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External and domestic debt financing from various perspectives.



Government is an institution holding mandate from its people to manage state daily life. To perform this function, government is supported by financial resources which managed trough state budget. The budget covers both revenues and expenditures. However both sides are not always in the balance position. When government outlay is greater than receipt, financing either from external or domestic sources are needed. In the past, to cover budget deficit, governments may ask central bank to print money. This choice is no longer utilized because it creates excessive inflation impact and gives pressure on countries balance of payment. Domestic financing could come from previous year cash surplus, from selling government asset (privatization) or by borrowing money from market. For external financing, it is generally managed by loans or debt securities issuance. The cash surplus and the privatization alternatives have sources limitation. As a result, nowadays, the choice to borrow either from domestic or external market is more prevalent implemented by many governments.

Therefore main discussion on the public deficit financing option is merely centered on the borrowing from external and domestic option. The trade-off cost and risk factors entail on both type of financing has made decisioin making process is demanding. There is no single optimal approach for all circumstances, as it depends on many aspects, such as the availability of financing choices, the economic environment, the institutional framework, and degree of development domestic financial markets.

To give better understanding of different aspect of external and domestic debt, this literature review tries to revisit external and domestic debt financing from various perspective. Initially, definition of external and domestic debt going to used trough out the study is being framed. It is followed by trend in utilizing external debt instruments and the background of shifting. Then recent trend of domestic debt will be detailed, includes benefits and drawbacks from the debt. Finally, dynamic interplay and how to design optimal portfolio by articulating both type of debts are reviewed as well.

2.1 Definition Framework of External and Domestic Debt

Before going into deep discussion on differing external and domestic debt, firstly we will define the terminologies for both external and domestic debt going to be used. Panizza (2008) lists three different kinds of definition which commonly used. The first definition refers to debt currency denomination (with external debt denominated in foreign currency). The second definition articulates on residence of the creditor (external debt is owed to non-residents). While the third definition is centered on the debt issuance place and the law that regulates the debt contract (external debt is debt issued in foreign countries and under the jurisdiction of a foreign court). According to him the first definition is less appropriate because from empirical data set collected, many countries have issued foreign currency denominated debt in its domestic market, and vice versa. This definition also confusing when applied to a country adopting another country currency as its national currency.

This definition captures transfer of resources between residents and non-residents intent and allows gauging the amount of international risk sharing and the income effects of variations in the debt stock of debt. The quarterly debt statistic issued by Indonesia Debt Management Office since 2006 also adopts this definition. Henceforth, we will refer to this description when dealing and differentiating with external and domestic debt terminologies.

2.2 Empirical Evidence on Public Debt Trend

Previously, researchers on public debt focused their analysis on external debt. However recent trend data plots depict evolution on public debt source to domestic debt. Aggressiveness of some developing countries in substituting foreign debt with domestic debt has made the balance surpassed. Panizza (2008) data sets shows increasing trend of domestic debt composition to total debt in relatively short period. His study covers 85 countries data from six different regions, the balance of domestic debt to total debt was still under external debt balance 30 percent in 1991. Five years later the balance increased to 35 percent and reached nearly 40 percent in 2005. The share of domestic debt increased significantly in most regions in the world, except for sub-Saharan Africa. Latin American countries gained the highest one from 24 percent to 40 percent during those ten years period. Especially for Brazil and Mexico, both countries were aggressively replacing external debt from their debt portfolio in the decreasing period of average debt to GDP ratio. Several arguments arise behind this phenomena is the attractiveness of fallen interest rate and ability to reduce vulnerability from external shock, such as foreign exchange volatility and substitution capacity in the occurrence of sudden stop.

Likewise, Hanson (2007) gives empirical evidence on velocity growth of domestic debt. His data set shows, in average the government domestic debt grown much faster than GDP between 1994 and 2004 and become larger than external debt. He argues that the growth of government domestic debt broadly reflects interaction of supply of bond associated with financial crises in the 1990s, the growth of central bank debt, and increased of attractiveness of borrowing domestically to the issuing governments. While from the demand side, it relates to the growth of new demand sources of government domestic debt, either domestically (pension and investment fund) or internationally (due to decline of interest rate in developed countries, greater macroeconomic stability in developing countries, high international foreign reserves and some potential developing currency appreciation).

