Lánamál ríkisins - Company Announcement

Medium-Term Debt Management Strategy 2017-2021

The Ministry of Finance and Economic Affairs has released the Medium-Term Debt
Management Strategy (MTDS) for 2017-2021. Since 2011, the MTDS has been issued
over a horizon of three years. In accordance with the new Act on Public Sector
Finances, it is now presented on the basis of a fiscal plan, and the Government
debt management objectives therefore cover a horizon of five years, from 2017
through 2021. 

The principal objective of the strategy is to ensure that the Treasury’s
financing need and payment obligations are met at the lowest possible cost that
is consistent with a prudent risk policy. 

The strategy lays down the authorities’ plans for debt financing during the
period. It describes debt management objectives and guidelines, the current
composition of the debt portfolio, inherent risk factors, and contingent
liabilities. It also describes the institutional structure of debt management
and explains how information disclosure to market agents and investors is
carried out. 

The new MTDS is based in large part on its predecessor but reflects changes in
emphasis in accordance with the fiscal plan. There are also changes in
liquidity management, debt management criteria, and execution. The main changes
and innovations in the 2017-2021 MTDS are as follows: 

1.      According to the objectives of the fiscal plan, gross debt is assumed
to decline, both in nominal terms and as a share of GDP, by at least 15% from
the end-2016 position by the end of 2021. All irregular and one-off revenues
will be used to pay down debt and reduce interest expense, including revenues
from the failed banks’ stability contributions. 

2.      In view of the Treasury’s improved performance and plans to deleverage
in coming years, the need for domestic market issuance has been reduced. In
order to maintain unchanged build-up of benchmark bonds and ensure continued
price formation with two-, five-, and ten-year benchmark issues, the
outstanding maximum size of each series will be reduced from ISK 100 bn to ISK
70 bn. 

3.      The targeted average time to maturity will be at least five years and
no more than seven years. 

4.      The loan portfolio structure will be as follows: non-indexed loans will
comprise 60-80% of the portfolio, indexed loans 10-20%, and foreign-denominated
loans 10-20%. 

5.      The objectives for Treasury foreign borrowing will be honed, and the
aim will be to maintain 1-2 benchmark issues at any given time if the
Treasury’s debt position and market conditions permit. 

6.      The foundations will be laid for effective liquidity management, and
the Treasury’s targeted domestic deposit balance will be lowered from ISK 60-70
bn, on average, to ISK 40 bn. 

7.      Preparation will begin on the issuance of interest rate swaps in the
domestic market, and the Treasury will be authorised to conclude such swap
agreements for ISK 20-40 bn per year. The main objective of such issuance is to
manage the Treasury’s interest rate risk. 

8.      According to the fiscal plan, total Treasury debt will amount to 32% of
GDP by end-2021. The aim is to bring the ratio of total debt to GDP down to 30%
by the end of the period and below 25% further ahead, and to reduce net debt to
below 20% by end-2021. The long-term objective is for the Treasury’s net debt
position to be in balance. 

Further information can be obtained from Esther Finnbogadóttir at the Ministry
of Finance, at tel: +354 545 9200, or by e-mail at
esther.finnbogadottir@fjr.is.

Attachments:

Medium-Term Debt Management Strategy 2017-2021.pdf