Managing Fiscal Risks: Disasters, Demographics and Debt - Jason Harris, IMF
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This presentation was made by Jason Harris, IMF, at the 40th OECD Senior Budget Officials meeting held in Tallinn, Estonia, on 5-6 June 2019
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Managing Fiscal Risks: Disasters, Demographics and Debt - Jason Harris, IMF
- 2. 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 2
- 3. Fiscal Costs of Contingent Liabilities (Percent of GDP) Bova, E., M. Ruiz-Arranz, F. Toscani, and H. E. Ture, 2016, “The Fiscal Costs of Contingent Liabilities: A New Dataset,” IMF Working Paper 16/14 (Washington: International Monetary Fund). I. Why Fiscal Risks Matter: Cost of Contingent Liabilities 3
- 4. II. Fiscal Risk Assessment Tools Fiscal Transparency Evaluation AUTBEL CYP EST FIN FRA DEU GRC IRL ITA LVA LTU LUX MLTNLD PRT SVKSVN ESP 0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 14 Revenuegrowth Nominal GDP growth 0 50 100 150 200 250 300 Portugal Ireland Romania Russia Uzbekistan Tunisia Albania Brazil Turkey UK Austria Finland Philippines Peru Georgia Mozambique Lithuania Macedonia Mexico Kenya Tanzania Explicit Public Corp Liabilities Contingent Liabilities (Percent of GDP) Macro-fiscal Volatility (St deviation) 4
- 5. AUT BEL CYPCZE DNK FIN FRA DEU IRL ISR ITA LVA LTU LUX MLT NLD NOR PRT SVK SVN ESP SWE CHE GBR 0 2 4 6 8 10 12 14 16 0 20 40 60 80 100 120 140 AverageMaturityofDebtinyears Debt as a percentage ofGDP 0 10 20 30 40 50 60 70 80 Sweden France Denmark Belgium UK Netherlands Finland Norway Germany Austria Luxemburg Croatia Ireland Malta Spain Hungary Italy Estonia Slovenia Czech… Romania Cyprus Portugal Bulgaria Greece Lithuania Latvia Slovakia Poland Increase 2016 - 2060 2060 0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 Azerbaijan Ireland Netherlands Belgium Russia Spain CzechRepublic Germany Greece Denmark France SlovakRepublic Turkey Lithuania UK Austria Croatia Poland Romania Sweden Switzerland Georgia Bulgaria Italy Portugal 0 5 10 15 20 25 30 35 40 45 0 10 20 30 40 Exchange rate volatilityForexGGdebt(percentofGDP ARM GEO HUN AZB PAKBUL ROM TUR RUS ISR UK AUS Disasters: Avg Annual Damages (Percent of GDP) II. Fiscal Risk Assessment Tools FTE Findings: Disasters, Demographics and Debt Demographics: Old age dependency ratio (65+ to working age popn) Debt: Rollover risk (avg maturity and size) Debt: Exchange Rate Risk (forex debt to erate volatility) 5
- 6. II. Fiscal Risk Assessment Tools Balance Sheet Assessment General Government Non-Financial Public Corps Financial Public Corps Public Sector Consolidation Total assets 114.4 16.3 33.9 140.8 -23.8 Nonfinancial assets 45.5 13.2 0.1 58.8 0.0 Financial assets 68.9 3.1 33.8 81.9 -23.8 Monetary gold and SDRs 0.0 0.0 0.5 0.5 0.0 Currency and deposits 5.1 0.3 0.9 5.3 -1.0 Debt securities 7.7 0.7 22.2 24.6 -5.9 Loans 11.8 0.2 8.1 14.3 -5.9 Equity and investment fund shares 31.2 0.6 1.0 21.8 -11.0 