but short in pesos.
  - (iii) SOEs’ balance sheets exhibit some mismatches relating to foreign currency debt, and show flow exposures to foreign currencies that are difficult to hedge due to the incompleteness of local markets.
  - (iv) The BSE’s balance sheet has a growing exposure to the nominal wage index, with a rising number of beneficiaries seeking annuities.

- Specific quantified exposures and dynamics:
  - 8.2 billion in foreign currencies (mostly USD; other currencies are close to flat), long UI by USD equivalent 5.4 billion, and short UYU by USD equivalent 11.8 billion.
  - In 2014, when nonresident demand was strong, the balance sheet had total assets of over USD 25 billion.
  - SOEs’ equity is 60 percent of total assets.
  - SOE debt: USD 0.8 billion equivalent in local currencies and 1.6 billion in USD.
  - BSE currently invests most assets under management in CPI-indexed securities, generating a growing exposure to the relative movements of nominal wages and inflation.
  - The two largest SOEs have a need to continuously purchase foreign currencies (largely to finance purchases of oil).

### Flow exposures, market incompleteness, and hedging constraints
- Flow and contract exposures:
  - UTE has 20-year contracts to buy electricity from private providers denominated in USD; it also exports energy to Argentina priced in USD.
  - ANCAP purchases oil in the international market (exposed to variable USD and oil prices) while officially administered prices of refined products are denominated in local currency with only limited pass-through from international prices.

- Market limitations and hedging arrangements:
  - Lack of domestic assets that co-vary with the wage index (UW) forces BSE to rely on GoU-provided tailor-made UW assets (private placements).
  - Virtually no public equity market is noted.
  - As the pension system matures and more retirees purchase annuities, the BSE’s asset/liability indexed exposure is expected to grow rapidly.

### Consolidation and policy implications
- Consolidated public sector balance-sheet (end-December 2017, partial figures shown):
  - Financial Assets: 20.3 (USD billions)
  - Financial Liabilities: 48.4 (USD billions)
  - CP-Indexed Local Currency (LC-UI) Assets: 0.8 (USD billions)
  - CP-Indexed Local Currency (LC-UI) Liabilities: 10.2 (USD billions)

- Net USD position and reserve composition considerations:
  - USD liabilities exceed USD assets by 4.3 billion.
  - High foreign-currency reserves are offset to a large degree by USD reserve requirements that banks must hold and the government’s USD debt.
  - The composition of FX reserves should consider the currency composition of external debt and FX reserves: allocation to USD can reduce risk if external debt is USD-denominated (natural-hedging-of-debt argument), whereas allocation to other currencies may increase risk.
  - The balance-sheet analysis supports a government strategy of reducing USD debt to lower risk, subject to cost and trade-offs as net USD debt decreases over time.

### Data and analysis gaps noted
- A full picture of SALM issues requires more granular information on individual entities’ liabilities and flow items, including which BCU liabilities are part of the “monetary base” and what portion of BCU liabilities does not pay interest.
- A thorough analysis of each SOE’s business, balance-sheet components, flows, business strategy, and public policy considerations is necessary to assess ALM issues fully.
- The GoU does not have readily identifiable sources of foreign-currency revenue beyond the balance-sheet items identified.

