The Ministry of Finance and Economic Affairs has published its updated Medium-Term Debt Management Strategy (MTDS) for 2021-2025. The strategy is based on the fiscal plan and sets forth targets and criteria for Treasury debt management over the specified period. The key objective of the strategy is to ensure that the Government's financing needs, and payment obligations are met at the lowest possible cost over the medium to long term, assuming a prudent degree of risk.
The 2021-2025 fiscal plan assumes that the Treasury’s borrowing need for the period will be approximately ISK 1.000bn. The Treasury has a variety of options for meeting that need, both domestically and abroad. As before, the main emphasis will be on meeting the financing need by issuing Treasury bonds in the domestic market. Increased emphasis will be placed on foreign borrowing. Liquidity management for the Treasury and HF-Fund will be unchanged in the first half of the period, and the planned sale of the State’s holding in Íslandsbanki will reduce the borrowing need in the coming term. The Treasury’s cash position is strong at present, with ISK-denominated deposits in the Central Bank totalling about ISK 145bn. In addition, the Treasury owns about ISK 220bn in foreign deposits, following the issuance of foreign-denominated bonds.
The MTDS lays down the Government’s plans for financing its activities during this period. The strategy describes debt management objectives and guidelines, the structure 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. The main changes are as follows:
- In view of the deterioration of the Treasury outcome, the borrowing need will increase significantly in the next few years. Price formation for two-, five-, and ten-year benchmark Treasury bonds will be ensured, as before, but the maximum size target for outstanding series will be abolished.
- Until now, foreign loans have been taken primarily to finance the international reserves. Because the financial need over the term of the fiscal plan is significant, it will be met in part with foreign borrowing or by tapping the Treasury’s foreign-denominated deposits with the Central Bank.
- The overall loan portfolio structure will change as follows: the share of foreign loans will increase to 15-25% of the portfolio, non-indexed loans will account for 50-70%, and indexed loans will account for 20-30%.
- Liquidity management for the Treasury and the HF-Fund will continue to be handled jointly, with the aim of maximising the benefit to the Treasury as a whole.
- Clearly defined green and sustainable projects in Iceland could be financed through issuance of so-called green (sustainable) Treasury bonds. A task force representing the Minister of Finance and Economic Affairs is currently analysing the feasibility of such an issue.
The principal objective of the fiscal plan is to halt the rise in the debt-to-GDP ratio by the end of the period. Even though debt is rising steeply, the Treasury’s debt position will be modest in international context, and a favorable interest rate environment means that the Treasury’s interest expense will not rise in line with its debt. The challenges in financing Treasury activities over the period are quite manageable. The Treasury has at its disposal a variety of options for meeting its financial need, its debt level is moderate and its credit ratings sound, the domestic economy has strong growth potential, and confidence in domestic economic policy has increased in recent years. All of these factors strengthen the Treasury’s financing capacity.