U1 Structure & Learning Objectives
In this part of the course, we will study the newly revamped IMF framework for public debt sustainability in market-access countries A historical overview of debt-to-gdp ratios for advanced and emerging economies (1880-2009) looks like this
U2 Debt Sustainability in MACs
WHAT IS THE MAC DSA? the IMF framework for public debt sustainability analysis for market access countries also used to refer to the accompanying Excel-based template used by IMF country teams to aid in surveillance, program design and review. WHICH COUNTRIES DOES IT COVER? In practice, the MAC DSA covers all advanced economies and most emerging markets.
HOW DOES THE MAC DSA ASSESS SUSTAINABILITY? SUSTAINABILITY = SOLVENCY + LIQUIDITY + REALISTIC ADJUSTMENT The MAC-DSA is a risk-based tool Countries are classified as HIGHER or LOWER scrutiny on the basis of a set of classification benchmarks HIGHER scrutiny countries are subject to more detailed analysis involving several additional steps/tools, as can be seen from the next flow-chart
There is an additional set of indicators which may prompt the classification of a country from LOWER scrutiny to HIGHER scrutiny
U3 Data: Coverage, Issues & Sources
The coverage of public debt in the DSA should be as broad as possible, ideally based on the entire public sector The MAC DSA is based on gross debt, but net debt can be used as a complementary measure where relevant The DSAs should ideally reflect long-term spending pressures (pensions, healthcare costs)
U4 The Baseline Scenario
The baseline scenario should be built around the macroeconomic framework, which is: The most likely scenario for countries under IMF surveillance, based on current and projected government policies. The programmed macroeconomic adjustment for program (or near-program) countries.
OUTLINE
U5 Realism of the Baseline Assumptions
What are the realism tools in the MAC DSA? Realism of macroassumptions Examines the track record in projecting macroeconomic variables Realism of fiscal adjustment Assesses the realism of projected fiscal adjustments Boom-bust analysis Assesses growth projections in countries that may have entered a boom-bust cycle
The realism of macro-assumptions is assessed through the forecast track record for : real GDP growth primary balance Inflation BOTTOM LINE: By comparing the forecast errors for the country of interest to the distribution of forecast errors for other MACs, this tool helps uncover sources of bias to potentially help calibrate more realistic baseline projections.
To evaluate the realism of the projected fiscal adjustment, the MAC DSA template produces two historical cross-country distributions for the: maximum 3-year adjustment in the CAPB and the maximum 3-year average level of CAPB over the projection horizon. BOTTOM LINE: If the Planned fiscal adjustment is large (located in the right-hand tail of either distribution), close scrutiny of assumptions is warranted
The Boom-Bust Tool Is triggered if it compares the growth projection for a particular country to the historical experience of boom-bust cases BOTTOM LINE: serves as a reality check for the growth forecast of countries that resemble past boom-bust cases.
U6 Dealing with Uncertainty: Alternative Scenarios
The MAC DSA assesses risks around the baseline scenario via: standardized and customized sensitivity analysis The Basic DSA includes two standardized alternative scenarios: Historical Scenario: real GDP growth, primary balance and real interest rates are at their historical averages Constant PB Scenario: the primary balance remains the same as it is during the first year of projections Both of these scenarios can be used to see if baseline assumptions are unrealistic (overly optimistic) or if policy actions or commitments may or may not be credible based on past country-specific trends.
The MAC DSA assesses the impact of the following standardized macro-fiscal shocks: Primary balance Real GDP growth Interest rate Exchange rate A combined macro-fiscal shock The template also includes default yet customizable interactions between the main shock variable and the other macro-fiscal variables.
U7 Dealing with Uncertainty: Customized Scenarios & Fan Charts
The MAC DSA allows the user to program customized scenarios to examine the effect of macro-fiscal variation from the baseline assumptions. The MAC DSA includes a Fan Chart Tool, which simulates various shocks to relevant macroeconomic variables in order to show the possible evolution of the debt-to-gdp ratio over the medium term. The MAC DSA can create two types of fan charts: Symmetric: centered around the baseline (upside risks are as likely as downside risks). Asymmetric: skewed (usually) downwards in order to represents the analyst s best assessment of the likelihood of shocks
U8 Contingent Liabilities
Contingent Liabilities (CLs) are government financial interventions which arise out of: Explicit liabilities: recognized by a law or contract or Implicit liabilities: assumed due to public and interest-group pressures. The DSA envisages several types of CL shocks. Non-financial shocks (natural disasters, state guarantees) are treated as non-standardized scenarios relying on country-specific circumstances.
The financial sector CL shock is triggered when at least one out of two quantitative triggers is breached: Additionally, for AEs: average annual increase in nominal housing prices over the preceding 5 year in excess of 7.5% If a quantitative trigger is breached: a financial CL shock of 10% of banking sector assets is automatically generated also includes a negative shock to growth, deterioration of primary balance, an increase in interest rates and decrease in inflation.
U9 Vulnerabilities Stemming from the Debt Level and Financing Profile
The MAC DSA places a lot of importance on the analysis of the level of debt and debt profile vulnerabilities (DPV) Benchmarks for the debt burden indicators are based on early warning models and are set to the following levels
MAC DSA relies on 5 indicators for the debt profile vulnerabilities (4 for advanced economies) To provide an early warning of emerging risks: an upper benchmark (75% of IB) and a lower benchmark (25% of IB for EMs; 50% of IB for AEs) are computed for all the DPV indicators as in the following tables
U10 Assessment & Write-Up
The Heat Map summarizes the risks to debt sustainability from the various modules in the template in a standardized way. Macro-fiscal and CLs risks are measured by their impact on debt burden indicators under both the baseline and stressed scenarios, in the following way
Finally, the heat map also summarizes debt profile risks, where the assessment depends on a comparison of the latest data available to the lower and upper early warning benchmarks A country is deemed to be: high risk - in red- when recent data are above the upper benchmark for that indicator. low risk - in green - when recent data are below the lower benchmarks for that indicator. moderate risk - in yellow - otherwise