New policy framework for government debt funding
Today, minister of finance Wopke Hoekstra sent the new policy framework for the financing of the overall state debt to the House of Representatives. In the coming years, the average maturity of the Dutch debt and swap portfolio will be gradually extended towards 8 years. In this way, the current low interest rates will be locked in for a longer period. Consistent with the current lower level of national debt, the maximum short term refixing amount will be increased from 18% to 30%. Consistency, transparency and liquidity remain key principles in the DSTA’s funding policy; at the same time more flexibility will be applied where possible. The new policy framework will apply as from January 2020.
In designing the new policy framework, the results of an extensive review of the existing policy framework have been incorporated. For this review, external research was conducted by SEO Amsterdam Economics. The review concludes that during the period 2016-2019, the policy pursued – i.e. the funding policy and the interest risk framework - contributed to the aim of debt financing at the lowest possible cost at an acceptable risk to the budget.
The Dutch State Treasury Agency (DSTA) therefore foresees no significant changes to its funding policy. In line with the recommendations of the policy review, the DSTA does intend to apply more flexibility in its funding policy, while adhering to its current principles of consistency, transparency and liquidity. New targets have been set for the interest risk framework. By further extending the average maturity of the debt and swap portfolio from the current 6.4 years towards 8 years, the current low interest rates will be locked in for a longer period, thereby creating greater budgetary certainty for the medium term. This extension also follows logically from the policy pursued in previous frameworks (since 2012 the average maturity of 3.5 years has been gradually extended).
Increasing the maximum short term refixing amount from 18% to 30%, is consistent with the current, lower level of national debt. Compered to four years ago, the national debt level has declined (both in absolute terms and as a percentage of GDP), allowing for a greater capacity to absorb possible interest rate increases in the short term.
Whilst taking into account the current principles of consistency, transparency and liquidity, the relevant market demand and the overall development of the funding need, the issuance of bonds with a longer maturity will have priority in the coming years, so as to further extend the average maturity of the portfolio. This also means that the use of interest rate swaps in the new framework will be limited.
The new policy framework will in principle apply for the next six years (2020 to 2025). In 2026, the framework will be evaluated in its entirety. At the same time, the DSTA will carry out an internal evaluation at least once every two years to allow for adjustments to the policy framework if necessary.
Additional information is available in minister Hoekstra’s letter to parliament, the executive summary of the evaluation report and the external research conducted by SEO, all of which are available on www.dsta.nl. The full English report will be available soon.