Download Output Drops, and the Shocks that Matter

Fiscal Risks
Paolo Mauro
Fiscal Affairs Department
International Monetary Fund
Introduction
• Fiscal Risks: Deviations of fiscal outturns
(deficits, debt/GDP) from expectations at the
time of the budget or other fiscal forecasts.
• How large and frequent are the deviations for
different groups of countries?
• What are the most important types of shocks?
Does this depend on degree of integration in
global financial markets? (Will rely on work on
the correlates of output drops.)
• What can policy makers do about fiscal risks?
(Identify, Disclose, Manage). Statements of
Fiscal Risks.
Begin by looking at Output Drops
•
•
•
•
Definition of output drop
Frequencies
Catalog of shocks
Unconditional and conditional frequencies,
expected cost
• Bivariate, then multivariate (probit)
approach
• Causality (timing)
Argentina GDP per capita
10000
Currency crisis and
Terms of trade shock
9000
8000
7000
6000
5000
4000
50
55
60
65
70
75
80
85
90
95
00
Figure 1. A "Concluded" Output Event
115
GDP per capita level
110
Event duration
105
100
95
Output
loss
90
Note: The gray area is the cumulative output loss and in this
example the event duration is 4 years.
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
80
1991
85
Table 2.Table
Output
Drops:
Frequency,
Duration
and
1. Output
Events:
Frequency,
Duration
andLoss,
Loss, 1970-2001
1970-2001
Frequency
All
Concluded
Ongoing
Median duration
All
Concluded
Ongoing
Median loss
All
Concluded
Ongoing
Advanced
economies
Emerging
markets
Developing
countries
1.9
1.5
0.1
(in percent)
6.2
2.8
1.6
6.4
2.1
1.9
4
5
4
(medians in years)
6
5
18
12
5
21
(in percent of pre-event GDP per capita)
-15
-41
-89
-13
-15
-38
-17
-192
-452
Sources: Maddison (2003) and staff calculations.
Source: Authors’
calculations
based
on concluded,
Maddison (2003)
data.
Notes:
"All" events
include
on-going
and sub-events.
Concluded
events
areconcluded,
fully observed
withinand
the sub-events.
sample period
Notes: “All” output
drops
include
ongoing
Concluded drops are
whereas
events
had whereas
not endedongoing
by 2001drops
and the
fully observed
within ongoing
the sample
period
had not ended by 2001 and
fordrops
theseare
events
are calculated
assuming
the duration duration
and lossand
for loss
these
calculated
assuming
that the drops ended in 2002.
that the events ended in 2002.
Table 3. Frequency of Output Event Conditional on Shock divided by
Frequency of Output Event Conditional on No Shock
Advanced Emerging Developing
economies markets
countries
Financial and macroeconomic shocks
Currency crisis
Banking crisis
Debt crisis
Sudden stops
Country specific external shocks
Terms of trade shock
Disaster
Sociopolitical
War
Political shock
Global shocks
Global interest rate hike
Oil shock
The end of booms
End of lending boom
End of growth boom
2.4
0.0
...
1.6
6.7
4.9
7.6
5.6
1.1
1.0
2.0
0.8
1.1
...
4.3
6.6
1.7
0.7
0.0
...
7.1
4.0
2.0
1.7
1.0
0.0
2.4
2.1
1.6
1.2
0.0
...
1.2
0.0
1.2
4.6
Sources: Author's calculations based on sources and definitions in the Annex.
Notes: The sample includes all output events. For a given type of shock
and group of countries, "..." indicates that the results are not reported
because the shock occurred less than 5 times; "0.0" implies that the shock
was never associated with an output event as defined in the text.
Expected cost =
= unconditional probability of a shock
× probability of output drop given the shock
× cost of the output drop when it occurs
Figure 2. Expected Cost of Shocks Based on Bivariate Estimates
(in percent of pre-event GDP per capita)
(Based on concluded events)
(Based on all events, including ongoing)
Sudden stops
Terms of trade
Political shocks
Interest rate hikes
Currency crises
Debt crises
Emerging markets
Sudden stops
Debt crises
Wars
Interest rate hikes
Developing countries
Emerging markets
Oil shocks
Oil shocks
Developing countries
Banking crises
Terms of trade
Political shocks
Disasters
Currency crises
Banking crises
Disasters
Wars
0.00
0.20
0.40
0.60
0.80
1.00
0.00 0.50 1.00 1.50 2.00 2.50 3.00
Figure 2b. Ex-ante Cost of Shocks
Based on Multivariate Estimates that are Statistically Significant
(in percent of pre-event GDP per capita)
Emerging Markets
(based on all events)
Developing countries
(based on ongoing events)
Sudden stops
Terms of
trade
Interest rate
hikes
Currency
crises
Terms of
trade
Wars
Debt crises
Debt crises
Disasters
0.00 0.10 0.20 0.30 0.40 0.50 0.60
0.00
1.00
2.00
3.00
4.00
5.00
Output Drops and Shocks: Key Results
• 1900-2001 and four sub-periods: countries with
lower initial p/c incomes have more output
drops.
