Knowledge Note

The enabling environment is the national government’s legal, regulatory, and institutional framework and debt market conditions that govern sub-national governments’ (SNGs) borrowing. When planning to borrow, SNG finance directors should assess the borrowing constraints imposed by the enabling environment. The most critical element of the enabling environment is the nation’s decentralization and fiscal laws governing the SNG revenues used to secure or guarantee debt repayment. Decentralization laws determine SNG revenue raising capability and expenditure requirements to deliver local services. Laws and regulations also determine which revenues an SNG uses to repay debt and the total outstanding debt, or debt capacity, an SNG can support with these revenues. National government’s fiscal laws that regulate SNG debt, commercial banks, and the stock markets also contribute to the supply and demand of SNG debt. Macroeconomic conditions also play a significant role in the supply and demand for SNG debt. The most direct impact on the SNG debt market is the central bank’s interest rate policy that shapes the government’s benchmark “yield curve”. The benchmark yield curve sets the interest rate floor for public (including SNG) and corporate debt. Government fiscal and monetary policy also contributes to the enabling environment. In addition to the government yield curve, fiscal and monetary policy drives the underlying economic base of SNG revenue collection, as well as inflation, which has a major impact on SNGs’ annual operating balance.

About the Presenters

Benjamin Darche

Joshua Gallo