Working Paper "Country-level interest rate risk impact on debt and fiscal sustainability: potential use of floating-rate and inflation-indexed liabilities"

The researchers from the EFSD and the CAREC Institute conducted a comprehensive analysis, resulting in the publication of a working paper titled "Country-level interest rate risk impact on debt and fiscal sustainability: potential use of floating-rate and inflation-indexed liabilities". The study affected the EFSD member countries (Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan), some of which are also part of the CAREC Program (Kazakhstan, Kyrgyzstan, Tajikistan). The paper examines the interest rate risks associated with recent dynamic of LIBOR (SOFR) and EURIBOR, as well as considers the potential inclusion of obligations with floating-rate and indexed principal in domestic debt portfolios of the countries under review.

An analysis shows that the risk associated with external floating-rate obligations is at a level that makes it possible to preserve public debt sustainability even under the most adverse scenario, similar to that of 1980. Only in countries with access to concession resources (Kyrgyzstan, Tajikistan) was there a risk of a possible multiple increase in the effective interest rate on the portfolio of external obligations due to subsequent increases in external credits and loans with a floating rate.

The use of long-term governments securities with a floating interest rate or inflation-indexed principal has significant benefits for Russia and Kazakhstan. Medium-term issues may be less beneficial. The potential for using these instruments for Armenia and Kyrgyzstan has been demonstrated both in terms of direct and indirect effects. In Armenia, the sensitivity of the interest rate structure to small changes in macroeconomic indicators is high, which allows the country to achieve significant savings even with medium-term floating-interest government bonds. Kyrgyzstan can minimise the discount on the primary placement of government bonds and significantly reduce issue costs, while also reducing inflation risks associated with an increase in excess liquidity in commercial banks.

The authors also concluded that, in order to maintain debt sustainability in an environment characterised by high FX interest rates and the further accumulation of floating-rate liabilities (including on the domestic market), a well-established system for interest rate risk management is essential. The fundamental principles for managing this risk should be incorporated into public debt management policies.

• Working Paper

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