Managing Foreign Exchange Rate Risk: Capacity Development for Public Debt Managers in Emerging Market and Low-Income Countries

IMF Working Papers, August 2, 2024

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Managing Foreign Exchange Rate Risk: Capacity Development for Public Debt Managers in Emerging Market and Low-Income Countries

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Bibliographic details

• Authors: Thordur Jonasson, Sheheryar Malik, Kay Chung, Michael G. Papaioannou
• Published: August 2, 2024
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9798400287107.001

Summary

• This paper presents sound practices for foreign-currency risk management in developing countries and outlines instruments for managing sovereign debt portfolio currency exposures.
• Adoption of a debt management strategy with well-defined targets for foreign exchange risk is identified as a critical element of public debt risk management.
• Public debt managers often face complex strategic and operational matters related to public debt hedging practices, including the use of derivatives.
• The paper highlights the main institutional challenges in managing foreign exchange risk in sovereign debt portfolios and discusses the overall implementation of a foreign exchange risk-management strategy.

Authors and Publication

• Authors: Thordur Jonasson, Sheheryar Malik, Kay Chung, Michael G. Papaioannou
• Date: August 2, 2024
• Series: Working Paper No. 2024/167
• Volume: 2024
• Issue: 167
• Pages: 32
• DOI: https://doi.org/10.5089/9798400287107.001
• ISBN: 9798400287107
• ISSN: 1018-5941
• Stock No: WPIEA2024167

Major Themes and Analysis

• Foreign-currency risk management practices for developing-country sovereign debt portfolios:
  • Defining clear targets for acceptable foreign exchange risk within a debt management strategy.
  • Instruments for managing currency exposures across sovereign debt portfolios, including derivatives.
• Strategic considerations for public debt managers:
  • Balancing hedging objectives with operational capacities and market access constraints.
  • Determining appropriate use of derivatives given institutional, legal, and credit considerations.
• Institutional challenges:
  • Capacity constraints within public debt management offices to design and implement hedging operations.
  • Legal and regulatory frameworks that affect permissible instruments and counterparty selection.
  • Coordination needs across fiscal, monetary, and financial sector authorities when executing foreign exchange risk-management strategies.

Policy Recommendations and Implementation Guidance

• Adopt a debt management strategy that explicitly includes well-defined targets for foreign exchange risk.
• Strengthen institutional capacity to address complex strategic and operational matters related to public debt hedging, including:
  • Technical skills for designing and executing hedging strategies.
  • Systems and controls to manage derivatives and counterparty risks.
• Address legal, regulatory, and governance barriers that impede the use of appropriate instruments for currency risk management.
• Ensure coordination across relevant government entities (fiscal, monetary, financial sector) to align objectives and operational roles in foreign exchange risk management.

Subject and Keywords (as provided)

• Subject: Asset and liability management, Currencies, Debt management, Exchange rate risk, External debt, Financial regulation and supervision, Foreign currency debt, Government debt management, Money, Public financial management (PFM)
• Keywords: Africa, Asia and Pacific, Central Asia, Currencies, currency exposure, Debt management, debt portfolio, Exchange rate risk, exchange rate risk risk management, Foreign currency debt, Government debt management, Middle East, North Africa, public debt manager, risk-management strategy, Sub-Saharan Africa

Thordur Jonasson, Sheheryar Malik, Kay Chung, and Michael G. Papaioannou, "Managing Foreign Exchange Rate Risk: Capacity Development for Public Debt Managers in Emerging Market and Low-Income Countries", IMF Working Papers 2024, 167 (2024), DOI: https://doi.org/10.5089/9798400287107.001

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