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Managing Public Wealth Alexander Tieman IMF, Fiscal Affairs Department IMF Fiscal Monitor October 2018 AIReF Madrid, November 7, 2018 Managing Public Wealth Overview I. The Public Sector Balance Sheet II. Why Does it Matter? III. Examples

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Managing Public Wealth

Alexander Tieman

IMF, Fiscal Affairs Department IMF Fiscal Monitor October 2018

AIReF Madrid, November 7, 2018

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Managing Public Wealth Overview I. The Public Sector Balance Sheet

  • II. Why Does it Matter?
  • III. Examples
  • IV. Conclusion

2

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  • I. The Public Sector Balance Sheet

Aggregate PSBS for 31 countries

Natural Resources 38 %

Infrastructure

72 %

Financial Assets

99 %

GG Debt

94 %

Pension Liabilities

46 % Others 58 %

Others 11 %

Net Worth 21 %

Aggregate Public Sector Balance Sheet (in percent of GDP) Assets Liabilities

US$101 Trillion

  • r

219 percent of GDP 198 percent of GDP

3 Source: IMF staff estimates, based on IMF October 2018 Fiscal Monitor.

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SLIDE 4
  • I. The Public Sector Balance Sheet

Individual country PSBS for 31 countries

4

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100 200 300 400

Norway Portugal Finland Japan Germany Korea Kazakhstan Russia United States Colombia Brazil Canada France Austria Tunisia Turkey India South Africa United Kingdom New Zealand Georgia Peru Albania Indonesia Australia El Salvador Tanzania Kenya Gambia Guatemala Uganda 50 100 150 Japan South Africa Australia Norway Tunisia Portugal Korea Georgia Russia Austria New Zealand United States France Kazakhstan Finland Kenya Tanzania Turkey Albania United Kingdom Germany Colombia Uganda Peru Brazil Canada Indonesia Gambia India Guatemala El Salvador

  • II. The Public Sector Balance Sheet

New elements

Financial Assets (Percent of GDP) Nonfinancial Assets (Percent of GDP) Natural Resource Assets (Percent of GDP)

50 100 150 200 250 300 350 Russia Kazakhstan Peru Norway Australia South Africa Brazil Indonesia Tunisia Colombia Canada Tanzania India Albania Georgia Guatemala United States Turkey United Kingdom Kenya Finland Uganda Portugal New Zealand Germany Austria Korea Japan France El Salvador Gambia

5 Source: October 2018 Fiscal Monitor

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SLIDE 6

50 100 150

Portugal Finland United Kingdom Norway Brazil Austria United States France Korea South Africa Germany Tanzania Australia Japan Peru Turkey Kenya Uganda Tunisia El Salvador Canada Gambia Colombia India Guatemala New Zealand Georgia Russia Indonesia Albania Kazakhstan

50 100 150 200 250 300

Japan Portugal Germany Tunisia Russia South Africa Norway Brazil United States Korea Kazakhstan India France United Kingdom Turkey Finland New Zealand Indonesia Colombia Australia Georgia Gambia Albania Peru Austria Canada El Salvador Uganda Tanzania Kenya Guatemala

  • I. The Public Sector Balance Sheet

New elements

Public Corporation Assets (Percent of GDP) Accrued Pension Liabilities (Percent of GDP)

6 Source: October 2018 Fiscal Monitor

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SLIDE 7
  • I. The Public Sector Balance Sheet

Challenges and Limitations

Balance sheets aren’t easy

  • Measurement and data availability issues (Spain GG BS)
  • Many assets are illiquid or not marketable

Bottom line:

  • Balance sheet approach complements existing debt approach
  • Consider alternative indicators: net financial worth & liquid assets
  • Strengthen statistical and accounting systems
  • Doable even in data-constrained environment (e.g., The Gambia)

7

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SLIDE 8
  • II. Why does it Matter?

Large Assets → Large Revenue Potential

Potential Revenue Gains from I mproved Asset M anagement (in percent of GDP)

Source: IMF October 2018 Fiscal Monitor.

