Decision No. 56/2012/QD-TTg Issuing the Regulation on Management and Handling of Risks for the Government Debt Portfolio

Pursuant to …;

Issuing the Regulation on Management and Risk Handling for the Public Debt Portfolio

Based on the Law on the Organization of the Government dated December 25, 2001;

Pursuant to the Law on Public Debt Management dated June 17, 2009;

Pursuant to Decree No. 79/2010/NĐ-CP of the Government dated July 14, 2010 on public debt management operations;

At the proposal of the Minister of Finance;

The Prime Minister issues this Decision on the Regulation on Management and Risk Handling for the Public Debt Portfolio,

Article 1. Attached hereto is the Regulation on Management and Risk Handling for the Public Debt Portfolio.

Article 2. THIS DECISION SHALL TAKE EFFECT FROM MARCH 1, 2013.

Article 3. Ministers, Heads of ministerial-level agencies, Chairpersons of provincial/municipal People's Committees under the central government, Heads of agencies, organizations, and individuals related to the management and risk handling for public debt shall be responsible for implementing this Decision.

 

REGULATIONS

MANAGEMENT AND RISK HANDLING FOR THE PUBLIC DEBT PORTFOLIO
(Issued together with Decision No. 56/2012/QĐ-TTg dated December 21, 2012 of the Prime Minister)

PART I
GENERAL PROVISIONS

Article 1. Scope of Regulation

Article 1. This Regulation stipulates the management and risk handling for the public debt portfolio, including risk detection, risk assessment, risk handling, and the responsibilities of organizations and individuals involved in the management and risk handling for the public debt portfolio.

Article 2. Types of risks specified in this Regulation include:

a) Market risk.

b) Liquidity risk.

c) Credit risk.

d) Operational risk.

Article 3. Financial instruments for handling risks in the public debt portfolio include:

a) Derivative transactions, including options and swaps.

b) Debt restructuring operations, including extensions, write-offs, cancellations, refinancing, exchanges, and buybacks.

Article 2. Applicability

This Regulation applies to agencies, organizations, and individuals related to the management and risk handling for the public debt portfolio.

Article 3. Explanation of Terms

In this Decision, in addition to terms defined in the Law on Public Debt Management dated June 17, 2009 and guiding decrees for the implementation of the Law on Public Debt Management, the following terms are understood as follows:

Point 1. Market risk means the possibility of losses occurring in public debt due to fluctuations in interest rates and exchange rates in the financial market.

Point 2. Credit risk means the possibility of losses occurring in public debt due to borrowers failing to fulfill their obligations to repay loans or bond issuances according to the agreed conditions and terms.

Point 3. Liquidity risk means the possibility of losses occurring in public debt due to the inability to raise funds or lack of liquid financial assets to meet debt obligations on time, or having to seek new sources of borrowing at abnormally high costs compared to market conditions.

Point 4. Operational risk means the possibility of losses arising from the processes of public debt management operations; human factors; insufficient or inadequate systems used in public debt management activities, or arising from external factors outside the management process (such as stolen or damaged debt databases, falsified documents related to debt management processes...).

Point 5. Interest Rate Option Contract is a legally binding agreement between two parties that allows the buyer of the option to fix the interest rate of a nominal loan or loan at a specific future date.

Point 6. Currency Option Contract is a legally binding agreement that allows the buyer of the option to purchase or sell a certain amount of foreign currency at a predetermined exchange rate at a specific future date.

Point 7. Currency Swap Contract is a legally binding agreement between two parties to exchange two different currencies over an agreed period, and at the end of the term, each party must return the original principal amount to the other party at the exchange rate determined at the start of the transaction.

Point 8. Interest Rate Swap Contract is a legally binding agreement whereby each party commits to pay the other party interest on a fixed or floating rate on a certain principal amount over a specified period.

Point 9. Extension of debt means extending the repayment period of the committed debt and during the extension period, the borrower still has to pay interest on the loan.

Point 10. Write-off of debt means not collecting part or all of the debt within a certain period without accruing interest during the write-off period.

Point 11. Cancellation of debt (principal, interest, fees) means allowing non-recovery of part or all of the outstanding balance (principal, interest, and fees) according to the initial commitment.

Point 12. Refinancing means raising new funds to prepay part or all of the old loan.

Point 13. Exchange of debt means simultaneously buying and selling two different debts of the same issuer at the same time with the aim of restructuring the debt portfolio.

Point 14. Repurchase of debt means purchasing all or part of the debt issued by the debtor.

Point 15. Provision for risk means the amount set aside to cover various types of risks arising during the process of raising, allocating, using borrowed funds, repaying debt, and managing public debt.

Point 16. ISDA Master Agreement is a standard form contract issued by the International Swaps and Derivatives Association (ISDA) and uniformly used when conducting derivative transactions. This contract includes binding clauses for both parties involved in the transaction while standardizing the legal documentation for these transactions.

