Medium-Term Debt Management Strategy 2021-2025

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 budget plan and defines objectives and criteria for the management of Treasury debt over the specified period. The main 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 budget plan assumes that the Treasury’s borrowing requirement for the period will be around ISK 1 trillion. The Treasury has a variety of options to meet this need, both domestically and abroad. As before, the focus will be on meeting the financing need through the issuance of Treasury bills on the domestic market. More emphasis will be placed on external borrowing. Treasury and HF-Fund liquidity management will be unchanged in the first half of the period, and the planned sale of the state’s stake in Íslandsbanki will reduce the need for financing in the next period. Treasury cash is strong at present, with ISK-denominated deposits with the Central Bank totaling around ISK 145 billion. In addition, the Treasury holds approximately ISK 220 billion of foreign deposits, following the issuance of bonds denominated in foreign currencies.

The MTDS sets the Government’s plans for financing its activities during this period. The strategy outlines debt management objectives and guidelines, debt portfolio structure, inherent risk factors and contingent liabilities. It also describes the institutional structure of debt management and explains how disclosure of information to market agents and investors is carried out.

The new MTDS is largely based on its predecessor, but reflects changes in focus in accordance with the financial plan. The main changes are:

1. Given the deterioration in the Treasury result, the financing requirement will increase significantly over the next few years. Benchmark two-, five- and ten-year Treasury bonds will be priced as before, but the maximum size target for outstanding series will be removed.
2. So far, external borrowing has been contracted mainly to finance international reserves. Since the financial needs over the duration of the fiscal plan are large, they will be met in part by external borrowing or by drawing on the Treasury’s foreign currency-denominated deposits with the Central Bank.
3. The overall structure of the loan portfolio will change as follows: the share of foreign loans will increase to 15-25% of the portfolio, non-indexed loans to 50-70% and indexed loans to 20-30%.
4. Cash management for the Treasury and the HF-Fund will continue to be managed jointly, with the aim of maximizing the benefit for the Treasury as a whole.
5. Clearly defined green and sustainable projects in Iceland could be financed by issuing so-called green (sustainable) treasury bonds. A working group representing the Ministry of Finance and Economic Affairs is currently analyzing the feasibility of such an issue.

The main objective of the budget plan is to halt the rise in the debt-to-GDP ratio by the end of the period. Even if the debt increases sharply, the Treasury’s debt position will be modest in the international context, and a favorable interest rate environment means that the Treasury’s interest charges will not increase in line with its debt. The difficulties in financing Treasury activities over the period are quite manageable. The Treasury has a variety of options to meet its financial needs, its debt level is moderate and its credit ratings are healthy, the national economy has strong growth potential and confidence in the national economic policy has increased in recent years. All these factors strengthen the financing capacity of the Treasury.

Further information can be found at www.government.is