*Source: Central Bank; Public Enterprises; BSE.*

### 0.6  Nominal Uruguay Pesos (UYU) 14.2

### wpiea2019290-print-pdf - 0.6  Nominal Uruguay Pesos (UYU) 14.2

### Role of Institutional Entities’ Arrangements in Supporting SALM
- SALM requires comprehensive coordination across sovereign entities responsible for monetary policy, fiscal policy, and debt management to capture interrelationships and correlations among balance-sheet risks.
- The Central Bank of Uruguay (BCU):
  - Operates as an autonomous entity, primarily responsible for achieving price stability and regulating and supervising financial institutions.
  - Adopts an inflation targeting scheme in which a monetary aggregate is chosen as the policy variable.
  - Uses reserve requirements and issuance of short-term BCU securities (LRM) to manage banking system reserves.
  - Operates a daily deposit and credit facility.
  - Maintains a flexible exchange rate regime as an important stabilizer and intervenes in the exchange market to provide market liquidity in foreign currency.
  - Holds an ample level of international reserves that act as a buffer for severely illiquid conditions.
- Institutional coordination initiatives:
  - Establishment of the PDCC Public Debt Coordination Committee (PDCC) in April 2016 to formally coordinate debt management strategies of the BCU and the government.
  - The PDCC is headed by the Manager of Economic Policy and Markets from the BCU.
  - PDCC responsibilities include development of domestic markets, management of the public sector consolidated balance sheet, and potential risk-mitigating strategies for publicly-owned companies.
  - Since its creation in April 2016, the PDCC has met uninterruptedly every 3 months and publishes a summary of main issues discussed (in both English and Spanish).
- Market segmentation of issuances:
  - BCU issues: planned to meet monetary targets on a quarterly basis; issues LRM up to one year to maturity (30, 90, 180, and 360 days).
  - MEF (Ministry of Economy and Finance) issues: directed to provide government financing for longer tenors, including fixed rate bonds and CPI inflation-indexed bonds.
  - MEF issuance plans for the following six months factor in information from BCU market operations about expected demand and market liquidity conditions.
- PDCC topical coverage includes:
  - (i) assessing domestic and international debt capital market developments and impacts on local and foreign currency yield curves;
  - (ii) government domestic market issuance calendar;
  - (iii) developing domestic market instruments to help insurance companies reduce balance-sheet currency mismatches associated with annuities under the pension regime;
  - (iv) analysis of currency hedging alternatives for public-sector enterprises;
  - (v) connecting domestic financial markets in Uruguay to global clearing and settlement systems.

### Transactions Designed to Address Risk Exposure across the Sovereign Balance Sheet
- Strategy: identify and reallocate currency risk across public-sector institutions via cross-sectoral natural and financial hedging; account for cyclical macroeconomic properties and revenue-base risk characteristics.
- Liability management operation (July 2015 joint operation by central government and BCU):
  - Two-stage coordinated issuance and exchange operation:
    - Stage 1: Government issued medium-term bonds in local currency via auction; market participants could buy with cash (pesos or dollars) or exchange holdings of short-residual-maturity central bank securities and/or central government securities (shorter residual maturity and higher coupons).
    - Stage 2: BCU and MoF transaction where BCU securities delivered in Stage 1 were exchanged for pesos and/or USD from the central bank.
  - Government placed a Peso equivalent of US$960 million; investors largely bought bonds by tendering holdings of shorter-dated central bank securities.
  - The government exchanged tendered BCU securities for dollars from the central bank, creating “new money” for the central government and allowing the BCU to cancel its own securities (reducing BCU balance sheet).
  - Outcomes:
    - Reduced currency mismatches for the central government by increasing local-currency liabilities and increasing dollar assets via exchanged central bank securities.
    - BCU mitigated its long-in-dollars balance sheet currency mismatch by swapping high-coupon local currency liabilities in exchange for dollar reserves, offsetting part of sterilization cost-of-carry.
    - Increased average time to maturity of consolidated public sector debt, as longer-dated securities were bought in exchange for short-dated central bank securities.
    - Contributed to local market development by enabling investors to switch from several small-volume securities into fewer, more liquid benchmarks.
- Hedging FX risk in SOEs (2017 off-market dollar forward transactions):
  - BCU held a significant long USD position (assets > liabilities in foreign currency); ANCAP and UTE held short USD positions (liabilities > assets).
  - BCU sold dollar forwards to ANCAP and UTE at market prices with standard counterparty-risk clauses to avoid implicit subsidy perceptions.
  - Transactions enabled public enterprises to mitigate exchange rate fluctuation impacts on their balance sheets where local hedging markets were limited.
  - Macroeconomic effect: redistributed foreign exchange risk toward entities better able to absorb it, integrating risk management across the consolidated public sector.
- Development of domestic debt market instruments (April 2018 legislation):
  - Creation of a new daily accounting unit tracking nominal wage index changes (Índice Medio de Salario Nominal - IMSN).
  - Government intends to issue medium and long-dated Treasury Notes in local currency tied to nominal wage changes to help state-owned insurance company BSE match currency and maturity composition of assets and liabilities in its retirement annuity business.
  - Policy trade-offs and cautions:
    - These instruments reduce insurance-company risk but transfer those risks to the central government (making the government the residual public-sector balance-sheet risk manager).
    - They support debt dedollarization and broaden local financing sources.
    - Potential downsides: could detract from conventional securities issuance and liquidity; purchases may be concentrated in BSE, limiting secondary market benefits; could lead to fragmentation of the domestic government bond market.
  - Future market development:
    - A yield curve in the new unit of account would facilitate an efficient swap market between the new accounting unit and CP-Indexed Local Currency (LC-UI), providing insurance companies with additional hedging instruments.