Point 17. Discount rate is the annual percentage rate (%) used as a basis for converting the future value of a debt cash flow to its present value.

Chapter II
MANAGEMENT AND RISK HANDLING FOR THE PUBLIC DEBT PORTFOLIO

Article 4. Objectives of Risk Management

1. Optimize the structure of public debt, ensure obligations for repayment, and enhance the effectiveness of public debt management operations.

2. Ensure that the obligation to repay public debt does not increase compared to the initial amount of debt put forward for resolution, valued at present value at the time of risk resolution.

3. Minimizing potential losses in the worst-case scenario at a reasonable cost.

Article 5. Principles for Handling Risks

1. The handling of risks shall only apply to objective causes.

2. Prevention and handling of risks must be based on loan agreements or original debt instruments in the current public debt portfolio, the causes of risk occurrence, and comply with Vietnamese laws and international practices.

3. Prevention of risks for the public debt portfolio must be carried out in accordance with the long-term strategy on public debt and foreign debt of the country, and the medium-term debt management program in each period.

4. For public debts at risk due to subjective reasons, the organizations or individuals causing losses must bear responsibility for handling and compensating according to the provisions of the law.

Article 6. Causes of Risks

1. Objective causes, including:

a) Natural disasters, enemy attacks, fires, epidemics occurring and directly damaging programs and projects using borrowed funds within the public debt portfolio.

b) Adjustments to macroeconomic mechanisms and policies, changes in political and legal conditions having direct impacts on the scale and obligations of public debt.

c) Impacts of the global and regional economy, fluctuations in the international capital market, financial and monetary liberalization processes, and international integration.

d) Borrowers who have been dissolved or declared bankrupt according to the law, who are rescheduling foreign loans from the Government or borrowing under Government guarantees.

2. Subjective causes, including:

a) Misuse of borrowed funds and intentional violation of regulations.

b) Borrowers, reschedulers, and those guaranteed by the Government lacking good faith and intentionally delaying repayment of maturing debt obligations according to the terms of loan agreements or debt issuance.

c) Other subjective causes as prescribed by law.

Article 7. Evaluation and Forecasting of Risks

1. The process of evaluating and forecasting risks for the public debt portfolio includes the following main contents:

a) Organizing assessments of the institutional, legal, macroeconomic, fiscal, monetary, exchange rate, interest rate environments, and domestic and international capital market fluctuations affecting the public debt portfolio.

b) Regularly analyzing and assessing trends in currency composition, interest rates, maturities, scale, public debt repayment obligations, current status, and future trends to identify the level of risk and take appropriate measures to handle risks.

c) Developing models and technical methods to quantify risks for the public debt portfolio to predict potential costs arising from adverse market changes when risks occur.

d) Conducting evaluations of credit risk damage levels to determine the probability of borrowers losing their ability to repay through debt classification.

e) Building a Matrix to describe the degree of impact of operational risks in public debt management work.

2. The Ministry of Finance shall lead and coordinate with relevant agencies and lending institutions to evaluate and forecast the level of risk for the public debt portfolio according to the provisions of this Regulation.

Article 8. Present Value of Debt

1. The present value of debt is the total of debt obligations (principal and interest) due in the future, converted to the current time point using an appropriate discount rate.

2. The discount rate for calculating the present value of debt is determined at the time of building risk management plans according to market regulations and international practices.

3. The risk management agency bases the discount rate on the transaction price of similar debts to the debt being managed (term, grace period, type of loan currency, interest rate, remaining maturity time). In cases where transaction prices cannot be determined, the discount rate is calculated based on the actual interest rate of the loan being managed (nominal interest rate plus fees).

4. The determination of the present value of debt is as follows:

Where:

- PV is the present value of the debt;

- DS_i is the debt obligation (principal, interest) of year i;

- r is the discount rate for calculating the present value of the debt;

- n is the remaining time (number of years) of the loan.

5. The present value serves as the basis for determining the reasonable value of financial instruments to manage risks associated with the public debt portfolio.

Article 9. Market Risk Management

1. Market risk for the public debt portfolio includes interest rate risk and foreign exchange rate risk.

2. Market risk management is carried out through main derivative transactions, including interest rate and currency derivatives such as Options (interest rates, currencies) and Swap contracts (interest rates, currencies).

3. The bases for managing market risk include:

a) Clearly identifying the target, type of risk, and tools applied to manage risk.

b) The risk management agency bases its selection of derivative transactions on the borrowing agreement and original debt instrument.

c) The effectiveness of risk management tools must be reliably determined and consistent with the debt structure goals set forth in the medium-term debt management strategy and program.

d) The selection of risk management tools should consider factors such as the uncertainty of cash flows, immediate costs related to the transaction, and the goal of offsetting risk.