Distribution of Annual Returns from Public Corporations (Percent Return on Assets)

5 10 15 20 25 30 35 40

<-4

  • 4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 >10

M edian = 0.6 percent

1 2 3 4 5 6 Non-financial public corporations Government financial assets Total Percent of GDP Current returns Potential Improvement

1 2 3

8

New Zealand case study

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SLIDE 9
  • II. Why does it Matter?

Stronger balance sheet → lower interest

9 Source: IMF October 2018 Fiscal Monitor.

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SLIDE 10
  • II. Why does it Matter?

Stronger balance sheet → Greater resilience

Kazakhstan case study

Real GDP per Capita Following Recessions (in percent)

Source: IMF October 2018 Fiscal Monitor. Note: Shaded area represents 90 percent confidence interval.

  • 20
  • 10

10 20 30 40 1 2 3 4 5 Percentage change Year

  • 6
  • 3

3 6 9 12 1 2 3 4 5 Percentage change Year

Real Government Expenditure per Capita Following Recessions (in percent)

Strong Balance Sheets Weak Balance Sheets

10

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SLIDE 11
  • III. Examples

The US and Japan – Consolidation and Assets

PSBS – US and Japan (2016, percent of GDP)

11

50 100 150 200 250 300 350 2000 2002 2004 2006 2008 2010 2012 2014 2016

Private Public

149 134 283

20 40 60 80 100 120 140 160 180 2001 2004 2007 2010 2013 2016

Public Private

54 110 164

Public Debt H oldings (percent of GDP) Japan United States

Sources: IMF October 2018 Fiscal Monitor, US Federal Reserve, and Bank of Japan

  • 350
  • 300
  • 250
  • 200
  • 150
  • 100
  • 50

50 100 150 200 250 300 350

United States Japan

Nonfinancial Assets Financial Assets Liabilities ex Pensions Pension Liabilities GG Debt GG Debt Net Worth

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  • III. Examples

UK – Impact of the crisis

  • 400
  • 300
  • 200
  • 100

100 200 300 400 2000 02 04 06 08 10 12 14 16

Other assets Financial public corporations assets Financial public corporations liabilities Pension liabilities Other liabilities Net Worth Assets Liabilities

UK – Public Sector Balance Sheet (percent of GDP)

12 Source: October 2018 Fiscal Monitor

Evolution since the crisis

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SLIDE 13
  • III. Examples

China – Transparency and Buffers

  • 150
  • 100
  • 50

50 100 150 200 250 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Private Debt Public Debt Asian Financial Crisis Global Financial Crisis

  • 150
  • 100
  • 50

50 100 150 200 250 Barbados* Gambia, The Brazil El Salvador India* Poland Ukraine Palau* Guatemala Albania Kyrgyz Republic Serbia Turkey Uganda Colombia Indonesia Kenya Uruguay Tanzania Croatia Marshall Islands Hungary Peru Moldova South Africa Malawi Bulgaria Georgia Russia Romania Kazakhstan Micronesia* China Financial assets Nonfinancial assets Liabilities Net worth Net financial worth

13 Source: Global Debt Database and October 2018 Fiscal Monitor

EM : General Government Balance Sheets (percent of GDP) EM : Levels of Public and Private Debt (percent of GDP)

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US public sector balance sheet (percent of GDP)

  • 200
  • 150
  • 100
  • 50

50 100 150 200 250 2000 2002 2004 2006 2008 2010 2012 2014 2016

  • III. Examples – Risk Identification

US – Fiscal Stress Test

14

  • 28
  • 54
  • 60
  • 50
  • 40
  • 30
  • 20
  • 10

Baseline Debt Nonfinancial assets GSEs: loan losses Pension funds Other Stress

Fiscal stress scenario - 2020 (percent of baseline GDP)

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  • III. Examples - Policy Evaluation

Indonesia – Public Investment boosts Public Wealth

15

  • 100
  • 50

50 100 150 200 250 2010 11 12 13 14 15 16

Natural resources Other nonfinancial assets Fixed assets Financial assets Other liabilities Debt securities and loans Currency/deposits Net worth