### Lessons Learned and Steps Forward
- Adoption of SALM Framework:
  - Uruguay’s broader definition of “gross public sector debt” (including BCU, most SOEs, and two financial entities) enables portfolio-level risk addressing and use of natural hedges within the consolidated balance sheet.
  - Lack of local FX hedging markets both constrains and motivates intra-sovereign solutions.
- Institutional Coordination:
  - SALM operations evolved from informal cooperation to institutional arrangements.
  - DMU (Debt Management Unit) and BCU pivotal in SALM implementation; the PDCC monitors and shapes risk management across the wider public-sector balance sheet.
  - PDCC establishment improved systematic analysis of financial risk, costs and returns across main entities and aided decisions on transferring risk to private sector via insurance or capital markets.
- Identification of Exposures:
  - Expanding the scope to central government, central bank, and SOEs reveals natural hedges, mismatches, and risk concentrations.
  - Accounting conventions (mark-to-market vs historical price) critically affect valuation and perceived volatility; mark-to-market valuation amplifies value fluctuations compared to historical prices and highlights hedging gaps.
- Risk-mitigation Measures:
  - Consolidated balance-sheet analysis enables policy changes at source (risk avoidance, retention, or transfer).
  - Domestic capital market depth and structure shape SALM implementation; lack of market hedging instruments encourages use of sovereign balance sheet to provide hedges.
- Implementation:
  - Implementation requires negotiation given differing legal requirements and policy objectives across entities; accountability must remain with delegated authorities.
  - Accounting rules influence feasible strategies (e.g., the treatment of FX reserves cost-of-carry and transfer of BCU profits to the Ministry of Finance).
- Accountability:
  - Residual risk management must preserve incentives for individual entities to manage their own balance sheets efficiently.
  - PDCC provides informal decisions requiring state approval when Treasury becomes residual risk manager.

### Considerations for Sound Practices in Applying SALM
- Data Requirements:
  - Increasing availability of sovereign financial statements facilitates SALM, but granular data (currency composition, maturity profile, asset allocation, duration) are needed for net currency and interest-rate exposure analysis.
  - Static balance-date information can provide an initial approximation; time-variation analysis can supplement.
- Analytical Framework and Strategy (four stages):
  - Stage 1: Identify scope and relevant entities; Uruguay’s approach is relatively broad.
  - Stage 2: Analyze financial risk across entities to reveal natural hedges and net risk positions using tools such as mean-variance, VaR, CaR, or stress tests.
  - Stage 3: Develop SALM strategy considering sovereign risk-bearing capacity, balance-sheet strength, fiscal prospects, contingent liabilities, access to finance, and cost-risk tradeoffs (risk avoidance, retention, transfer).
  - Stage 4: Implement strategy and evaluate outcomes, including instrument choices and policy changes.
- Accounting and performance reporting:
  - Differing accounting practices between central banks (typically mark-to-market) and government debt managers (often historical cost) can create apparent combined reporting losses despite economic hedges.
  - Supplementary position and performance reporting (e.g., total return on net assets, performance attribution with mark-to-market for both assets and liabilities) can mitigate misleading metrics.
- Policy and Coordination:
  - SALM adds value in several circumstances, e.g., where government foreign-currency debt can be better matched to foreign-currency reserves, or where central banks have significant local-currency debt fragmenting the market.
  - A well-articulated public debt management (PDM) strategy with clear analysis and rationale enhances investor confidence and public understanding.
  - Domestic capital market structure (liquidity, investor base, hedging instruments) determines ability to implement SALM fully.
  - Successful SALM adoption requires clear institutional structure, close coordination, and information sharing to translate analysis into implementable financial risk strategies.
- Other Institutional Considerations:
  - Identify and address institutional impediments promptly; benefits of coordination may not accrue evenly across entities, weakening incentives.
  - Strong leadership may be required to overcome historic frictions and align incentives.

