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Fiscal Risks: Sources, Disclosure and Managemen
Fiscal Risks: Sources, Disclosure and Managemen
Ricardo Velloso
Fiscal Affairs Department, IMF
Presentation at 2009 ICGFM Miami Conference
May 21, 2009
Introduction
• Fiscal Risks could be defined as deviations of
fiscal outturns (deficits, debt/GDP) from
expectations at the time of the budget and/or
other fiscal forecasts.
• How large are fiscal risks for different groups of
countries?
• What are the most important sources of risk?
• What can policy makers do about fiscal risks?
Context
• Increasing interest in fiscal risk disclosure and
management: more countries are preparing
fiscal risk statements.
• Presentation draws on recent FAD paper
discussed at IMF’s Executive Board.
• Extension of IMF’s ongoing work on fiscal
transparency (revised Code and Manual on
Fiscal Transparency).
• Preliminary Guidelines: tool for policymakers
that will evolve with experience.
• More requests for advisory services in this area.
Outline of Presentation
10th Percentile
Frequency
60 40
20
0
10th Percentile
Frequency
40
0
140
160
90
140
120
80
10th percentile
120
10th Percentile 10th Percentile
100
70
100
60
80
Frequency
Frequency
Frequency
50
80
60
40
60
30
40
40
20
20
20
10
0
0
-10 -5 0 5 10 -20 -15 -10 -5 0 5 10 15 20 -15 -10 -5 0 5 10 15
In percent of GDP; positive deviation if actual > forecast In percent of GDP; positive deviation if actual > forecast In percent of GDP; positive deviation if actual > forecast
Total obs. 378; mean=0.02; sd=2.20; skewness=-0.42; kurtosis=6.80 Total obs. 388; mean=-0.57; sd=3.52; skewness=-0.66; kurtosis=10.34 Total obs. 631; mean=-0.45; sd=3.49; skewness=-0.21; kurtosis=6.86
Sources of Fiscal Risk
• Fiscal risks arise from macroeconomic shocks
and the realization of contingent liabilities.
• Sources of macroeconomic shocks include real
GDP growth, inflation, commodity prices, and
interest and exchange rates.
• Contingent liabilities are obligations triggered
by uncertain events and can be:
– Explicit: defined by law or contract, e.g., debt
guarantees.
– Implicit: arising from government ownership
of SOEs, expectations that the government
will provide assistance (e.g., following
natural disasters, to depositors in event of
bank failures, etc).
Currency Crises
(depreciation by at least 25 p.p. and at least 10 p.p. greater than the previous year)
10th percentile
10
Frequency
5 0
-10 -5 0 5 10
In percent of GDP; positive deviation if actual > forecast
Total obs. 46; mean=-2.22; sd=3.33; skewness=-0.91; kurtosis=3.12
Oil Exporters: Years of Oil Price increase
18
15
15
12
Frequency
Frequency
10
96
5
3
0
0%
10%
20%
30%
40%
50%
60%
In 1 9
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n 0
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ic
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Bu ado
Ph lg r
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Ve ara s
ne gu
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nt oa 1 r
in t i
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C J sia
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ch pa
C M Re n
(in percent of GDP)
ol
om al p.
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a i
Sr 19 a
i L 82
an
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th ia
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om B nia
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Ar t e 19 a
ge d S 98
nt t a
Banking Crises: Net Fiscal Costs
in te
a s
1
Es 99
to 5
N nia
or
w
ay
Sw
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
e
N den
o
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C a la y
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om
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19
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p
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ni ru i a
t e gu
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at
Ko es
Ec re
ua a
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ra zil
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Fi nia
n
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In ma d
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N one a
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ar ia
ag
D M ua
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in ithu ico
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Ar nt lga
g in ri
Ar e nt a 1 a
g in 99
Ar e nt a 1 5
g in 98
C ent a 1 0
ol in 98
om a 9
bi 20
a 01
1
Banking Crises: Recovery rate
C 982
(recovery as a share of gross fiscal costs)
ro
at
Ph La ia
ilip tvi
pi a
R n es
Sr uss
i L ia
Vi ank
et a
na
m
Benefits of Disclosure
• Strengthens incentives to ensure that key risks
are identified, estimated and carefully managed.
• Promotes earlier, smoother policy responses.
• Increases confidence amongst stakeholders in
the quality of fiscal management.
• Reduces uncertainty for investors and
taxpayers.
• Improves access to international capital
markets.
• International trend toward greater disclosure.
Macroeconomic Shocks
16
New Zealand
• Clear responsibilities for macro and fiscal
forecasting to help ensure realistic budgets.
• Independent experts assess macro and fiscal
forecasts.
