FiscalRisksPaoloMauroFiscalAffairsDepartmentInternationalMonetaryFund

IntroductionFiscalRisks:Deviationsoffiscaloutturns(deficits,debt/GDP)fromexpectationsatthetimeofthebudgetorotherfiscalforecasts.Howlargeandfrequentarethedeviationsfordifferentgroupsofcountries?Whatarethemostimportanttypesofshocks?Doesthisdependondegreeofintegrationinglobalfinancialmarkets?(Willrelyonworkonthecorrelatesofoutputdrops.)Whatcanpolicymakersdoaboutfiscalrisks?(Identify,Disclose,Manage).StatementsofFiscalRisks.BeginbylookingatOutputDropsDefinitionofoutputdropFrequenciesCatalogofshocksUnconditionalandconditionalfrequencies,expectedcostBivariate,thenmultivariate(probit)approachCausality(timing)CurrencycrisisandTermsoftradeshockTable2.OutputDrops:Frequency,DurationandLoss,1970-2001Source:Authors’calculationsbasedonMaddison(2003)data.Notes:“All”outputdropsincludeconcluded,ongoingandsub-events.Concludeddropsarefullyobservedwithinthesampleperiodwhereasongoingdropshadnotendedby2001andthedurationandlossforthesedropsarecalculatedassumingthatthedropsendedin2002.Expectedcost== unconditionalprobabilityofashock×probabilityofoutputdropgiventheshock×costoftheoutputdropwhenitoccursFigure2.ExpectedCostofShocksBasedonBivariateEstimates

(inpercentofpre-eventGDPpercapita)

Figure2b.Ex-anteCostofShocks

BasedonMultivariateEstimatesthatareStatisticallySignificant

(inpercentofpre-eventGDPpercapita)

OutputDropsandShocks:KeyResults

1900-2001andfoursub-periods:countrieswithlowerinitialp/cincomeshavemoreoutputdrops.1970-2001:emergingmarketshaveadropevery16years,duration6years,cumulativecost40%ofayear’sGDP;developingcountriestwicethecostsFinancialshocksmattermoreforemergingmarkets,realshocksfordevelopingcountries.Forgivenoutputdrop,declineinconsumptionislowerincountriesthatareathighleveloffinancialdevelopmentthanincountriesofmediumandlowlevelsoffinancialdevelopment.OutputDropsareAllUnexpected:ForecastErrorfromOctoberOneYearAheadNowmovetoFiscalRisksFiscalRisks:Deviationsoffiscaloutturns(deficits,debt/GDP)fromexpectationsatthetimeofthebudgetorotherfiscalforecasts.Possiblesources:macroeconomicshocks(exchangerate,costofborrowing,..),contingentliabilities(guarantees,PPPs),legalclaimsagainstthegovernment,bailoutsoflocalgovernments,state-ownedenterprises,banks,assumptionsofdebts....HowlargeandfrequentPreliminaryempiricalworkonsourcesofrisksAllCountries-SurpriseDeviationsinDebt/GDPSurpriseDeviationsinDebt/GDP

AllCountries-SurpriseDeviationsinBalance/GDPSurpriseDeviationsinBalance/GDP

AdverseTermsofTradeShock

(worseningofthetermsoftradeforgoodsby10percentormore)CurrencyCrises

(depreciationbyatleast25p.p.andatleast10p.p.greaterthanthepreviousyear)BankingCrises

(outbreakyearsofcrisesasidentifiedintheliterature)SuddenStops

(worseningoffinancialbalancebymorethan5p.p.ofGDP)OilExporters:YearsofOilPriceincreaseLessonsforPolicyMakersIdentifyyourrisks,andanalyzetheminacomprehensiveframeworkSourcescanbemacroshocks(exchangerates,interestrates,...),contingentliabilities(implicit—e.g.naturaldisasters,bankingsystem)orexplicit(guarantees,PPPs).Disclosethemandmanagethem(moreandmorecountriesaredoingfiscalriskstatements).Disclosureimposesdisciplinetoidentifyandmanagefiscalrisks,andmayreducelong-runborrowingcosts.ReferencesCountryInsurance:TheRoleofDomest