Moreover a decomposition of the change debt to GDP ratio to 12 emerging market countries experiencing financial crises between 1995 and 2002 by Bolle, Rother, and Hakobyan (2006) reveals domestic debt on average grew faster than external debt in the run-up to the crisis. Correspondingly, the similar phenomena is detailed by Wheeler (2004) [1] that in the late 1980s and early 1990s the countries facing fiscal problems, high ratio of public debt to gross domestic product (GDP), and a large share of foreign currency debt in their government debt portfolio were in the first move to considerably amend its government debt management.

Some incident is contributed in triggering issuance of domestic debt. Borensztein, Cowan, Eichengreen, and Panizza (2007) find trend on utilizing of domestic debt after the country experiencing crises. While in other case occurs when a country run budget deficit but cannot fully match by foreign debt, the countries substituted it by domestic debt issuance.

Reinhart, Rogoff, and Savastano (2003) when measuring debt intolerance found in all of the Asian countries in their core sample except India, the buildup of domestic government debt was propelled by the recapitalization of domestic financial systems that government engineered in the aftermath of the 1997-98 crisis. Financial system bailout also contributed to the rise of domestic government debt in Mexico and Turkey. In other cases, including India, the buildup of domestic public debt has primarily reflected fiscal profligacy (governments’ inability to offset the revenue losses stemming from trade and financial reform, and from disinflation, with new taxes or lower spending sets them up for a fall). Further research by Reinhart and Rogoff (2008) [2] found rarer default case for domestic debt compare to external debt case. Along the fact is the domestic debt often build-up in the aftermath of external debt default.

From the above historical trend we can conclude on some significant factors facilitating the increase in domestic debt utilization. Most of the authors argue on issue of crisis as main catalyst. Unprecedented issuance of domestic debt is proved link to financial restructuring after crisis period. This pattern is so evident in Latin America and Southeast Asia. Even though in the midst of crises, external debt component tended to dominate the overall debt dynamics due to exchange rate depreciation impact. While in the aftermath of crises, the share of domestic debt typically continued to rise while external debt declined. Amid domestic exchange rate appreciation and balance of payment improvement, some countries early repaid their external debt to tame future vulnerability from external shock. It is supported by the attractiveness of fallen domestic interest rate which makes domestic debt option more affordable.

2.3 Revisit Costs and Benefits of External Debt

2.3.1 Benefiting External Debt

In the past, the early debate of analysis in this area was focused by Keynes (1929). [3] He underlined transfer effect of external debt. While external borrowing creates resources inflow to domestic market, domestic borrowing transfers within country only. Todaro (2000) names this external sources as imported capital since it is imported with intention to fulfill domestic saving gap (imbalance between saving and funding needed to finance its activities) or to fulfill current account deficit. When domestic capital accumulation does not enough to manipulate domestic sources, foreign capital is injected.

From developing countries perspective, this capital inflow likes engine of growth which could boost economic growth. Borrowing permits a country to invest more than that it can save and import more than it can export. If the additional funds finance productive investment, they should yield sufficient returns to pay the interest and principal on the initial foreign inflows. Since capital is relatively scarce in developing countries, these countries have the potential to realize higher rates of return on investment and more rapid economic growth than richer countries, providing the foundation for lending from surplus capital formation countries to deficit capital formation countries. Under these circumstances, foreign borrowing can help support growth of the development at the same time as it yields attractive return to the lender. Succinctly, both parties are benefiting from the flow scheme.

Perhaps, besides the origin reason of capital inflow benefit, other financial motives which repeatedly cited by author in favor of external debt are cheaper borrowing cost. It actually relates to the earlier fact. The scarcity of domestic saving combined with high inflation, together contributes to the higher interest rate. It has induced countries to borrow from international market which can provide them sufficient amount of fund with cheaper cost of fund. It is championed by easier access gate to the international capital market in the last decades to emerging market economies as well (Gray and Woo, 2000). In contrast to developing countries, developed countries market has ample liquidity either from their domestic saving or from money deposited by non-residents people (exceptionally during increase of oil price period). However the money offer low returns if invested in the domestic market. This capital supply then pours emerging market searching for higher returns. The interest offered by this creditor is lower than domestic commercial lending rate, even after has been adjusted to foreign currency discount (assuming normal foreign currency fluctuations). Nevertheless, to offset this cheap cost of money, the creditors usually lend their money in short-term period, so the risk for them is less.