• 1970-2001: emerging markets have a drop
every 16 years, duration 6 years, cumulative
cost 40% of a year’s GDP; developing countries
twice the costs
• Financial shocks matter more for emerging
markets, real shocks for developing countries.
• For given output drop, decline in consumption is
lower in countries that are at high level of
financial development than in countries of
medium and low levels of financial development.
Output Drops are All Unexpected: Forecast Error from October One
Year Ahead
12
Series: WEO_DACTOCT
Sample 1900 2001 IF EVENT_ALL25
Observations 40
10
8
6
4
2
0
-20
-15
-10
-5
0
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
-5.648995
-4.819912
1.470343
-19.32673
4.640448
-0.803957
3.562790
Jarque-Bera
Probability
4.836862
0.089061
Now move to Fiscal Risks
• Fiscal Risks: Deviations of fiscal outturns
(deficits, debt/GDP) from expectations at the
time of the budget or other fiscal forecasts.
• Possible sources: macroeconomic shocks
(exchange rate, cost of borrowing,..), contingent
liabilities (guarantees, PPPs), legal claims
against the government, bailouts of local
governments, state-owned enterprises, banks,
assumptions of debts....
• How large and frequent
• Preliminary empirical work on sources of risks
All Countries-Surprise Deviations in Debt/GDP
Deviations of Debt/GDP--All Countries
-4sd
-3sd
-2sd
-1sd mean +1sd
+2sd
+3sd
+4sd
+5sd
20
40
60
80
10th Percentile
0
Frequency
100 120 140
-5sd
-30
-20
-10
0
10
20
In percent of GDP; positive deviation if actual > forecast
Total obs. 398; mean=-0.77; sd=6.78; skewness=0.21; kurtosis=6.96
30
Surprise Deviations in Debt/GDP
Emerging Countries
Developing Countries
-4sd -3sd -2sd -1sd mean +1sd +2sd +3sd +4sd
-4sd -3sd -2sd -1sd mean +1sd +2sd +3sd +4sd
10th Percentile
10th Percentile
15
Frequency
30
0
0
0
10
5
10
20
10
30
20
Frequency
40
50
20
60
10th percentile
25
40
70
80
50
30
Advanced Countries
-5sd -4sd -3sd -2sd -1sdmean+1sd +2sd+3sd+4sd+5sd
-30
-20
-10
0
10
20
30
In percent of GDP; positive deviation if actual > forecast
Total obs. 257; mean=-0.03; sd=5.73; skewness=0.19; kurtosis=5.60
-30
-20
-10
0
10
20
30
In percent of GDP; positive deviation if actual > forecast
-30
-20
-10
0
10
20
30
In percent of GDP; positive deviation if actual > forecast
Total obs.73; mean=-1.88; sd=8.62; skewness=0.80; kurtosis=7.52
Total obs. 68; mean=-2.38; sd=7.81; skewness=-0.02; kurtosis=5.44
All Countries- Surprise Deviations in Balance/GDP
Deviations of Balance/GDP--All Countries
120 160 200 240 280 320
80
10th Percentile
0
40
Frequency
-6sd -5sd -4sd -3sd -2sd -1sd mean +1sd +2sd +3sd +4sd +5sd +6sd
-20
-15
-10
-5
0
5
10
15
In percent of GDP; positive deviation if actual > forecast
Total obs. 1397; mean=-0.36; sd=3.21; skewness=-0.47; kurtosis=8.96
20
Surprise Deviations in Balance/GDP
Developing Countries
Emerging Countries
Advanced Countries
-5sd -4sd -3sd -2sd -1sd mean+1sd +2sd +3sd +4sd +5sd
10th percentile
80
100
10th Percentile
-10
-5
0
5
10
In percent of GDP; positive deviation if actual > forecast
Total obs. 378; mean=0.02; sd=2.20; skewness=-0.42; kurtosis=6.80
0
0
0
10
20
20
20
40
40
30
60
Frequency
80
60
40
Frequency
60
70
100
10th Percentile
50
120
80
120
140
160
140
100
90
-5sd -4sd -3sd -2sd -1sd mean+1sd +2sd +3sd +4sd +5sd
-6sd-5sd-4sd-3sd-2sd-1sdmean1sd 2sd 3sd 4sd 5sd 6sd
