The Foreign Currency Debt
For the past several years, debt management has aimed to reduce foreign currency debt as a percentage of the central government debt. The reason is that foreign currency debt is associated with greater risk than is the kronor-denominated debt, without offering lower costs over the long term. The Government has decided on an SEK 25 billion amortisation of the foreign currency debt for next year and, provisionally, for the two subsequent years. The Debt Office may deviate from this benchmark by SEK ±15 billion if warranted by cost and risk considerations.
In 2002 the Debt Office has refrained from amortising the foreign currency debt and thus has used the entire lower half of the deviation interval. The krona was judged to be considerably undervalued and therefore could be expected to strengthen. Consequently amortising less than the Government's benchmark was warranted for reasons of cost. Since then, the krona has indeed strengthened, in TCW terms, from about 139 to about 131.
The Debt Office now estimates that after strengthening recently, the exchange rate for the krona will not deviate substantially from what may be assumed to be its likely long-term level. It is possible to argue that the krona may strengthen some more, especially if Sweden decides to join EMU, but there is also some risk that the krona could weaken. The Debt Office, while acknowledging the uncertainty that always exists in exchange rate estimates, thus concludes that the krona lies within an interval that warrants an amortisation of the foreign currency debt in line with the Government's benchmark of SEK 25 billion.
If the referendum results in a yes vote for EMU, there will be reason to review the amortisation of the foreign currency debt. With entry, the euro part of the foreign currency debt and the kronor-denominated debt will together make up domestic debt. The foreign currency debt would shrink from its present share of more than 30 per cent of the central government debt to less than 15 per cent. A yes vote in the referendum could promt the Debt Office to present a new proposal to the Government for guidelines on central government debt management.
The Duration of the Nominal Debt
The benchmark for the average duration of the nominal part of the central government debt is to continue to be 2.7 years. Under the Government's decision, it is possible for the Debt Office to choose a benchmark in the interval of 2.7 years, ±0.3 years. One reason for deviating from the Government's benchmark may be that interest rates are at exceptional levels. But major changes in forecasts of the borrowing requirement could also give cause for an adjustment of the duration. The Debt Office has found that neither interest rate levels nor other factors warrant a change in the duration.
Inflation-Linked Bonds
Efforts in recent years to increase the demand for inflation-linked bonds are continuing. These efforts include working to increase knowledge of inflation-linked bonds among investors, ranging from the largest institutional managers to households. Next year, like this year, the focus of bond issues will be on longer coupon borrowing. Given the recent increased demand, the volume of issues mentioned previously of SEK 15 billion annually is considered reasonable.
Increased Efforts on Investor Relations
With the closer connection with the euro area that may result from the referendum on EMU, the Debt Office has decided to conduct additional work on international investor relations next year. If Sweden joins EMU, there will be a change in the investor base for Swedish government bonds; Sweden's central government debt can then be expected to be financed by international investors to a greater extent. For this change to occur on good borrowing terms, it is crucial that international investors have a good knowledge of the Swedish economy and the Debt Office's borrowing strategy.
For additional information, please contact:
Thomas Franzén, tel: +46 8 613 46 51
Erik Thedéen, tel: +46 8 613 46 46.