Generally, according to Christina, Barry and Lydia (2007) [4] , developing countries utilize the money borrowed at least for three typical kinds of purposes: short term transaction smoothing, medium term expenditure smoothing, and investment in long term projects, such as improvements in infrastructure. It makes expenditures could follow different cycles of revenues. The borrowed money during months of deficit is repaid during the months of surplus. For example, to help to limit short-term volatility in the exchange rate, comparable loans denominated in foreign currency are taken to smooth international transactions over time. The average level of short term government debt related to domestic borrowing usually grows more or less at the rate of growth of overall domestic economic activity, while the foreign currency component of such debt grows roughly in proportion to the growth of foreign trade and payments. Nevertheless, all too often in recent years, developing countries with very limited borrowing capacity have to follow such so-called pro-cyclical policies. Problem could arise when the net borrowing over the full cycles is excessive. This could happen when sequence of adverse economy shocks repeatedly postpones recovery, or when a permanent adverse change is mistaken for a temporary development.

Other financial advantage of external debt is less crowding-out effect of private borrowers. Drazen (1998) argues that domestic debt is likely crowd-out domestic capital accumulation while external debt would not. With limited domestic saving, government and private sector will be in tight competition to get fund. So if government forces to earn money in the domestic market there will be likely crowding out in the market.

Additionally, in the similar context Gray and Woo (2000) try to enrich the literature by revisit some benefit of external debt financing. Both of them reassure frequently cited benefits associated with international borrowing in the international capital markets, such as establishing market presence, acquiring disciplinary device, building up gross reserve, and achieving portfolio diversification. Establishment of market presence the government in the international capital market may be facilitated by a government benchmark rating. Interest rate charge for public debt can be use as borrowing rate benchmark for private sectors. Acquisition of disciplinary device is recognized since the government cannot inflate away its foreign debt as opposed to domestic debt. Regarding accumulation of gross international reserve, it is argued that by building up such reserves, the government can temper expectation of short-term exchange rate depreciation (when foreign borrowing is long-term) and reduce roll-over risk on existing foreign debt. Though there is a cost to holding gross reserves, as borrowing costs will almost always exceed returns on the invested funds. This is because reserve assets, to serve the purposes stated above, need to be secure and liquid, and the return on such assets will be lower, as a rule, than a government’s borrowing costs.

2.3.2 Potential Cost of External Debt

However tremendous changing of landscape happened after eruption of debt crisis in the 1980s decades which associated with excessiveness reliance on foreign debt. It has created other perspectives on vulnerability of external debt in propagating crises. There was radical changing opinion or country perception on external debt. External debt financing sources such as from multilateral donor institutions (IMF and World Bank) and foreign commercial banks are reduced. Many countries in Latin America and Asia, which notably knew as emerging countries, shift its financing strategy from relying on external debt sources to domestic market. The focus of interest in emerging market countries’ debt is shifting to domestic debt.

Some valuable learning experiences earned from extensiveness reliance to external debt sources are the vulnerability from sudden shock (Calvo and Reinhart, 2000), currency mismatch and maturity mismatch problem (Eichengreen and Hausmann, 1999). They called the last two problems as “original sin”, inability to borrow abroad in local currency and inability to borrow from domestic market with long-term maturity. While most developed countries can borrow from foreign market with their domestic currency, but most foreign borrowing made by developing countries is in foreign currencies. Eichengreen et al. (2002) prove that countries with original sin exhibit financial fragility due to greater output and capital flow volatility, lower credit ratings and limited ability to manage monetary policy. The presence of foreign currency debt, together with volatility of the real exchange rate that characterized most developing countries has culminated developing countries to the risk of sudden debt explosions (Campos, Jaimovic and Panizza, 2006).

It is true that countries are benefiting from capital inflow. However, the flow of money from market with the cash surplus is subject for interruption. Since the money invested in the debtor’s country is not permanent investment, especially from private creditors is purely motivated to find better rent seeking. When creditors think the return is not enough to cover the cost or better alternative investment outside the country available, the money will out flow to other countries. In fact, to offset this cheap cost of money, the creditors usually lend their money in short-term period to lessen the risk. Accordingly supply of the external funds tends to be volatile, pro cyclical, and subject to sudden stops (Calvo, 2005).