4. The risk management agency may establish reserves to manage market risk according to regulations. For government debt portfolios, the Ministry of Finance compiles them into annual borrowing and repayment plans to be submitted to the Prime Minister for approval.

5. Authority and Responsibility

a) For government debt portfolios: The Ministry of Finance leads and coordinates with relevant agencies to implement derivative transactions to manage market risk.

b) For government-guaranteed debt: The guaranteed party proactively develops and implements market risk prevention plans according to this Regulation. If the risk management plan changes the obligations of the guaranteed party, it must be reviewed by the Ministry of Finance before implementation.

c) For local government debt: Provincial People's Committees and municipalities directly under the Central Government develop plans, submit them to the People's Council for consideration and decision, and simultaneously send the results to the Ministry of Finance for consolidation and adjustment of the current public debt portfolio.

6. Legal procedures for managing market risk through derivative product transactions are governed by the ISDA Master Agreement. Other contents are agreed upon by the parties but must not contravene Vietnamese laws and international practices.

Article 10. Management of Liquidity Risk

1. Measures for managing liquidity risk include:

a) Identifying liquidity risk in the public debt portfolio based on determining the trends of principal and interest repayment obligations of existing public debts and future trends, in accordance with available financial assets to meet repayment commitments.

b) Developing plans to address liquidity risk and submitting them for approval by competent authorities.

c) Implementing, monitoring, supervising, evaluating, and reporting on the results of implementing plans to address liquidity risk.

2. Operations to manage liquidity risk include: Debt rollover, debt swap, and debt buyback.

3. Conditions for implementing operations to manage liquidity risk include:

a) Applicable to commercial loans and bonds.

b) Ensuring that public debt limits approved by competent authorities are met at each stage.

4. Sources of funds for addressing liquidity risk

a) For government debt: The Ministry of Finance may mobilize idle funds (from the Accumulation Fund for Repayment, state budget, or other lawful financial sources) or new loans to roll over debt, prepay old debt, and buy back debt to continue restructuring the public debt portfolio in line with the debt strategy and medium-term debt management program objectives.

b) For government-guaranteed debt: The guaranteed party must proactively arrange risk reserve funds and other lawful financial sources to address risks.

c) For local government debt: Provincial People's Committees and municipalities directly under the Central Government must proactively allocate budgetary resources and reserves to address risks.

5. Authority and Responsibility

a) The Ministry of Finance shall take the lead and coordinate with relevant agencies to develop, approve, and implement plans to address liquidity risk, ensuring they align with the medium-term debt management strategy and annual borrowing and repayment plan approved by competent authorities.

c) The guaranteed party shall develop plans to address liquidity risk for government-guaranteed debts, seek agreement from the Government Guarantee Agency (Ministry of Finance) before implementation.

b) Provincial People's Committees and municipalities directly under the Central Government shall develop plans to address liquidity risk, seek agreement from the Ministry of Finance before approval for implementation.

Article 11. Management of Credit Risk

1. Measures for managing credit risk include:

a) Regularly collecting information about borrowers and guaranteed parties to conduct loan assessment, classification, and calculation of credit risk levels to implement appropriate measures.

b) Addressing credit risk must be considered on a case-by-case basis based on the causes of the risk, the level of risk, and the borrower's and guaranteed party's ability to repay.

c) When overdue principal and interest arise, reassess the borrower's and guaranteed party's ability to repay.

2. Addressing credit risk must meet at least one of the following main conditions:

a) Investment projects funded according to regulations have been used for their intended purposes.

b) Borrowers and government-guaranteed parties suffer losses due to objective reasons resulting in partial or total loss of capital or assets.

c) Borrowers and government-guaranteed parties face financial difficulties leading to inability to repay debt.

3. Classification of credit-risk affected debt

Debt classification should be conducted according to the following five groups:

a) Group 1 (Standard Debt): Includes current debt and is assessed as having full recovery potential for both principal and interest within the due period.

b) Group 2 (Watch List Debt): Includes debt overdue up to less than 90 days.

c) Group 3 (Substandard Debt): Includes debt overdue from 90 to less than 180 days; debt restructured once; debt with interest relief or reduction but the borrower or guaranteed party does not comply fully with the contract terms.

d) Group 4 (Doubtful Debt): Includes debt overdue from 180 to 360 days; debt restructured and again overdue, requiring a second restructuring.

e) Group 5 (Loss Debt): Includes debt overdue more than 360 days; debt restructured twice and again overdue, requiring a third restructuring; debt set aside, pending resolution.

4. The Ministry of Finance shall take the lead and coordinate with relevant agencies to classify credit-risk affected debt according to this Regulation; issue criteria for assessing and ranking the repayment capacity of borrowers and guaranteed parties.