-20 -15 -10
-5
0
5
10
15
20
In percent of GDP; positive deviation if actual > forecast
Total obs. 388; mean=-0.57; sd=3.52; skewness=-0.66; kurtosis=10.34
-15
-10
-5
0
5
10
15
In percent of GDP; positive deviation if actual > forecast
Total obs. 631; mean=-0.45; sd=3.49; skewness=-0.21; kurtosis=6.86
(worsening of the terms of trade for goods by 10 percent or more)
Deviations of Balance/GDP--All Countries
-3sd
-2sd
-1sd
mean
+1sd
+2sd
+3sd
+4sd
50
-4sd
10
20
30
40
10th percentile
0
Frequency
Adverse Terms of Trade Shock
-20
-15
-10
-5
0
5
10
In percent of GDP; positive deviation if actual > forecast
Total obs. 128; mean=-1.15; sd=4.10; skewness=-0.92; kurtosis=6.85
15
Currency Crises
(depreciation by at least 25 p.p. and at least 10 p.p. greater than the previous year)
Deviations of Balance/GDP--All Countries
-2sd
-1sd
mean
+1sd
+2sd
+3sd
15
-3sd
10
5
0
Frequency
10th percentile
-10
-5
0
5
In percent of GDP; positive deviation if actual > forecast
Total obs. 46; mean=-2.22; sd=3.33; skewness=-0.91; kurtosis=3.12
10
Banking Crises
(outbreak years of crises as identified in the literature)
Deviations of Balance/GDP--All Countries
-3sd
-2sd
-1sd
mean
+1sd
+2sd
+3sd
+4sd
15
-4sd
0
5
10
10th percentile
-10
-5
0
5
In percent of GDP; positive deviation if actual > forecast
Total obs. 35; mean=-1.05; sd=2.75; skewness=-0.31; kurtosis=2.97
10
Sudden Stops
(worsening of financial balance by more than 5 p.p. of GDP)
Deviations of Balance/GDP--All Countries
-3sd
-2sd
-1sd
mean
+1sd
+2sd
+3sd
70
-4sd
40
30
20
10
0
Frequency
50
60
10th percentile
-20
-15
-10
-5
0
5
10
In percent of GDP; positive deviation if actual > forecast
Total obs. 154; mean=-0.62; sd=4.85; skewness=-0.56; kurtosis=5.99
15
Oil Exporters: Years of Oil Price increase
Deviations of Balance/GDP--Fuel Exporters
Deviations of Debt/GDP--Fuel Exporters
-4sd -3sd -2sd -1sd mean +1sd +2sd +3sd 4sd
-2sd
-1sd
mean
+1sd
+2sd
+3sd
6
9
Frequency
10
3
5
0
0
Frequency
12
15
15
18
20
-3sd
-30 -20 -10
0
10
20
30
40
In percent of GDP; positive deviation if actual > forecast
Total obs. 27; mean=-6.07; sd=10.23; skewness=-0.70; kurtosis=2.94
-15
-10
-5
0
5
10
15
20
In percent of GDP; positive deviation if actual > forecast
Total obs. 26; mean=3.16; sd=5.18; skewness=-0.41; kurtosis=5.69
Fiscal Balance-to-GDP Ratio:
Worst 10th Percentile of Forecast Error Distribution
(percentage points of GDP)
Type of shock
All countries
Advanced
Emerging
Developing
Adverse terms of
trade shock
-5.1
-3.8
-5.2
-4.7
Banking crisis
-3.9
-3.7
-3.9
-5.2
Currency crisis
-8.4
-8.6
-9.3
-4.9
Sudden stop
-5.6
-1.7
-6.3
-8.1
Lessons for Policy Makers
• Identify your risks, and analyze them in a
comprehensive framework
• Sources can be macro shocks (exchange rates,
interest rates,...), contingent liabilities (implicit—
e.g. natural disasters, banking system) or explicit
(guarantees, PPPs).
• Disclose them and manage them (more and
more countries are doing fiscal risk statements).
• Disclosure imposes discipline to identify and
manage fiscal risks, and may reduce long-run
borrowing costs.
References
• Country Insurance: The Role of Domestic
Policies, IMF Occasional Paper 260
• Output Drops and the Shocks that Matter,
IMF Working Paper No. 06/172
• Fiscal Risks—Sources, Disclosure, and
Management
All available on www.imf.org or just google
the titles