Likewise, on the issue that external borrowing is able to avoid crowding out effect in the domestic market. Agca and Celasun (2009) highlight the potential costs of external debt for the domestic corporate sector even when debt is issued in foreign capital markets. They found that borrowing from foreign sources for emerging market governments could significantly raises the borrowing costs of the domestic corporate sector. Excessive external debt will raise sovereign credit risk and make exposure to corporate sector debt less desirable. Thereby it potent to crowd out foreign credit to private sectors. Especially countries with weak creditor rights, they will accept stronger negative effect.

From different angle Gray and Woo (2000) cast doubt in this issue as well. The insulation property of external financing becomes more dubious when the government needs to finance consumption of domestically produced goods. There is mismatch between expenditures flow with revenues flow. Consider a given level of government spending and tax revenue, and thus, a given deficit to be financed. Moreover, under a flexible exchange rate regime, foreign financing will lead to an appreciation of the exchange rate. This, in turn, will give rise to an increase in imports but a decline in exports. While deterioration in the trade balance will temper the crowding out effect of government spending on private consumption and investment, exporters and some domestic producers will be crowded out. Domestic financing, on the other hand, will lead to an increase in capital inflows, and possibly by an increased savings rate domestically. It is difficult to determine what will be the relative impact of the two types of financing on both long-term and short-term output growth.

Additionally, externalities may go beyond market size. For instance, extending the maturity of government debt may have a market creation effect and help corporations to issue longer dated debt. However, this policy may also increase the government’s incentives to dilute its debt and, by increasing inflationary expectations, have a negative effect on the maturity of corporate debt. In the six countries studied by Borensztein, Cowan, Eichengreen and Panizza (2007) there is no clear pattern of spillovers from public debt composition to that of private debt, but they commented if this is an area that requires more research.

Generally, relying on external debt is deemed more risky for emerging countries (IMF, 2003). The argument is fostered by empirical evidence of Reinhart, Rogoff, and Savastano (2003) research on low debt intolerance of emerging market economies which extensively use external debt source showing by its prevalence to debt default. They suggest safe benchmark of external debt to GDP ratio for developing countries between 15 to 20 percent. Even though foreign debt offered with low interest rate there is also opportunity cost coming from debt conditionality.

Lastly, another benefit of external financing which find the turn is that it enables the borrowing government to establish market presence and presumably to make future foreign borrowing cheaper than otherwise. However it must be questioned what governments actually achieve by establishing market presence. While such presence might enable the borrowing government to broaden demand for its debt and facilitate future access, it is less clear that it will necessarily reduce it funding cost (Gray and Woo, 2000). In fact, to the extent that there is a perceived information asymmetry between domestic and foreign investors, foreign investors may actually demand in information risk premium on holding sovereign debt.

2.4 Revisit Benefits and Cost of Domestic Debt

2.4.1 Benefiting from Domestic Debt

The utilization of domestic debt, as clarified by empirical evidence is primarily to retire external debt and reduce a country from exchange rate risk volatility. There is now widespread believe that issuing debt in the domestic market may reduce the risk of sovereign finance. The devastating financial crises hit several emerging market economy in the 1990s has made policymakers well aware of external debt risks.

Debt denominated in local currency is believed able in reducing risk of currency mismatches and lengthening term of debt (IMF, 2003). Domestically issued debt has advantage being denominated in the domestic currency and possibly will rely on a more stable investor base. The formula answer problem of inability of emerging market countries to issue international debt in their own currency, or named as original sin by Eichengreen and Hausmann (2005). To reduce this impact they focus on domestic debt as substituting instrument. Long-term domestic currency debt is deemed able to reduce maturity and currency mismatches.

Furthermore the fund raised from domestic debt market is playing important role in the occurrence of external funding sudden stop by keeping money flowing to domestic market (Calvo and Reinhart, 2000). The drawback of government foreign borrowing in the early 1990s, particularly from private sources, was of course its potential volatility. “Sudden stop” of private capital inflows, meant an inability to even rollover existing government foreign debt. It was main factors prompt the deep depreciations, external defaults and costly crises of the 1980s, as well as in the crises that were to come in the 1990s.