Assets Liabilities

Public Sector Balance Sheet (percent of GDP) Change in I ntertemporal Net W orth from H igher I nvestment (percent of 2023 baseline GDP)

  • 20
  • 18
  • 16
  • 14
  • 12
  • 10
  • 8
  • 6
  • 4
  • 2

Baseline net worth Change in net assets Change in future primary balances Scenario net worth

Net worth Postive changes in net worth Source: October 2018 Fiscal Monitor

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I ntertemporal Net W orth (percent of GDP)

  • III. Examples – Demographics

Finland and Norway – Intertemporal Balance Sheet

16 Source: October 2018 Fiscal Monitor

  • 600
  • 400
  • 200

200 400 600 800 Norway Finland Norway Finland Intertemporal Component Natural resources Other assets Liabilities (Intertemporal) net worth

410 ppt 101 ppt

Static Intertemporal

Construction of intertemporal balance sheet

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  • Our report shows the benefits of PSBS analysis

– Comprehensive view of public finances – Identify & manage risks – Evaluate policies – Macroeconomic relevance

  • Promotes transparency and accountability

– Public assets at the service of economic and social goals – Accountability to citizens and creditors

  • Next steps

– Start compiling balance sheets – Perform basic balance sheet analysis – Over time, improve statistical and accounting practices

  • V. Conclusion

17

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Thank You

Managing Public Wealth

IMF October 2018 Fiscal Monitor www.imf.org/fiscalmonitor Blog: The Wealth of Nations: Governments Can Better Manage What They Own and Owe Full Report: Managing Public Wealth

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Backpocket

19

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Additional Detail on Natural Resources W ealth

Source: IMF Fiscal Monitor, Fall 2018.

Natural Resources 38 %

Infrastructure

72 %

Financial Assets

99 %

GG Debt

94 %

Accrued Pension Liabilities

46 % Others 58 %

Others- 11 %

Net Worth 21 %

Aggregate Public Sector Balance Sheet (in percent of GDP)

Assets Liabilities

219 % 198 %

Russian Federation 340.2 Kazakhstan 219.4 Peru 169.4 Australia 163.6 Norway 155.6 South Africa 101.4 Brazil 72.7 Indonesia 60.2 Tunisia 51.3 Colombia 48.6 Canada 42.1 Tanzania 40.6 India 40.5 Albania 40.3 Georgia 19.6 Guatemala 16 United States 10.6 Turkey 9 United Kingdom 7.4 Kenya 5.4 Finland 5.1 Uganda 4.7 Portugal 4.3 New Zealand 2.6 Germany 1.4 Austria 0.8 Korea, Republic of 0.2 Japan 0.1

Natural resources (in percent of GDP)

20

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  • III. Examples

Quantitative Easing

0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8

Central Government Debt Public Sector Debt

£ Trillion

Over 10 years Up to 10 years Up to 5 years < 1 year

Sources: Office for Budget Responsibility, Bank of England, UK Debt Management Office

United Kingdom: M aturity Structure of Outstanding Debt, 2016

21

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The Gambia: Public Sector Balance Sheet (percent of GDP) Gross Financing Needs under Stress (percent of GDP)

  • III. Examples – Risk

The Gambia – Fiscal Stress Test

2016 Central Government Public Corporations Public Sector Total assets

47.3 61.9 61.0

  • f which: Nonfinancial assets

13.4 22.4 35.8

Financial assets

33.9 39.4 25.2

Total liabilities

93.5 61.9 107.2

  • f which: Debt securities

78.4 2.0 61.4

Net financial worth

  • 59.5
  • 22.4
  • 82.0

Net worth

  • 46.2

0.0

  • 46.2

Source: IMF staff estimates

10 20 30 40 50 60 2006 08 10 12 14 16 18 20

Baseline Stress Source: IMF staff estimates.

