## Fiscal Risk Analysis & Management — Brian Olden, Fiscal Affairs Department, IMF-JICA Conference, February 2017

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**Canonical URL:** [Fiscal Risk Analysis & Management — Brian Olden, Fiscal Affairs Department, IMF-JICA Conference, February 2017](https://www.imf.org/-/media/files/news/seminars/imf-jica_conference_020117_olden.pdf)

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### I. Why fiscal risks matter
- Advanced Economies: Public Debt (2007-2016) — Spring 2007 vs Spring 2016: change cited as 37% of GDP.
- Emerging Economies, Excluding China: Public Debt (2007-2016) — Spring 2007 vs Spring 2016: change cited as 9% of GDP.
- Unexpected increase in general government debt (percent of GDP, 2007-2010) — 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.
- Drivers identified in the period include: Exogenous shocks, Macroeconomic shocks, Financial sector interventions, Policy changes, Other factors, Cash-accrual adjustments, Changes to government boundary, Revisions to 2007 deficit & debt, Underlying fiscal position.

### II. Characteristics of fiscal risks
- Fiscal risks are large and surprisingly frequent:
  - Charted categories include Macroeconomic, Financial Sector, Legal claims, Subnational, SOEs, Natural Disaster, PPPs, Corporate (average fiscal cost and probability axes shown).
- Fiscal risks are biased toward the downside:
  - Forecast error for general government debt in Y+3 (2000-13 average as % of GDP, actual-forecast) shows downward bias in debt forecasts.
- Fiscal risks are non-linear:
  - Revenue and expenditure variations around shocks show asymmetric and non-linear responses over event horizons (t-5 to t+5).
- Fiscal risks are highly correlated:
  - Contingent liability realizations display correlation across types: Financial Sector, Legal, Natural Disasters, State Owned Enterprises, Public Private Partnerships, Private Non-Financial Sector, Subnational Government, Other.
  - Time series of Total Fiscal Cost of CL Realization (% GDP, right axis) and Number of Episodes reported for 1990–2014.
- Fiscal risks have broader macro implications:
  - Identified spillovers to Debt, Fiscal Balance, GDP, and Increase in Debt.

### III. Fiscal risks in LICs
- Main sources of contingent liabilities in LICs include: Macroeconomic Risks, Specific Fiscal Risks, Long-Term Sustainability, Budgetary Contingencies, Asset and Liability Management, Guarantees/PPPs/Financial Sector, Natural Resources and Environmental Risk, Sub-National Governments, Public Corporations, Risk Disclosure & Analysis, Fiscal Coordination.
- Materialized contingent liabilities in LICs — selected realized fiscal costs (percent of GDP):
  - 0.7
  - 0.9
  - 1.2
  - 4.5
  - 5.3
  - 12.0
  - 3.0
  - 0.6
  - 1.2
  - 1.4
  - 3.7
  - 4.2
  - 6.0
  - 10.0
  - 11.8
  - 13.6
- Specific examples and magnitudes:
  - Loan guarantee for SOE (Mozambique, 2015) — 0.7 percent of GDP.
  - Loan guarantees for SOEs (Malawi, 2012-14) — 0.9 percent of GDP.
  - Agri. loan guarantees (Honduras, 2003) — 1.2 percent of GDP.
  - Transfers/loan guarantees to SOEs (Gambia, 2014) — 4.5 percent of GDP.
  - Ebola-related outlays (Liberia, 2015-2016) — 3.2 percent of GDP for 2015 and 2.1 percent of GDP for 2016 (amount covers only the cost that the government acknowledges).
  - Guarantees on private infra. project (Guinea, 2015) — 5.3 percent of GDP.
  - Transfers to SOEs (Burkina Faso, 2013) — 12.0 percent of GDP.
  - Resolution of banking crises examples (selected): Zambia (1995-1998), Kazakhstan (2008), Mongolia (2008), Bolivia (1994), Vietnam (1997), Nigeria (2011), Nicaragua (2000) — referenced as materialized fiscal costs in the chart.