The presence of government bonds can promote domestic financial market deepening, the development of the corporate bond market by building required minimum size, supplying a benchmark yield curve, and providing the necessary trading infrastructure. Together it create more liquid debt market. Missale (2000) stressed on the well functioning domestic debt market as a way to minimize debt cost. By increasing the liquidity and efficiency of secondary market and enhancing the transparency and predictability of the issuing policy interest cost can be reduced. Development of domestic market is also important in supporting debt market development. Since size of market such as broadening investor base by encourage foreign investor participation in the local market and promoting institutional investor growth, is important matter for bond market development (Borensztein, Cowan, Eichengreen, and Panizza, 2007). Moreover, the availability of a well working market for domestic debt can reduce capital flight by providing domestic savers with safe alternative investing opportunities (Abbas and Christensen, 2007). As a consequence, policymakers who trying to reduce the risk of sovereign finance by limiting excessive foreign borrowing and by developing required infrastructure and institutional set up for a well working domestic debt market should be properly applauded and encouraged. (Panizza, 2008)

2.4.2 Potential Cost of Domestic Debt

Notwithstanding copious valuable features of domestic debt, from different point view Panizza (2008) reminds that movement from external debt to domestic debt is basically trading one’s vulnerability for another as well, such as currency mismatch with maturity mismatch and positive externalities for private sector with crowding-out effect. Adjacent, from political economy point of view, domestic debt is more difficult to be restructured. He also put stressed on the foreign currency borrowing cost where the country currency is in the appreciation mode, interest cost after calculating domestic currency fluctuation may totally higher than in the dollar rate.

Mehl and Reynaud (2010) found that movement from external to domestic source of financing can be riskier for emerging market countries when the debt instrument distributed to narrow investor base. Large portion debt securities ownership by banking sector may propagate to financial instability. There are also important interactions between domestically issued domestic debt and the functioning of the banking sector. Also here the effect can go either way. Most analysts find that in emerging market countries banks are the main holders of government bonds is a source of vulnerability and is a signal that government debt crowds out credit to the private sector. However Kumhof and Tarner (2005) suggest that, rather than being a symptom of financial repression, these holdings of public debt are largely voluntarily and improve the working of financial sector in countries characterized by poor institutional quality and lack of collateral. In some countries a liquid market for government bonds can foster financial sector development, can lead to a more competitive setting for interest rates and can improve the effectiveness of monetary policy.

One aspect which received less attention in the literature, however, is that domestic debt itself is a potential source of risks, particularly when it comes to its composition. Domestic debt has high exposure when dominantly composed by short-term and foreign denomination currency debt (IMF and World Bank, 2003). Since excessive reliance on short-term public domestic debt dig out exposure to default risk when debt cannot be rolled over, or liquidity risk when assets are illiquid. The role of short-term public debt was identified as a major source of vulnerability such as in the Mexican crisis of 1995 and the Russian crisis of 1998. Potential buyers did not wish to hold long-term government domestic debt voluntarily because of the risk of default, whether explicit or implicit trough inflation Hansen (2008). In addition, denomination in foreign currencies of public domestic debt may give rise to balance sheet mismatches if the bulk of assets or revenues are in local currency.

Debt composition has important implications for the cost of defaulting on debt obligations. The sovereign debt literature highlights two channels through which these costs may materialize: reputation and direct sanctions, but various empirical studies found that these costs of default tend to be fairly small (Borensztein and Panizza, 2006, provide a survey of this literature). Borensztein, Levy, Yeyati and Panizza (2006) argue that the reason why countries do repay their debt may have more to do with the domestic cost of default which, in turn, is positively correlated with the share of debt held by domestic investors. As a consequence, domestic debt is much more difficult to restructure than external debt and several countries which successfully managed to reduce their external debt obligations (sometimes through debt relief) are still burdened by high levels of domestic debt.

Risk could come from limitation of domestic debt market capacity to absorb government financing need. Because empirical study of Beaugrand, Loko, and Mlachila (2002) showed foreign concessional debt is preferable than domestic debt for African countries due to lower degree of development of domestic financial market.

In the presence of limited demand for bonded instruments, market creation can become crowding out and excessive reliance on domestic government bonds can stunt the market for corporate bonds. Attempt at testing whether market creation dominates crowding out have yielded mixed results. Eichengreen and Leungnaruemitchai (2004) find no significant correlation between size of the domestic government bond market and the size of the domestic private bond market and argue that benefits in terms of market creation balance the costs in term of crowding out. While research by Borensztein and Panizza (2006), Borensztein, Cowan, Eichengreen and Panizza (2007) found it give benefit and value for domestic debt market. Abbas and Christensen (2007) surveyed on macroeconomic literature and also found that the evidence on crowding out effect is mixed.

