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Sovereign Asset and Liability Management: An E-Learning Training Course
I. Institutional Setting
II.Asset and Liability Management Office
III.Debt Management Office
IV. Potential Conflicts of Interest Between the Central Government and Central Bank
Conclusion
Bibliography
Glossary
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Asset and Liability Management Office

“DMO that are housed within the Ministry of Finance have sometimes been merged into a broader organizational structure charged with providing advice on the management of risk across the government’s balance sheet.  For example, the New Zealand Debt Management Office, which reports to the Minister of Finance through the Chief Executive of the New Zealand Treasury, forms part of the Treasury’s Asset and Liability Management Branch.  The asset side of the branch provides advice on the privatization of government assets (including management of the sale process) and on restructuring State-Owned Enterprises.  It also advises on the management of a wide range of commercial, contractual, and litigation risks on behalf of the government” (Wheeler, 2004).

Having an ALMO is the optimal institutional setting to achieve SALM objectives. Having the management of assets and liabilities housed within a single entity lends itself to developing policies and procedures that manage both sides of the balance sheet in a coordinated manner.  This is the result of clear objectives and a better understanding of sovereign risk in its entirety as ministers, policy advisers, and policymakers are encouraged to share information, communicate, and analyze risk within a broader balance sheet context.  Asset and liabilities are not independent portfolios that occasionally have correlating risks mitigated but are managed in a cohesive manner on a daily basis.  Being mindful of the entire balance sheet not only leads to decision making that reduces risk but can also increase the government’s net worth.

Another benefit of having an ALMO is that it may form more natural hedging of risks for the entire sovereign balance sheet.  In a fragmented institutional structure, many different agencies may be performing similar functions while financial reporting may be uncoordinated and not result in effective risk management.  For example, multiple units may manage financial flows from a particular entity in a completely independent manner.  While this provides a safeguard against potential collusion, it lacks a cohesive framework for analyzing risk.  With each unit hedging its cash flows independently due to a lack of information sharing fails to manage risk at the level of the entire balance sheet.  This also can increase transaction costs if natural hedges already exist on the balance sheet but financial instruments are being purchased by each unit to mitigate its own risk exposure.

The creation of an ALMO should lead to an environment in which assets and liabilities are managed cohesively.  However, an ALMO does not automatically ensure the most effective management of sovereign assets and liabilities will take place.  If there are institutional issues regarding disclosure, information sharing, and cooperation, the ALMO will not deliver the expected benefits.  The effectiveness of the SALM framework will be determined by the accuracy of data that drives decision making and the institutional setting in which it is formulated.

For information on the creation of the Asset and Liability Management Branch in South Africa, please see World Bank report on "Sound Practice in Government Debt Management" (see pages 65 and 66).

 

 

 

 

 

 

 

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