5. Implementation of operations to manage credit risk (debt extension, debt write-off), mechanisms for implementation, and authority to manage credit risk shall be carried out in accordance with Decree No. 15/2011/NĐ-CP dated February 16, 2011, on granting and managing government guarantees, and Decree No. 78/2010/NĐ-CP dated July 14, 2010, on relending foreign government loans.

6. Costs for evaluating and ranking borrowers and guaranteed parties when overdue debt occurs and the state bears credit risk shall be covered by the state budget. In cases where the lending agency bears the credit risk, the lending agency shall bear responsibility.

7. For local government debt, local budgets shall ensure funding for annual credit risk management activities.

Article 12. Management of operational risks

a) Environmental tasks are managed through assignment or contract forms;

a) Management of operational risks mainly focuses on agencies and organizations directly related to the business of managing public debt.

b) Management of operational risks is an important, ongoing, continuous, and comprehensive task throughout all activities of managing public debt.

2. The business of managing operational risks mainly includes:

a) Establishing an appropriate risk management environment, formulating principles for identifying, assessing, monitoring, and internal control measures to reduce operational risks.

b) Transferring risks to third parties through purchasing insurance for operational risks.

c) Developing control tools and risk warning systems, maintaining and regularly inspecting procedures for managing public debt operations.

d) Enhancing material resources, providing specialized training, equipping modern information technology facilities for risk management.

3. The Ministry of Finance shall issue procedures and business guidelines for managing operational risks applicable to public debt management agencies.

4. The budget of the state shall ensure funding for implementing operational risk management activities of public debt management agencies.

5. Losses occurring in public debt management activities due to objective reasons shall be covered by the state budget, while losses resulting from subjective reasons shall be compensated by the individuals directly responsible according to the provisions of the law.

Article 13. Authority and responsibility for handling risks

1. The Prime Minister:

a) Deciding on the write-off or suspension of risky debts at the proposal of the Ministry of Finance.

b) Approving overall restructuring plans for public debt; plans for issuing international government bonds to refinance; repurchasing debt when there is a benefit below 5%, but it is deemed necessary to restructure debt to ensure strategic objectives regarding debt structure and safety limits approved by competent authorities.

2. Ministry of Finance:

a) Deciding on the extension, refinancing, exchange of debt, and implementation of derivative product transactions for the government's debt portfolio, ensuring the principle of risk handling as stipulated in this Regulation.

b) Proactively implementing plans and conducting debt repurchase operations when there is a minimum benefit of 5% compared to the initial debt obligation value at the time of risk handling.

c) Taking the lead and coordinating with relevant agencies to organize the review of applications for debt write-offs and suspensions, and submitting them to the Prime Minister for decision.

c) Taking the lead and coordinating with the Ministry of Justice and relevant agencies to guide negotiations on ISDA contracts in accordance with Vietnamese law and international practices; proactively selecting financial institutions with credit ratings of Aa1 or higher (by Moody’s) or AA+ or higher (by S&P/Fitch) as partners for derivative product transactions involving the government's debt portfolio.

d) Submitting to the Prime Minister for assignment to competent agencies to handle according to the law organizations and individuals responsible for non-payment if determined to be due to subjective reasons, and performing other tasks assigned under this Regulation.

3. Borrowers, guarantors:

a) Proactively developing specific plans, selecting risk management tools within their authority to manage, prevent, and handle risks in accordance with the Public Debt Management Law, guiding documents, and regulations of this Regulation.

b) Fulfilling all obligations arising from loan agreements, guarantees, and risk handling. Proactively allocating risk reserve funds as required by law to create capital for handling risks when they occur.

c) Being subject to inspection, supervision, closely cooperating, and facilitating public debt management agencies in understanding information, evaluating debt status, classifying debts, and determining risk levels.

4. Provincial People's Committees:

a) Implementing risk management and handling measures for local government debt portfolios as prescribed in this Regulation.

b) Being responsible for managing and supervising, promptly detecting risks arising from local government debt portfolios, local development fund debts, and debts guaranteed by local governments with commitments to allocate local budget sources to ensure repayment obligations.

c) Proactively allocating annual local budget reserves to prevent local government debt risks.

Article 14. Implementation Organization

1. The Minister of Finance is responsible for leading and coordinating with relevant agencies to guide, organize, direct, and inspect the implementation of this Regulation.

2. Ministries, ministerial-level agencies, and government agencies:

a) Cooperating with the Ministry of Finance and lending agencies in evaluating, ranking, and classifying risky debts as stipulated in this Regulation.

b) Participating and coordinating with the Ministry of Finance in developing plans for writing off, suspending risky debts, overall public debt restructuring, and issuing international bonds, and submitting them to the Prime Minister for consideration and decision./.