### Concluding Remarks
- Preconditions and sequencing for SALM adoption:
  - Need for an integrated sovereign balance sheet, an appropriate institutional coordination platform for included entities, and effective policy instruments to modify portfolio cost and risk characteristics.
  - A fully developed sovereign balance sheet may be a long-term goal; initially identify main assets and liabilities with material impact and analyze them (central government and central bank balance sheets are primary candidates).
- Institutional arrangements and implementation:
  - Formal body to coordinate SALM may take time to establish; Uruguay’s PDCC provided impetus for systematic analysis despite earlier reliance on existing channels.
  - Negotiations across entities with constitutional or statutory independence are necessary; operational independence of SALM requires a “meeting of minds” aligned with SALM objectives.
  - A separate SALM implementation entity (e.g., an expanded public debt management unit) may be desirable given its role, institutional arrangements, and capacity to execute high-value financial transactions.
- Reporting standards and market development:
  - Differing financial reporting standards and definitions of risk can reduce incentives for SALM cooperation; governments can support development of local instruments and derivative capacity when markets are lacking.
- Dynamic monitoring and feedback:
  - SALM serves as a monitoring device; implementation affects fiscal accounts, monetary and exchange rate policies, and institutional structures, potentially triggering policy reactions.
  - A dynamic SALM process should be accompanied by ad hoc stress testing and ex-ante scenario analysis to monitor, assess, and address sovereign portfolio risks iteratively.