Insurance, pensions and guarantees 0.0 0.0 0.0 0.0 0.0 Financial derivatives 0.0 0.0 0.0 0.0 0.0 Other accounts receivable 13.1 1.3 1.2 15.5 0.0 Liabilities 114.6 16.3 33.9 141.0 -23.8 SDRs 0.0 0.0 0.0 0.0 0.0 Currency and deposits 0.3 0.0 6.8 6.1 -1.0 Debt securities 75.5 4.4 13.9 87.9 -5.9 Loans 3.3 2.6 3.2 3.3 -5.9 Equity and investment fund shares 0.0 8.4 8.8 6.2 -11.0 Insurance, pensions and guarantees 17.0 0.0 0.0 17.0 0.0 Pension entitlements 12.5 0.0 0.0 12.5 0.0 Claims of pension fund 4.5 0.0 0.0 4.5 0.0 Other 0.0 0.0 0.0 0.0 0.0 Fianncial derivatives 0.0 0.0 0.0 0.0 0.0 Other accounts payable 18.4 0.9 1.2 20.5 0.0 NET FINANCIAL WORTH -45.7 -13.2 -0.1 -59.1 - NET WORTH -0.2 0.0 0.0 -0.2 - Revenue 39.8 6.1 1.3 45.2 2 Expense 40.2 6.1 1.3 45.6 2 Net investment in nonfinancial assets 0.6 0.3 0.0 0.9 0 Net lending/borrowing -1.0 -0.3 0.0 -1.3 0 Canada Public Sector Statement of Operations Canada 2016 Public Sector Balance Sheet (Percent of GDP) -250 -150 -50 50 150 250 350 450 NOR BTN------ JPN FIN------ FSM 1 CZE------ SWE KOR------ ROM HUN------ LUX KAZ------ SVN AUT------ HRV AUS------ PRT SMR------ ISL NZL------ LVA ZAF------ MWI 1 GEO------ EST FRA------ USA CAN------ CYP DNK------- BGR NLD------ ESP ALB------ MDA MHL 1------ GRC DEU------- ITA HKG------ RUS LTU------ COL GBR------ URY CHE------ PER SVK----- KGZ PLW 1------ BEL UKR------ POL IRL------ SRB 1 BRB 1------ BRA IDN------ GMB TUR------ SLV IND 1------- Total risk-adjusted assets Total risk-adjusted liabilities Total assets Liabilities Risk Adjusted Assets and Liabilities (Percent of GDP) 6
- 7. II. Fiscal Risk Assessment Tools Fiscal Stress Tests - Iceland 0 10 20 30 40 50 60 70 80 90 100 2006 2011 2016 2021 Baseline Macro Only Stress: Macro + CL -5 0 5 10 15 20 25 30 2016 2017 2018 2019 2020 2021 Baseline Stress 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 Public Debt (Percent of GDP) Liquidity: Gross Financing (Percent of GDP) Solvency: Comprehensive Balance Sheet (Percent of GDP) 7
- 8. The Gambia: SOE projections (Percent of GDP) II. Fiscal Risk Assessment Tools SOE Health Scan Electricity Company with reforms TelecommunicationPort Authority - 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000 LLC"Marabda-KartsakhiRailway" JSC"GeorgianRailway" JSC"GeorgianState Electrosystem" JSC"GeorgianOilandGas Corporation" EnergoTrans LLC"UnitedWaterSupply CompanyofGeorgia" Ltd.Engurhesi Ltd."StateConstruction Company" LLC"Mechanic" LLC"GeorgianGasTransportation Company" JSC"ElectricitySystem CommercialOperator" Anothermediumriskandlow-risk OtherHighrisk Medium and Low RiskHigh risk SOEs Financial Risk Rating: Georgia SOEs 8
- 9. Impact on Government Deficit (accrual and cash) Impact on Government Gross Debt…. … and contingent liabilities Assessment of project fiscal risks II. Fiscal Risk Assessment Tools PPP Fiscal Risk Assessment Model
- 10. III. 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 10
