Auditor General's Report: “Audit of the Public Debt Management Office” - What are the most important findings of the audit?

A management audit was carried out, aimed at evaluating the effectiveness of public debt management

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The Audit Office announces that its Special Report on “Audit of the Public Debt Management Office” posted today (1/2) on its website, at:

According to a statement issued by EY, a management audit was carried out, aimed at evaluating the effectiveness of public debt management, in order to timely meet the financial needs of the Republic in the most economical, efficient and effective way and the lowest possible borrowing costs, under the prevailing circumstances, within an acceptable level of risk, ensuring as much as possible a sustainable public debt, which achieves the objectives of the medium-term strategy.

The most important findings of the audit are summarized below:

Ε The Audit Office realizes that the issue of taking on public debt strongly involves the element of political decision and therefore considers that it has reasonably been subject, by law, to political power and not to the administrative function of the state. On the other hand, the management of public debt itself is based to an extremely large extent on technocratic analyzes.

Given the enormous importance of the issue in public finances, it is the view of EV that the existence of two distinct insurance channels is necessary, as follows:

➢ The political decisions of the Minister to become more transparent and politically controllable, with greater involvement (in the form of information or approval, as the case may be) of the Council of Ministers and in some cases the House of Representatives, especially in cases where the Minister's decisions will leave the recommendations of the GDC.
. Ensure the independence of the GDH, and in particular of the Chief, in order to reduce the risk that the GDH's suggestions to the Minister will be influenced by political pressure.

 With the amendment of the Law, contradictions arose with the Law on Financial Responsibility and the Financial Framework Law (L.20 (I) / 2014), in relation to the risk assessment arising from guarantees to third parties, which was not amended
The EV suggests the amendment of Law 20 (I) / 2014, so that contradictory provisions do not arise with the Law.

. Due to the small number of staff employed in the DGT, the separation of tasks is not strictly observed, nor is the required quality control of the work exercised by a second person.

It is suggested that a study be conducted for the appropriate staffing of the GDDX and that the process of implementing procedures be ensured to ensure the separation of tasks and the quality of work.

Ε The EV considers that the information provided by the GATT to the Council of Ministers, in the context of the approval of the Medium-Term Public Debt Management Strategy (hereinafter referred to as the MSDD), should be enriched, in particular in relation to the risks arising from the choices between short-term, medium-term and long-term borrowing.
It is suggested that, together with the MSDDX, a relevant report is submitted to the Council of Ministers and the House of Representatives by the Budget Council, which will explain any risks arising from the type of lending that is proposed.

Που Although government debt involves floating-rate borrowing, resulting in interest rate risk from interest rate fluctuations, the GDC does not use financial instruments (eg derivatives) to minimize this and / or foreign exchange risk. in case of new foreign currency lending.

EV emphasizes the need to establish procedures that determine how to use appropriate financial instruments, so that, when the need arises, the DGT is ready to take advantage of the benefits offered by these tools.

The following conclusions emerged from the analysis carried out in relation to the examination of the public debt sustainability of Cyprus and the current practices of the GDDX:
. Today's extremely low interest rates in the eurozone make Cyprus's public debt sustainable, but its high level remains a cause for concern, as its course may be derailed by possible shocks.

It is suggested that the GDDH is constantly on the alert, to promote timely and effective actions, to promote the gradual reduction of public debt and to prevent derailment of the debt path in case of possible shocks.

Increased risk is identified in 2028

 According to the Audit Report, a potential point of increased risk is identified around 2028, when very high amounts of debt become payable and will have to be refinanced. This challenge, which the GATT needs to address, underscores the need for the GATT to continue to focus on the future and for the GATT to strengthen its capacity to identify areas of increased risk and optimize funding strategies.

"We suggested that the GDC ensure the public debt financing strategy, in order to distribute the financing needs around the point of increased risk, without deviating significantly from the current risk / cost strategy that is in line with the best international practices." ΕΥ in the Exhibition.