### IV. Understanding & management of fiscal risks
- Fiscal Transparency Code and coverage improvements:
  - Coverage of balance sheet data (GFS) has improved between 2003 and 2013 (COFA Database).
- Disclosure remains predominantly qualitative:
  - Percentage of countries by disclosure approach for contingent liabilities: Quantitative Analysis of Risk, Qualitative Discussion of Risk, No Disclosure — categories shown for AEs, EMMIEs, LIDCs, All (IMF Staff Estimates).
- Mitigation efforts are often ad hoc and fragmented:
  - Instruments identified across countries include:
    - Direct controls and limits on exposure (e.g., reinsure/securitize guarantees).
    - Budget provisioning (e.g., provisions/funds for natural disaster).
    - Transfer or sharing of risks (e.g., risk-related premiums, PPP value-for-money checks).
    - Regulations, incentives, and other measures (e.g., bank levies, deposit insurance funds, performance targets for SOEs).
  - Percentage-of-countries scales presented for each instrument and risk area (natural disaster, commodities, SOEs, financial, guarantees, PPPs, subnational).

### V. Strengthening fiscal risk analysis & mitigation
- Fiscal stress testing framework:
  - Debt and liquidity scenarios presented with series for Public Debt (Percent of GDP) using Baseline, Macro Only, Stress: Macro + CL across years 2006, 2011, 2016, 2021.
  - Liquidity: Gross Financing (Percent of GDP) shown for 2016–2021 with Baseline and Stress paths.
- Solvency and fiscal burden analysis:
  - Fiscal Burden: Interest Cost (Percent of revenue) — Stress vs Baseline scenarios shown across large negative-to-positive axis (-1,000 to 1,000).
  - Solvency: Net Financial Worth (Percent of 2017 GDP) using a Comprehensive Balance Sheet (Percent of 2017 baseline GDP) with Baseline and Shock columns.
  - Comprehensive Balance Sheet (percent of 2017 baseline GDP) — Baseline vs Shock values:
    - Financial assets: 903.5 vs 811.1
    - Currency and deposits: 9.2 vs 9.0
    - Loans: 8.5 vs 8.4
    - Shares and other equities: 17.9 vs 9.0
    - Other accounts receivable: 7.0 vs 7.0
    - NPV Revenues: 860.2 vs 777.0
    - Liabilities: 942.9 vs 918.6
    - Securities other than shares: 21.8 vs 42.8
    - Loans: 20.4 vs 27.3
    - Insurance technical reserves: 18.0 vs 18.1
    - Other accounts payable: 7.4 vs 7.4
    - NPV Expenditures: 875.3 vs 823.0
    - Net Financial Worth: -39.4 vs -107.6
      - Existing Net Financial Worth: -24.3 vs -61.6
      - Future discounted deficits: -15.1 vs -46.0
- Fiscal risk management toolkit (sequenced steps):
  - STEP 1: IDENTIFY AND QUANTIFY — Identify risks; Calculate exposure and likelihood; Weigh costs and benefits of intervention.
  - STEP 2: MITIGATE — Cap exposure; Regulate; Transfer.
  - STEP 3: PROVISION — Expense; Budget contingencies; Buffer funds.
  - STEP 4: ACCOMMODATE RESIDUAL — Account for in setting fiscal objectives.

### VI. Conclusions and policy recommendations
- Fiscal risk analysis recommendations by country capacity:
  - Low capacity countries should focus on:
    - macro-fiscal sensitivity analysis
    - financial balance sheet
    - disclosing explicit contingent liabilities
  - Intermediate capacity countries should prioritize:
    - alternative macro-fiscal scenarios
    - full balance sheets
    - disclosing all contingent liabilities
  - High capacity countries should concentrate on:
    - disclosing the size and probability of contingent liability realizations
    - periodic fiscal stress tests
- Fiscal risk management recommendations:
  - All countries should strengthen institutional arrangements for monitoring and managing risks.
  - Low capacity countries should strengthen direct controls and centralize approval of explicit contingent liabilities.
  - Intermediate capacity countries should prioritize more effective use of risk mitigation and transfer tools.
  - Advanced capacity countries should build risk exposure into fiscal plans.

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_Source: https://www.imf.org/-/media/files/news/seminars/imf-jica_conference_020117_olden.pdf_