- 11. IV. Conclusions • Fiscal risks can be large, with major implications for fiscal policy • Governments need to identify and understand the risks they face – Fiscal Risk Statement • IMF tools available to analyze, quantify and assess risks: – Fiscal Transparency Evaluation – Balance Sheet Assessment and Fiscal Stress Test – SOE health scan & P-FRAM • Fiscal Risk Management Toolkit helps identify, mitigate, provide for and absorb a wide range of different risks 11
- 12. Key Documents Fiscal Transparency, Risk and Accountability Analyzing and Managing Fiscal Risk – Best Practices Fiscal Transparency (Code, handbook and evaluations) Fiscal Monitor – Managing Public Wealth PPP- Fiscal Risk Assessment Model 12
- 13. 13 FRA DEU NLD ESP PRT GBR USA GRC IRL ISL AVE* Underlying fiscal position 1.7 3.2 -2.4 1.8 11.3 3.7 8.1 16.3 1.3 10.9 6.0 Revisions to 2007 deficit & debt 1.7 1.8 -0.9 -0.1 0.1 1.5 7.1 2.5 1.6 4.0 4.7 Changes to government boundary -0.7 1.4 -0.2 0.6 9.4 1.9 0.9 11.2 -0.1 2.5 1.1 Cash-accrual adjustments 0.7 0.0 -1.3 1.3 1.7 0.3 0.0 2.6 -0.2 4.5 0.2 Exogenous shocks 8.4 12.8 14.2 15.4 8.1 17.0 6.3 40.0 60.2 39.5 9.8 Macroeconomic shocks 8.3 4.7 5.2 13.0 4.4 8.9 3.8 38.4 35.7 -3.3 6.0 Financial sector interventions 0.0 8.1 9.0 2.5 3.6 8.1 2.5 1.6 24.5 42.8 3.8 Policy changes 2.3 3.8 1.9 4.9 4.7 1.1 6.4 -8.0 -9.9 -4.3 4.7 Other factors 2.1 -0.3 6.5 1.9 3.7 6.2 8.3 -6.7 7.5 21.6 5.9 Total Unforecast Increase in Debt 14.4 19.5 20.2 24.0 27.8 28.0 29.1 41.7 59.1 67.7 26.4 * GDP-weighted average Sources of Unexpected Increase in General Government Debt (percent of GDP, 2007-2010) Unreported Deficits SoEs & PPPs Arrears Macroecono mic Risks Contingent Liabilities Stimulus / Consolidatio n Issues Revealed by the Crisis I. What are Fiscal Risks? Sources of Fiscal Risks: Global Financial Crisis
- 14. 14 AUT BEL CYPCZE DNK FIN FRA DEU IRL ISR ITA LVA LTU LUX MLT NLD NOR PRT SVK SVN ESP SWE CHE GBR 0 2 4 6 8 10 12 14 16 0 20 40 60 80 100 120 140 AverageMaturityofDebtinyears Debt as a percentage ofGDP 0 10 20 30 40 50 60 70 80 Sweden France Denmark Belgium UK Netherlands Finland Norway Germany Austria Luxemburg Croatia Ireland Malta Spain Hungary Italy Estonia Slovenia Czech… Romania Cyprus Portugal Bulgaria Greece Lithuania Latvia Slovakia Poland Increase 2016 - 2060 2060 0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 Azerbaijan Ireland Netherlands Belgium Russia Spain CzechRepublic Germany Greece Denmark France SlovakRepublic Turkey Lithuania UK Austria Croatia Poland Romania Sweden Switzerland Georgia Bulgaria Italy Portugal 0 5 10 15 20 25 30 35 40 45 0 10 20 30 40 Exchange rate volatilityForexGGdebt(percentofGDP ARM GEO HUN AZB PAKBUL ROM TUR RUS ISR UK AUS Disasters: Avg Annual Damages (Percent of GDP) III. Fiscal Risk Assessment Tools FTE Findings: Disasters, Demographics and Debt Demographics: Old age dependency ratio (65+ to working age popn) Debt: Rollover risk (avg maturity and size) Debt: Exchange Rate Risk (forex debt to erate volatility)
- 15. 15 III. Fiscal Risk Management Toolkit