1 / 29

ASSESSING FISCAL SUSTAINABILITY: A NEW APPROACH Enrique G. Mendoza Pedro Marcelo Oviedo

ASSESSING FISCAL SUSTAINABILITY: A NEW APPROACH Enrique G. Mendoza Pedro Marcelo Oviedo Comments by: Andres F. Arias Ministerio de Hacienda y Crédito Público Republic of Colombia. Probabilistic Model = ability to repay in crisis state.

zavad
Download Presentation

ASSESSING FISCAL SUSTAINABILITY: A NEW APPROACH Enrique G. Mendoza Pedro Marcelo Oviedo

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. ASSESSING FISCAL SUSTAINABILITY: A NEW APPROACH Enrique G. Mendoza Pedro Marcelo Oviedo Comments by: Andres F. Arias Ministerio de Hacienda y Crédito Público Republic of Colombia

  2. Probabilistic Model = ability to repay in crisis state where b* = stock of debt that government is able to repay in all states of nature “Credible repayment commitment”

  3. Very nice approach because… • Also captures stock of debt that government is “willing” to repay if lender chooses r so that b* reflects a rationing debt level that enforces the government’s participation constraint (i.e. constraint under which the government always finds it preferable to repay and maintain credit relationship)

  4. Very nice approach because… • Incorporates the role of volatility of fiscal variables in determining ability to repay. f(t) B A t tBmin=0.10 tAmin=0.18 tmean=0.2 Long-run method  A & B share the same sustainable debt ratio. Probabilistic method  A has a higher sustainable debt ratio than B.

  5. But… • Defines a “maximum” debt level and not a “target” debt level (to be achieved through policy adjustment). • Maximum debt level is not equilibrium or optimal debt level.

  6. Is this a tool for governments or for Wall Street? • As a government, I discuss “optimal” indebtedness and strategic behavior (i.e. repayment/default) under different scenarios (critical and non-critical). • For instance, it may be optimal to issue b>b* and repay/default under different states of nature.

  7. If so (and if markets buy b>b*) why do I care about b*? I already did when I defined my optimal strategy. • Does this mean that my debt is not sustainable?

  8. Should governments (or firms and households) do debt sustainability analysis based on their capacity to repay under the worst case scenario (i.e. the crisis state)? • Will they ever do it? • If so, does this mean that Argentina never thought about the logic behind the probabilistic model?

  9. Besides… How can we operationalize the probabilistic model? • Bail-outs  gmin? • Sudden stops/TOT shocks/Balance sheet effects  r, , gmin? • Inflation tax  tmin?

  10. Colombia… The coefficient of variation in revenue is 7.3%, while expenditure cuts cannot exceed 5% of GDP because of budgetary inflexibilities (investment is the only item freely adjustable, 5% of GDP=60% of public investment)

  11. Colombia… of GDP of GDP 2002 (net of interests) r = 6%  = 3.7% b* = -0.4% of GDP Does this mean that Colombia’s debt is (or is not) sustainable?

  12. Colombia… In any case from the point of view of a sovereign debt issuer, the probabilistic model is very useful in suggesting that volatility of fiscal variables must be taken into consideration. This can be done with a series of tools…

  13. Debt projections and sensibilities… Colombian medium-term debt path Base Scenario

  14. This base projection may change… Due to shocks in variables such as r, , E, fiscal expenditure and contingencies.

  15. Debt projections and sensibilities… % GDP 1 Historical averages (96-02) for t>=2004 Base Scenario

  16. Debt projections and sensibilities… 2 % GDP 2 std dev shock in 2004 to Base Scenario

  17. Debt projections and sensibilities… 3 % GDP 2 std dev shock in 2004 to Base Scenario

  18. Debt projections and sensibilities… % GDP 4 2 std dev shock in 2004 to (t-g) Base Scenario

  19. Debt projections and sensibilities… % GDP 5 1 std dev shock in 2004 and 2005 to r,  and (t-g) Base Scenario

  20. Debt projections and sensibilities… % GDP 6 30% devaluation in 2004 Base Scenario

  21. Debt projections and sensibilities… % GDP 7 Increase of 10 points in debt stock Base Scenario

  22. Statistical significance of sensibilities… Sensibilities may be evaluated with p-values

  23. Financing needs… The NFPS deficit is financed through internal and external indebtedness Net Financing % GDP Source: Public Credit-MHCP

  24. Future external indebtedness % of net capital inflows to developing countries absorbed by Colombia… Source: IMF, Central Bank. Calculations DGPM.

  25. Future internal indebtedness • From forecast of real sector’s portfolio demand and with assumptions about M3 growth, I can deduce private sector’s demand for domestic government debt (TES) • No signs of crowding out % GDP Consistent with financing strategy Source: Banco de la República- DGCP- Calculations DGPM

  26. Default probability • Manasse, Roubini and Schimmelpfennig (2003)  Binary recursive tree analysis (sequence of rules) to determine if country is prone to fiscal crisis

  27. In Colombia… • ¿Does total external debt exceed 50% of GDP? NO (48,6%) • ¿Is short-term external debt to reserves ratio greater than 1.34? NO (0,98)

  28. In Colombia… • ¿Is the public external debt to revenue ratio greater than 2.15? NO (1) • ¿Is the economy growth rate greater than -5.45? YES (3.13)  Colombia is not crisis-prone (probability = 2.3%)

  29. ASSESSING FISCAL SUSTAINABILITY: A NEW APPROACH Enrique G. Mendoza Pedro Marcelo Oviedo Comments by: Andres F. Arias Ministerio de Hacienda y Crédito Público Republic of Colombia

More Related