Managing interest rate risk
Context: Fixed interest rates on medium- and long-term loans are normally only available from official bilateral sources. Although the variability on their loans is generally much lower than on those from commercial sources, even multilateral institutions such as the World Bank find it necessary to lend at rates that vary over the loan's life. It may be possible for a debt manager to increase the proportion of fixed-term debt, for example by substituting official export credits for commercial borrowing. Furthermore, flexible maturity and shared equity loans are becoming available to developing countries and some middle-income countries are using interest rate swaps to exchange floating rate for fixed rate loans. However, borrowers may have to accept floating rate debt and consequently have to make assumptions about future interest rates when they plan future debt service payments. Since interest payments cannot generally be rescheduled, an important indicator of vulnerability to rising interest rates is the ratio of future interest payments to forecast export earnings. If a country has been able to reschedule its debts, the proportion of debt at floating rates can be much higher than that of non-rescheduling countries, as can the interest-to-exports ratio.
Type Classification: D: Detailed strategies