Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Fiscal Risks

463 views

Published on

Presentation from ADEMU Fiscal Risk and Public Sector Balance Sheets Conference at the University of Bonn, July 6-7

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

Fiscal Risks

  1. 1. Fiscal Risks Vitor Gaspar IMF Fiscal Risk, Public Sector Balance Sheets, and Risk Management Bonn 6-7 July 2017
  2. 2. Outline of Presentation I. Why Fiscal Risks Matter II. What have we learned? III. Systematic Approach to Fiscal Risk IV. The Way Forward
  3. 3. 60 70 80 90 100 110 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Advanced Economies: Public Debt (2007-2016, Percent of GDP) Source: Fiscal Monitor Database and staff estimates. Spring 2007 Spring 2016 37% of GDP I. Why Fiscal Risks Matter: Public Debt Forecasts for Advanced Economies
  4. 4. I. Why Fiscal Risks Matter Size and Frequency Size and likelihood of fiscal shocks by type Macroeconomic Financial Sector Legal claims Subnational SOEs Natural Disaster PPPs Corporate 0 2 4 6 8 10 0 2 4 6 8 10 12 Average fiscal cost (percent of GDP) Probabilityofoccurrence(percent) Source: Toscani (2015). Shows average contingent liability shocks for advanced and emerging economies
  5. 5. 40 60 80 100 120 140 160 40 60 80 100 120 140 160 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014(f) General Government debt excluding reclassified SOEs, PPPs or financial sector* GG Gross debt reported in Dec 2009 SOE & PPP debt outside the General Government sector SOE & PPP reclassifications post Dec 2009 Financial sector bailouts General Government Gross Debt Arrears Fin Sector SOE&PPP reclassification Debt dynamics I. Why Fiscal Risks Matter Portugal – how risks played out Source: Portugal FiscalTransparency Evaluation
  6. 6. -400 -300 -200 -100 0 100 200 300 400 Net Worth Public Sector Consolidation Central Bank Fin Public Corp Non-Fin Public Corp General Government Reported Unreported Liabilities Assets Unreported Public Sector Expenditure (Percent of Total Expenditure) Ireland: Public Sector Balance Sheet, 2011 (Percent of GDP) • Improved focus on general government leaves public corporations unreported • Large amounts of quasi-fiscal activity continues to occur outside the budget Countries often report much less than full public sector Large gaps in public sector balance sheet • In Ireland, only a quarter of public sector liabilities were reported. • Reflects the temporary impact of financial sector rescue operations II. What Have We Learned? Fiscal Transparency Evaluations Source: Various Fiscal Transparency Evaluations undertaken over the period 2013-2016.
  7. 7. 0 50 100 150 200 250 300 Ireland Portugal Russia Romania Tunisia Albania Philippines Turkey UK Brazil Finland Austria Georgia Mozambique Peru Kenya Tanzania Explicit Public Corp Liabilities • Leads to unrealistic medium-term fiscal plans with weak credibility. Macro and fiscal forecasts are systematically optimistic Large contingent liabilities, many of which are unreported • Include guarantees, PPPs, pension liabilities and public corporation liabilities. Medium Term Expenditure Forecast Errors (2000-2015) (% of GDP) Contingent Liabilities (% of GDP) II. What Have We Learned? Fiscal Transparency Evaluations Source: Various Fiscal Transparency Evaluations.
  8. 8. II. What have we learned If risks eventuate, fiscal can help if there are buffers Public Spending in Financial Crises (Percentage points) Sources: IMF, Fiscal Monitor; and IMF staff estimates.
  9. 9. Feature Optimal Design Rationale  Targeting / Incentives  Viable institutions (screening)  Conditionality  Burden sharing (creditors/debtors)  Moral hazard and fiscal cost  Instruments  Direct government support measures preferable over tax incentives  Public recapitalization as last resort and well-designed AMCs  Tax avoidance and complex tax system  Moral hazard and fiscal cost  Timing  Early  Minimize output and fiscal cost  Policy complementarities  Strong insolvency and bankruptcy  Prudential policies  Quick and efficient resolution  Moral hazard II. What have we learned But Policy Design is Critical for Effectiveness
  10. 10. III. Systematic Approach to Risk New Zealand’s 3-step risk assessment approach Comprehensive Net Worth Value at Risk Fiscal Stress Test
