Title page
Contents
Abstract 3
1. Introduction 5
2. Macroeconomic context 6
2.1. Lower GDP growth, inflation and higher interest rates after zero-rate policies 6
2.2. SNG debt represents, on average in the OECD area, 11% of GDP or 150% of their own revenues 6
2.3. Recent SNG debt stress episodes warrant attention 8
3. Overall SNG debt profile 9
3.1. SNG borrowing frameworks have large heterogeneity across countries 9
3.2. Bank loans account for 55% of SNG borrowing in the OECD area 11
3.3. Who lends to SNGs? 12
3.4. Debt-to-revenue ratios vary considerably across SNGs within countries 13
3.5. Interest payments could increase by up to 1% of GDP 13
4. Subnational bonds profile 15
4.1. Although most of SNGs' marketable debt has fixed rates, some SNGs have a significant share of floating-rate bonds, increasing their interest rate risk 16
4.2. Issues in foreign currency are very low for most countries, but some portfolios are heavily exposed to exchange rate fluctuations 17
4.3. The size of bonds and their age influence liquidity 18
4.4. Heterogeneity across SNGs' borrowing costs within countries is small 19
4.5. Expected yield changes of up to 3.5 p.p. with high dispersion across SNGs 21
4.6. Possible weak links in SNGs' debt sustainability should be assessed in detail 23
5. SNG bonds: stylised facts from selected countries 26
5.1. Brazil 26
5.2. Canada 27
5.3. China 27
5.4. Germany 28
5.5. India 28
5.6. United States 29
6. Mitigating the risks - SNG debt and institutions 30
6.1. SNG indebtedness is not clearly correlated with the strength of fiscal rules, but there is some correlation with tax autonomy 30
6.2. Well-designed insolvency frameworks can also help 32
7. Concluding remarks 33
References 36
Annex A. What do we know about SNG debt? A brief literature review 40
Annex B. ESG-labelled bonds: a new funding source for sustainable investments 43
Annex C. More details on SNG bonds 47
Annex D. Measures of revenues and debt ratios 53
Table 1. Number of ESG issuances by country 44
Figure 1. Ratio of subnational government debt to GDP in 2022, in per cent 7
Figure 2. Subnational and central governments' debt-to-own revenues ratio in 2022 7
Figure 3. Growth in subnational debt-to-own revenues ratio during the pandemic 8
Figure 4. Factors affecting SNG financing capacity 10
Figure 5. Share of SNGs' debt exposed to interest-rate risk in the short-term 12
Figure 6. Variation of debt-to-revenues across states in selected countries 13
Figure 7. Estimated growth in annual interest expenses: three scenarios 14
Figure 8. Estimated growth in annual interest expenses as a share of GDP and own revenues 15
Figure 9. Instrument composition of SNG bond portfolio 16
Figure 10. Share of SNG bonds outstanding in foreign currency 17
Figure 11. Individual size of SNG bonds 18
Figure 12. Age of SNG bonds outstanding 19
Figure 13. Yield-to-maturity across SNGs' bonds in secondary markets as of October 2023 20
Figure 14. Individual SNG bond yield variance across countries and time 21
Figure 15. Change in average SNG bond yields by country 22
Figure 16. Change in average SNG bond yields by issuer 23
Figure 17. Share of tax-exempt bond issuances in United States 24
Figure 18. SNG issuances of ESG-labelled bonds 26
Figure 19. SNG compared to central government debt-to-own revenue ratios 30
Figure 20. SNG indebtedness versus fiscal rules 31
Figure 21. SNG indebtedness versus tax autonomy 32
Figure 22. SNG issuances of ESG-labelled bonds 44
Figure 23. ESG-labelled bonds issued by SNGs classified by type 45
Figure 24. ESG-labelled bonds issued by the use of proceeds 46
Figure 25. Number of deals and issuers of subnational bonds 48
Figure 26. Number of SNG bond issuances in the last two decades 49
Figure 27. Volume of SNG bond issuances in the last two decades - in USD billions 50
Figure 28. Evolution of the share of bonds issued in foreign currency 51
Figure 29. Share of foreign currency bonds issued since 2000 51
Figure 30. Share of bonds outstanding in foreign currency 52
Figure 31. Foreign currencies accessed by SNGs 52
Figure 32. Two measures of SNG debt-to-revenues ratios 54
Boxes
Box 1. Explicit and implicit guarantees 24
Box 2. ESG-labelled bonds: a new tool to help SNGs achieve their goals 25