Slide 1 Macro I Macroeconomic Assessment and Risk Management Framework Outline of the lecture Introduction Overview Identification of macroeconomic risks Filling up the RMF Budget support is an. Budget support is an aid modality. It involves the transfer of financial resources to the national Treasury of a partner country. The process that leads to BS involves 4 assessments by the Commission of (the relevance and credibility of): Public policies Macroeconomic framework Public financial management Transparency and oversight of the budget process.
Macro - I Macroeconomic Assessment and Risk Management Framework Outline of the lecture • - Introduction / Overview • - Identification of macroeconomic risks • - Filling up the RMF Overview Budget support is an aid modality It involves the transfer of financial resources to the national Treasury of a partner country The process that leads to BS involves assessments by the Commission of (the relevance and credibility of): •Public policies •Macroeconomic framework •Public financial management •Transparency and oversight of the budget process Overview The risk assessment framework helps anticipate, monitor and react to political or economic development in the economy risk categories are considered 1.Political risks 2.Macroeconomic risks 3.Development risks 4.Public Financial Management risks 5.Corruption and fraud The materialization of any of these risks is likely to significantly reduce the effectiveness of budget support unless adequate mitigating measures are taken by the partner country Outline of the lecture • • • • - Introduction / Overview What is macroeconomic stability? Detecting macroeconomic risks Filling up the RMF Macroeconomic Stability Key elements of macroeconomic stability: Sustainable balance of Payments (external balance) Low and stable inflation and low unemployment (internal balance) Public debt sustainability (internal balance) Sound financial system Sustainable private (corporate and household) debt Macroeconomic Stability Growth is hard to achieve without a sustainable balance of payments External crisis usually brings disruptions to imports and capital flows that can trigger a fall in GDP Country Year Mexico: 1995 Indonesia: 1998 Turkey: 2001 Argentina: 2002 1995 1998 2001 2002 % Change in Real GDP -6.2 -13.1 -7.5 -10.9 Source: IMF World Economic Outlook, September 2006, October 2007 Macroeconomic Stability • Growth is hard to achieve without price stability • High inflation discourages saving and foreign investment, distorts relative prices, promotes wasteful financial activities, and encourages speculation, dollarization, and capital flight • Deflation (negative inflation) discourages consumption, investment (if real interest rates are positive) and delays relative price adjustments (because of nominal rigidities) Macroeconomic Stability Unsustainable public debt can threaten macroeconomic stability and economic growth A high public debt oMay reduce the ability of the government to implement contra-cyclical fiscal policies as needed oCan panic investors and thus result in a self-fulfilling public debt crisis (high interest rates and inability to roll-over short term debt) Macroeconomic Stability In addition, high fiscal deficit can lead to • o High inflation (notably in case of fiscal dominance that forces the CB to “print money” to finance the budget deficit) o A reduction in private investment when government borrowing crowds out the private sector o Increased external vulnerability in case of foreign borrowing 10 Detecting macroeconomic risks External Sector Current Account Balance check list (2/2) -In case of large inflows of remittances: are these flows at risk? -In case of large inflows of officials grants: are these flows at risk? 17 Detecting macroeconomic risks External Sector Capital and financial account check list (1/1) -Size and composition of capital flows (short term / long term) -In case of large short term capital flows: - How volatile are they? - Are they at risk? (for example in case of change in global interest rate) - Did portfolio flows in the last few quarters coincide with large stock market appreciation? - Would banks be able to roll-over their short term 18 debt in foreign currency? Detecting macroeconomic risks External Sector External debt sustainability and stock of FX reserves check list (1/1) -Is the external debt sustainable? -In case of large short term capital flows: what is the amount of FX reserves available in case of sudden stop in capital flows? 19 Detecting macroeconomic risks Public finance The budget check list (1/1) Size of budget deficit • Total • Primary (before interest payments) • Before grants Revenue (as % of GDP) (it is a problem when it is too low – e.g below 15% in poor countries) Deficit financing • Central bank financing? • Other domestic financing? (any risk of crowding out private sector borrowing and investment?) • External financing? (at concessional rate?) 20 ... Overview The risk assessment framework helps anticipate, monitor and react to political or economic development in the economy risk categories are considered 1.Political risks 2 .Macroeconomic risks... leads to BS involves assessments by the Commission of (the relevance and credibility of): •Public policies ? ?Macroeconomic framework •Public financial management •Transparency and oversight of the... flows at risk? -In case of large inflows of officials grants: are these flows at risk? 17 Detecting macroeconomic risks External Sector Capital and financial account check list (1/1) -Size and composition