*Source: Central Bank; content from the supplied IMF PDF chapter excerpt.*

### REFERENCES

### REFERENCES

### Selected citations
- Allen, Mark, Christoph B Rosenberg, Christian Keller, Brad Setser and Nouriel Roubini, 2002, “A Balance Sheet Approach to Financial Crisis,” IMF Working Paper WP/02/210 (Washington DC: International Monetary Fund).
- Anderson, Phillip R. D., 1999, “Debt Management in New Zealand Using an Asset-Liability Management Framework,” presentation to the Second Sovereign Debt Management Forum (Washington DC: The World Bank).
- Bolder, David Jamieson, 2002, “Towards a More Complete Debt Strategy Simulation Framework,” Bank of Canada Working Paper 2002–13 (Ottawa, Ontario, Canada: Bank of Canada).
- Cangoz, Coskun, Sebastien Boitreaud and Christoper Dychala, 2018, “How do Countries Use an Asset and Liability Management Approach? A Survey on Sovereign Balance Sheet Management,” World Bank Working Paper No. 8624 (Washington DC: The World Bank).
- Cassard, Marcel, and David Folkerts-Landau, 1997, “Risk Management of Sovereign Assets and Liabilities,” IMF Working Paper WP/97/166 (Washington DC: International Monetary Fund).
- Cavanagh, Joe, Suzanne Flynn, and Delphine Moretti, 2016, “Implementing Accrual Accounting in the Public Sector,” Fiscal Affairs Department, Technical Notes and Manuals, September (Washington DC: International Monetary Fund).
- Claessens, Stijn, and Jerome Kreuser, 2007, “Strategic Foreign Reserves Risk Management: Analytical Framework,” Annals of Operations Research, Vol. 152, Issue 1, pp. 79–113 (July).
- Culp, C.L., 2001, The Risk Management Process, (New York: Wiley).
- Currie, Elizabeth and Antonio Velandia, 2002, “Risk Management of Contingent Liabilities within a Sovereign Asset-Liability Framework,” (Washington DC: The World Bank).
- Das, Udaibir S., Michael G. Papaioannou, Guilherme Pedras, Faisal Ahmed, and Jay Surti, 2010, “Managing Public Debt and Its Financial Stability Implications,” IMF Working Paper WP/10/280 (Washington DC: International Monetary Fund).
- Das, Udaibir S., Yinqiu Lu, Michael G. Papaioannou, and Iva Petrova, 2012, “Sovereign Risk and Asset and Liability Management: Conceptual Issues,” Working Paper WP/12/241 (Washington DC: International Monetary Fund).
- Davis, Nick, 1998, “Governance of Crown Financial Assets,” New Zealand Treasury Working Paper Series 98/2, (Wellington: New Zealand Treasury).
- ECB, 2004, “Risk Management for Central Bank Foreign Reserves,” (Frankfurt am Main: European Central Bank Publications).
- Eichengreen, Barry, Ricardo Hausmann and Ugo Panizza, 2003, “Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why It Matters,” NBER Working Paper No. 10036.
- Grimes, Arthur, 2001, “Crown Financial Asset Management: Objectives and Practice,” Treasury Working Paper Series 01/12 (Wellington: New Zealand Treasury).
- International Monetary Fund, OECD, and the World Bank, 2007, “Use of Derivatives for Debt Management and Domestic Debt Market Development: Key Conclusions,” Ninth Annual OECD/World Bank/IMF Bond Market Forum, May 22–23, 2007, Paris.
- International Monetary Fund, and the World Bank, 2014, “Revised Guidelines for Public Debt Management,” Washington DC, March.
- International Working Group of Sovereign Wealth Funds, 2008, “Santiago Principles: Sovereign Wealth Funds Generally Accepted Principles and Practices,” (Washington DC: International Monetary Fund).
- International Monetary Fund, “Fiscal Monitor: Managing Public Wealth,” Washington DC, October 2018.
- Irwin, Timothy and Oscar Parkyn, 2009. "Improving the Management of the Crown's Exposure to Risk", Treasury Working Paper Series 09/06, (Wellington, New Zealand).
- Jonasson, Thordur and Michael G. Papaioannou, 2018, “A Primer on Managing Sovereign Debt-Portfolio Risks,”, IMF Working Paper WP/18/74 (Washington DC: International Monetary Fund).
- Koc, Fatos, 2014, “Sovereign Asset and Liability Management Framework for DMOs: What Do Country Experiences Suggest,” United Nations Conference on Trade and Development, January.
- Lu, Yinqiu, Michael G. Papaioannou, and Iva Petrova, 2007, “Sovereign Asset and Liability Management,” IMF 7th Debt Managers’ Forum, November 5–6, 2007 (Washington DC: International Monetary Fund).
- Magnusson, Tomas, Abha Prasad, and Ian Storkey, 2010, “Guidance for Operational Risk Management in Government Debt Management,” (Washington DC: The World Bank).
- Papaioannou, Michael G., 2009, “Exchange Rate Risk Measurement and Management—Issues and Approaches for Public Debt Managers,” South-Eastern Europe Journal of Economics, Vol. 1, pp. 7–34.
- Papaioannou, Michael G., 2011, “Sovereign Debt Portfolios: Risks and Liability Management Operations,” Journal of the Asia Pacific Economy, Vol. 16, No. 3, pp. 354–360.
- Ortiz, Guillermo, 2007, “A Coordinated Strategy for Assets and Liabilities: the Mexican Experience,” in Johnson-Calari, Jennifer and Malan Rietveld (eds.) “Sovereign Wealth Fund Management,” Central Banking Publications, London.
- Piga, Gustavo, 2001, “Derivatives and Public Debt Management,” International Capital Markets Association.
- Rosenberg, Christoph, Ioannis Halikias, Brett House, Christian Keller, Jens Nystedt, Alex Pitt, and Brad Setser, 2005. “Debt-related Vulnerabilities and Financial Crises: An Application of the Balance Sheet Approach to Emerging market countries,” IMF Occasional Paper 240, (Washington DC: International Monetary Fund).
- Togo, Eriko, 2007, “Coordinating Public Debt Management with Fiscal and Monetary Policies: An Analytical Framework,” World Bank Working Paper No. 4369, (Washington DC: The World Bank).
- Traa, Bob and Alina Carare, 2007, “A Government's Net Worth,” Finance and Development, June 2007, Volume 44, Number 2, (Washington DC: International Monetary Fund).
- Storkey, Ian, 2011, “Operational Risk Management and Business Continuity Planning for Modern State Treasuries,” Technical Notes and Manual 11/05 (Washington DC: International Monetary Fund).
- United Kingdom Cabinet Office, 2017, “Management of Risk in Government,” (London: U.K. Cabinet Office).
- United States Chief Financial Officers Council and Performance Improvement Council, 2016, “Playbook: Enterprise Risk Management for the U.S. Federal Government,” (Washington DC: U.S. Chief Financial Officers Council and Performance Improvement Council).
- Wheeler, Graeme, 2004, “Sound Practice in Government Debt Management” (Washington DC: The World Bank).