Policies aimed at promoting the entry of foreign investors in the domestic debt market are also controversial. Supporters argue that the presence of foreign investors can help in expanding market size and, by increasing the net flows of external resources into the country, limit crowding out. In this sense having a large presence of foreign investors in the domestic market is equivalent to being able to issue domestic currency debt in the international market. However, policies aimed at promoting the presence of foreign investors may result in a loss of policy space. For instance, such policies are often incompatible with the presence of capital control and with a country’s ability to manage its exchange rate. Moreover, policies aimed at attracting foreign investors may result in sudden inflows of “hot money” and thus lead to high capital flow volatility and financial instability. There is also disagreement on which policies should be implemented to promote the participation of foreign investors in the domestic market (Eichengreen, Borensztein, and Panizza, 2006).

Abbas (2007) and Abbas and Christensen (2007) study the relationship between domestic public debt and economic growth and find a positive and non-linear relationship between these two variables. Thus, the benefits of domestic borrowing dominate its costs.

2.5 Designing Optimal Debt Portfolio

Miscalculating benefit of external debt, according to Gray and Woo (2000) has contributed to the happenstance of the crisis. In creating optimal debt portfolio many countries may overstate benefit of accessing international capital while understate the cost and risk factors. Henceforth many countries switch its financing strategy by relying more on domestic financing. However, the option is not straightforward decision, since each financing strategy has different magnitude on actual and potential debt costs and risks impact as we discussed earlier. The decision takes on debt strategy in the previous period will affect future decision and decision maker should consider both of current state and future state of its debt position. Bolder (2003)

Dennis (2004) defines optimal debt portfolio as portfolio which bear minimum costs of borrowing and risks, taking into account future revenue flows, and consider opportunity cost. Barro (1997) recommends tax-smoothing (matching debt maturity with tax receipt pattern) to maintain liquidity and indexed-bonds (link interest rate to variable such as inflation, etc) to protect bond holders and government from decreasing bond real value. More technical way is suggested by IMF (2003). Optimal debt portfolio should consider level of government debt risk tolerance which can be analyzed by:

Projecting on repayment capacity from pressure (matching pro forma cash inflow with debt maturity profile)

Accompanying debt risk indicators disclosure when projecting optimal debt portfolio profile.

Preparing some scenarios of debt cost and risk trade-off emerge in each portfolio

IMF (2003) reminds the decision makers on some pitfall when designing optimal debt portfolio such as by accepting higher risk of debt but may lead to lower debt costs. Short-term debt, for investors offer low risk thereby they will agree to receive lower return for this investment. However, excessiveness reliance on short-term debt from government point of view actually increasing vulnerability of certain country from currency and interest exposure. Since short-term reduction of debt cost in one side will be followed by increase of risk on the other side.

Maturity of debt structure should not concentrate in certain time or period. Besides avoid over reliance on one type of debt instrument, for instance, excessiveness on short-term type of debt and vice versa or similarity on interest type. IMF recommends Asset Liability Management (ALM) approach to manage this obstacle. The underlying assumption is every borrowing risk should be matched with the government asset structure. Long-term debt duration is better supported with long-term nature asset as well. Debt managers need to identify of its debt cost and risk characteristics with nature of its assets and revenue streams.

In order to identify and manage the trade-offs between expected cost and risk in the government debt portfolio, a framework should be developed. This framework must be backed by a quantification of risk, including stress tests of the debt portfolio based on the economic and financial shocks to which the country is potentially exposed (OECD, 2005).

In detail OECD (2005) gave some guidelines how to measure risk. Many countries use scenario models based on a limited number of deterministic scenarios. Stress testing the model, that is, running the model using different (extreme) input values, is a common approach for assessing market risk in the debt portfolio.

Moreover Reinhart, Rogoff, and Savastano (2003) reply that design of optimal sovereign debt portfolio depend on some specific countries factors such as markets development level, foreign exchange system, existing debt portfolio, institutional development stage, credit rating and debt management objectives itself. Therefore when design the policy setting, government should tailor it to each country best use.

However based on IMF and World Bank (2003) research, they found some convergence issue workable in all countries when managing debt. These are the need to understand debt management objectives clearly, managing risks and cost trade-off, separate but well coordinated of debt and monetary management policy, a limit of debt expansion, prudently managed three important debt risks (refinancing risk, market risk, and interest risk), sound institutional structure along with the policies to contain operational risk, and clear cut responsibilities and accountabilities among parties involving in managing debt.

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