  11. 11. NZ$ billion Assets Liabilities Net Worth Based on accounting principles Social 130 86 44 Financial 122 96 25 Commercial 23 11 13 Accounting Net Worth 275 193 82 Add Contingent Liabilities 0 18 (18) NPV future expenses & revenue 785 886 (101)Add Comprehensive Net Worth 1078 1098 (20) Social Assets – Tangible assets, primarily P&E, used to support the delivery of social services. Financial and Commercial Assets – Assets held to fund contractual or social obligations such as New Zealand Superannuation. Fiscal – Estimates of the present value of future Government spending and income Contingent Liabilities – An estimate of the value of both contingent and implicit liabilities. Note: Figures are illustrative only. Comprehensive Net Worth – Combines balance sheet, expected losses from CL realizations, and NPV of future policies Accounting Net Worth – Cumulative impact of past decisions NZ Comprehensive Net Worth III. Systematic Approach to Risk Comprehensive balance sheet assessment
  12. 12. III. Systematic Approach to Risk Ex ante risk analysis • Value at risk (NZ approach): – Commercial banking approach to public sector financial balance sheet – Concerns around underlying data and models – lessons from the crisis • Contingent Claims Analysis for implicit liabilities – Exploit different pricing of debt and equity to estimate expected losses. – Gray (2013) estimated implicit subsidy of 85bps for euro area banks – Lucas (2010) estimated Fannie subsidy of 35bp – Highly sensitive & non-linear relationship to asset values • Judgement based (UK forthcoming) – Recognize the difficulty and unreliability of precise probabilities – Broad categorizations (high, medium, low)
  13. 13. Source: IMF Staff Estimates Public Debt (Percent of GDP) Liquidity: Gross Financing (Percent of GDP) 0 10 20 30 40 50 60 70 80 90 100 2006 2011 2016 2021 -5 0 5 10 15 20 25 30 2016 2017 2018 2019 2020 2021 Baseline Macro Only Stress: Macro + CL Baseline Stress III. Systematic Approach to Risk Worst case Fiscal Stress Testing: Iceland
  14. 14. 0 5 10 15 20 2006 2011 2016 2021 Stress Baseline Fiscal Burden: Interest Cost (Percent of revenue) -1,000-750 -500 -250 0 250 500 750 1,000 Stress Baseline Stress Baseline Stress Baseline Liabilities Assets Financial Net Worth Discounted Future Flows Net Financial Worth Solvency: Net Financial Worth (Percent of 2017 GDP) Comprehensive Balance Sheet (Percent of 2017 baseline GDP) Baseline Shock Financial assets 903.5 811.1 Currency and deposits 9.2 9.0 Loans 8.5 8.4 Shares and other equities 17.9 9.0 Other accounts receivable 7.0 7.0 NPV Revenues 860.2 777.0 Liabilities 942.9 918.6 Securities other than shares 21.8 42.8 Loans 20.4 27.3 Insurance technical reserves 18.0 18.1 Other accounts payable 7.4 7.4 NPV Expenditures 875.3 823.0 Net Financial Worth -39.4 -107.6 Existing Net Financial Worth -24.3 -61.6 Future discounted deficits -15.1 -46.0 III. Systematic Approach to Risk Worst case Fiscal Stress Testing: Iceland Source: IMF Staff Estimates
  15. 15. IV. Way Forward – better risk management Fiscal Risk Management Toolkit • Cap Exposure • Regulate • Transfer STEP 2: MITIGATE • Expense • Budget contingencies • Buffer funds STEP 3: PROVISION • Account for in setting fiscal objectives STEP 4: ACCOMMODATE RESIDUAL • Identify risks • Calculate exposure and likelihood • Weigh costs and benefits of intervention STEP 1: IDENTIFY AND QUANTIFY • Cap Exposure • Regulate • Transfer STEP 2: MITIGATE • Expense • Budget contingencies • Buffer funds STEP 3: PROVISION • Account for in setting fiscal objectives STEP 4: ACCOMMODATE RESIDUAL • Identify risks • Calculate exposure and likelihood • Weigh costs and benefits of intervention STEP 1: IDENTIFY AND QUANTIFY
  16. 16. 40% 60% 80% 100% 0 1 2 3 4 5 6 PercentofGDP 80 percent debt threshold Critical threshold of 80% Account for macro- fiscal volatility Debt anchor = 50 percent of GDP 40% 60% 80% 100% 0 1 2 3 4 5 6 PercentofGDP 85 percent threshold Critical threshold of 85% Account for macro- fiscal volatility Debt anchor = 60 percent of GDP IV. Way Forward – fiscal policy Accommodating residual risk in policymaking Allowing for risk in setting fiscal rules
  17. 17. IV. Way forward – Balance Sheet Analysis Improving fiscal policy and risk analysis • Develop a comprehensive balance sheet – Complete public sector, including public corporations – Bring together accounting balance sheet and long-term sustainability • Use balance sheets to improve fiscal strategy and objectives: – Move focus from debt & deficit towards net worth – Include balance sheet projections within standard fiscal forecasts • Understand and account for risks within balance sheets: – Increased attention to valuation shocks to assets and liabilities – Identify currency, maturity and liquidity mismatches and exposures
  18. 18. Concluding Questions • How should we quantify and provide for fiscal risks? • What constitutes a strong public sector balance sheet? • How will fiscal policy be strengthened through balance sheet analysis?

×