Γ In recent years, the GATT has been pursuing a debt management strategy that lies between a low cost and a low risk strategy, which is in line with international best practices. In the past they were observed important
deviations from this strategy, but since the establishment of the GATT in 2013, the situation has stabilized significantly. We note that any deviation from the existing strategy must be approved at the highest level of government, as it implies
risk-taking, which we believe should be politically legitimized.

Any changes in the debt financing strategy should be notified promptly and clearly to potential investors.

The report notes that, although GATTs generally enjoy considerable flexibility internationally in defining their public debt financing strategy, they tend to commit to annual issuance plans and avoid surprising markets.

It suggests that the GDC ensure that significant changes in the public debt financing strategy and consequently in the risk tolerance of the state are avoided and, if necessary, that an information mechanism of the House of Representatives is established.

. Debt financing strategies implemented in 2011-2012 and 2018 do not seem to be in line with the goal of securing debt financing at the lowest possible cost, within acceptable risk levels. The discrepancies of the period
2011-2012 preceded the establishment of GDDX, while the most recent deviation of 2018 occurred during the issuance of a government bond, to Hellenic Bank, for the purchase of the Cooperative Bank of Cyprus (hereinafter: SKT).

Καθο Determining a weighted average debt maturity at an acceptable value is not in itself sufficient to control the risks arising from public debt management, as there are several alternatives to this.
ways of issuing debt, some of which may deviate from the limits of optimal performance. This has been observed with the latest version of 2021, which deviates somewhat from the limit of optimal options (efficient frontier).

Therefore, the choice of debt financing portfolio is as important as maintaining the weighted average debt maturity when it is issued at the set levels, the Report notes.

It then suggests that the GDC further develop its risk management capabilities to design efficient debt financing strategies, taking into account the uncertainty surrounding all aspects of public debt and taking into account future challenges related to periods related to periods. the end of the MSDDX.

This suggestion is in line with a relevant suggestion made by the ESM in 2015, however the fact that it is recorded by the Audit Office, after 6 years, shows that no satisfactory progress has been made in this direction, the Report emphasizes.

2021 The XNUMX debt issuance portfolio reveals a small shift towards lower costs, but with higher risk, which is not in line with the overall reduction in interest rates observed due to recent ECB policies.

It is suggested that the GDC ensures and takes timely, immediate actions to exploit circumstances arising from unforeseen situations to reduce the cost of the public debt portfolio.

Ρείται There has been a significant accumulation of liquidity reserves in the last two years, corresponding to approximately 150% of the short-term debt financing needs, and arose mainly to ensure liquidity, in view of the uncertainty brought about by the
pandemic COVID-19. Using part of this liquidity reserve to repay debt could significantly improve the cost and risk of public debt, which the GATT now seems to be applying.

Although, in order to increase the liquidity reserve, the GDC followed the relevant procedure for its determination and carefully substantiated its reasoning, the Audit Office suggests that due consideration be given to the consequences of such decisions in the future, as they are not an effective method of ensuring of the lowest cost with acceptable risk.

Χ Government debt is presented as sustainable for a wide range of growth rate and forecasts, in relation to the level of interest rates. However, a combination of high interest rates and low growth could derail its course. One such
A combination of events could be caused by external shocks and the GDC should be aware of these risks. Endurance tests confirm that high debt levels create a fragile situation.

It was suggested that the GDCS ensure close monitoring of possible external shocks and be prepared for immediate corrective action, along with a simultaneous effort to reduce the amount of public debt.

Climate Change

 Climate change endurance tests confirm that high debt levels create a situation that becomes more fragile due to the effects of climate change on the economy.

The Audit Office proposes that the GDCA, in cooperation with the Financial Council, integrate climate risk analysis into public finances.

The above findings and suggestions of the Audit Office were submitted on 23.12.2021 to the Ministry of Finance, whose views were received on 4.1.2022 and, where deemed appropriate, were incorporated in the text of the Report.