• Sensitivity of budget and medium-term fiscal
forecasts to variations in the key assumptions.
• Full-fledged alternative macroeconomic and
fiscal scenarios are considered alongside
baseline scenario.
• This approach provides policy-makers with a
better feel for the likely path of fiscal
aggregates, and improve their ability to judge
whether the effects of fiscal shocks are likely to
be temporary or permanent.
17
Contingent Liabilities
General definition
- Obligations that have been entered into, but
the timing and amount of which are contingent
on the occurrence of some uncertain future
event outside the control of the Government.
Other definition
- Off-balance sheet contingent obligations
(accounting).
18
Contingent Liabilities
Contingent Liabilities
Explicit Implicit
(obligations based on contracts, laws, (political or moral obligations,
or clear policy commitments). rather than contractual)
Guarantees Bailouts
(loan; trade and exchange rate; minimum pension; (of public enterprises, financial institutions,
income, profit and rate of return guarantees under PPPs) subnational governments, strategic private firms)
Other
e.g. ideminities; insurance programs; uncalled capital
19
Contingent Liabilities
• Disclosure practices driven by accounting, reporting and
transparency standards.
– Accounting Standards (IPSAS):
Likelihood and Loss more likely than not Loss less than likely but Loss remote
measurability of loss (probability > 50%) more than remote
20
Contingent Liabilities
• Disclosure venues:
– Financial statements (Australia, Canada, New Zealand, US).
– Budget documentation
22
Contingent Liabilities
• Exemptions from disclosure:
• Implicit CLs, to minimize moral hazard.
• Information that, if quantified, would
prejudice:
– Substantial economic interests of the country.
– Security or defense of the country.
– International relations of the government.
– Ongoing litigation and negotiation.
Quasi-fiscal deficit Central Bank Australia, Chile Quasi-fiscal deficit and capital position
of CB; guaranteed CB liabilities
24
Guidelines for Fiscal Risk
Disclosure and Management
• Fiscal risks to which the government is exposed
should be identified and disclosed to facilitate an
effective fiscal policy.
• Risks should be mitigated in a cost-effective
manner.
• There should be a clear legal and administrative
framework to regulate overall fiscal management
and the government’s exposure to fiscal risks.
• Risks should be systematically incorporated in
fiscal analysis and the budget process.
Guidelines
Identification & Disclosure
• Availability of information: compilation and
monitoring of all risks—importance, probability,
and where possible, quantification.
• Legislative/accounting framework for disclosure
of risks, with presumption of publication;
exceptions based on clear criteria (materiality,
moral hazard, prejudice of national interest).
• Full presentation of risks in budget
documentation, possibly in statement of fiscal
risks.
Guidelines
Cost-Effective Risk Mitigation
• Efforts to address or reduce fiscal risks before
they are taken or materialize include a
combination of:
– Assessing if the government should take on a
particular risk.
– Modifying the activity to reduce risk.
– Taking up insurance or otherwise transfering or
sharing the risks particularly with those able to
influence outcomes.
– Allocating risks based on an assessment of best
ability to bear and manage risks.
Guidelines
Legal/Administrative Framework
• Clear allocation of responsibilities between CG
and rest of public sector on use of public funds.
• Fiscal risk management may be facilitated by a
CG unit that can monitor and control overall risk
and consider interactions.
• Integration with overall fiscal management is
facilitated by location of unit within MOF.
• Ministries/agencies to have clearly specified
responsibilities for managing their risk exposure.
• Responsibility for taking on risks should be
separate from that of estimating potential costs.
Guidelines
Incorporating Fiscal Risks in
Fiscal Policy & Budget Process
• Risk analysis should be incorporated in the
macroeconomic policy framework, with fiscal
targets allowing for the possibility that some
risks may materialize.
• Exposure to fiscal risks should be incorporated
in fiscal sustainability analysis.
Guidelines
Incorporating Fiscal Risks in
Fiscal Policy & Budget Process
• Decisions over contingent liabilities should be
integrated with the annual budget cycle so that
proposals are considered alongside competing
instruments.
• A framework should be in place to require
parliamentary approval of contingent liabilities.
• An annual budget appropriation could be
included to cover the expected cost of
contingent liabilities (general, by main category,
or specific).
Statement of Fiscal Risks
State-Owned Enterprises
- Policy framework for SOEs (pricing policy, dividend policy).
- Financial performance and position of the SOE sector and the largest
SOEs.
- Financial performance and position of state-owned banks.
Subnational Governments
- Legal framework for intergovernmental fiscal relations, and summary of
recent (aggregate) subnational government financial performance and
financial position.
Thank you!
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