### Appendix 1. Liability Management Operations
- Risk: Refinancing risk/rollover risk
  - Operations:
    - Smooth maturity profile by well-planned primary market issuance.
    - Regular use of buybacks and exchanges to reduce size of large individual maturities.
    - Use of amortizing bonds/debt.
- Risk: Funding liquidity risk and market liquidity risk
  - Funding liquidity risks:
    - Use of cash buffers and contingency credit lines.
  - Market liquidity risk:
    - Issuance in key maturity segments; concentrate on small number of instrument types; transparency to reduce uncertainty.
    - Use of market makers and securities lending facilities.
    - Use of buybacks and bond exchanges to contribute to trading in on-the-run issues.
- Risk: Interest rate risk
  - Operations:
    - Targets for issuance of fixed/floating rate instruments in primary market issuance.
    - Interest rate derivatives to change interest rate structure and duration.
    - Changes in portfolio composition to manage interest rate sensitivity.
- Risk: Exchange rate risk
  - Operations:
    - Limits for overall foreign exchange risk and benchmark portfolio composition.
    - Well-structured primary market issuance.
    - Use of bond exchanges to achieve a targeted mix of local and foreign currency in the debt portfolio.
    - Use of cross-currency swaps or optionality in loan agreements (where they exist).
    - Use of foreign exchange derivatives to hedge other foreign exchange risk deriving from other instruments such as foreign-currency bonds or CP, as well as assets.
- Risk: Credit risk
  - Operations:
    - Alerting fiscal authorities of the need to take appropriate action and address market concerns so sovereign bond yields and credit default spreads are reduced.
- Risk: Counterparty risk for derivative transactions and assets on the balance sheet
  - Operations:
    - Counterparty credit risk limits.
    - Monitoring of counterparty creditworthiness and adequate posting of collateral.
- Risk: Legal risk
  - Operations:
    - Use of standard legal agreements.
    - Sound internal processes and a legal strategy for the use of collective action and pari passu clauses; consistent application of cross default and negative pledge clauses.
- Risk: Operational risk
  - Operations:
    - Internal structure that delineates responsibilities.
    - Well-documented internal processes and systems.
    - Four-eye principle and well-trained staff.
    - A risk management culture that rewards reporting of failed processes or close calls.
- Source: Jonasson and Papaioannou (2018)

### Appendix 2. Countries Applying Elements of SALM
- Overview:
  - There are numerous instances of government using ALM principles in a more or less ad hoc way. These fall into four categories: (i) coordinated management of foreign currency reserves with foreign currency debt; (ii) management of asset levels to provide a buffer against adverse market conditions; (iii) transactions between the central bank and government in order to strengthen policy outcomes, reduce cost, and reduce risk; and (iv) analysis of the variables that drive government revenues and development of debt portfolios that match these.
- Table 1. Selected SALM Country Cases
  - Canada
    - Decision-making authority for both assets and liabilities is assigned to the Ministry of Finance, which delegates the day-to-day management is delegated to the Central Bank. The coordination mechanism is instituting regular meetings between the entities involved in SALM.
  - New Zealand
    - Manages local currency and foreign currency assets and provides derivative transactions for government entities.
  - Australia
    - Allocation of assets between alternative portfolios and funds may take account of the government’s broader priorities and objectives, but not specifically of balance sheet risks, coordination is by the responsible ministry.
  - Hungary, Uruguay
    - The coordination mechanism is instituting regular meetings between the entities involved in SALM.
  - Mexico
    - Reduced its external debt in 2006 through issuing domestic securities and using the proceeds to acquire FX from the central bank, which in turn redeemed its securities to reduce negative carry-costs improving the composition of the sovereign balance sheet.
  - Denmark
    - Manages the consolidated position of the government debt by considering assets of government funds (e.g., pension funds, holding primarily government bonds and on-lending), guidelines for government guaranteed entities on exchange rate risks and loan types.
  - Turkey
    - Manages the currency composition of the international reserves based on the maturity structure and currency composition of the government foreign exchange liabilities.
  - Finland, Turkey
    - Management of central government debt and cash reserves is on a net basis.
- Source: Lu, Papaioannou and Iva Petrova (2012) and country websites.

*Content derived from the referenced PDF section: REFERENCES, Appendix 1, Appendix 2.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019290-print-pdf.pdf_