22

Back

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Kazakhstan: Public Sector Balance Sheet (percent of GDP)

  • III. Policy Implications – Risk

Kazakhstan

General Government Public Corporations Public Sector Total assets

348.6 99.9 399.0

  • f which: Nonfinancial assets

263.4 27.3 290.7

Financial assets

85.2 72.6 108.3

Total liabilities

16.9 99.9 67.2

  • f which: Debt securities

11.5 8.9 10.5

Net financial worth

68.3

  • 27.3

41.0

Net worth

331.7 0.0 331.7

Source: IMF staff estimates 50

100 150 200 250 300 350 2013 Net worth Deficit Oil price Depletion Currency 2016 Net worth

Net worth Negative changes to net worth Positive changes to net worth

Kazakhstan: Evolution of Net W orth (percent of 2016 GDP)

23

Back

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  • 20
  • 10

10 20 Total Shareholder Return (LHS) Ret urn on Capital Employed (LHS) Net profit (RHS) 2013 2017

New Zealand: Public Sector Balance Sheet (percent of GDP)

Examples – Asset Management New Zealand

Assets Liabilities Net Worth Social

57.5 7.1 50.5

Financial

33.2 50.5

  • 17.3

Commercial

20.1 12.0 8.1

Static balance sheet

110.8 69.5 41.3

Fiscal

1,381.9 1,480.0

  • 98.1

Intertemporal balance sheet

1,492.7 1,549.5

  • 56.8

Source: New Zealand 2017 Investment Statement. New Zealand: Financial H ighlights – Commercial Priority Companies

24

Back

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General Government Public Corporations Public Sector Total assets

208.9 75.2 254.1

  • f which: Nonfinancial assets

80.2 10.4 90.6

Financial assets

128.7 64.8 163.5

Total liabilities

178.6 75.2 223.8

  • f which: Debt securities

54.1 13.7 57.2

Net Financial Worth

  • 49.9
  • 10.4
  • 60.3

Net Worth

30.3 0.0 30.3

Net present value of primary balances

83.3

Intertemporal net worth

113.6

Source: IMF staff estimates. 30 35 40 45 50 55 60

  • 4

4 8 12 16 20 2005 2015 2025 2035 2045 2055 2065

Primary palance (left scale) Primary expenditure (right scale) Revenue (right scale)

Finland Long-term Fiscal Projections (percent of GDP) Finland I ntertemporal Balance Sheet, 2016 (percent of GDP)

Examples – Demographics Finland – Current Policies Add to Future Public Wealth

Back to Norway – Finland example

25

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Intertemporal Balance Sheet Accounts for future cost of current policies

Natural Resources

Infrastructure

Financial Assets GG Debt

Pension Liabilities

Others

Others

Net Worth

Aggregate Public Sector Balance Sheet (in percent of GDP)

Assets Liabilities Future discounted Primary Balances

26

Back to Norway – Finland example

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The Public Sector Balance Sheet Evolution since the crisis

Public Sector Balance Sheet (Weighted average of 17 countries, percent of GDP)

$11 Trillion

Source: IMF Fiscal Monitor, October 2018. Note: The data excludes natural resource assets and pension liabilities.

100 110 120 130 140 150 160 170 180 190 200 2000 2002 2004 2006 2008 2010 2012 2014 2016 Assets Liabilities 5 10 15 20 25 30 35 40 45

  • 65
  • 60
  • 55
  • 50
  • 45
  • 40
  • 35
  • 30
  • 25
  • 20

2000 2002 2004 2006 2008 2010 2012 2014 2016 Net W orth (right scale) Net Financial W orth (left scale)

Assets and Liabilities Net (Financial) W orth 27

Back

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Liabilities Assets

■ Cross lending/ borrowing ■ Valuation of non-financial assets (liquidity) ■ Exposure to new financing vehicles and policy lending ■ PPPs Consolidation: clarify cross lending/borrowing across institutions

China What are we missing?

Back

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  • I. The Public Sector Balance Sheet

Emerging Markets Balance Sheets

29

  • 150
  • 100
  • 50

50 100 150 200 250 Barbados* Gambia, The Brazil El Salvador India* Poland Ukraine Palau* Guatemala Albania Kyrgyz Republic Serbia Turkey Uganda Colombia Indonesia Kenya Uruguay Tanzania Croatia Marshall Islands Hungary Peru Moldova South Africa Malawi Bulgaria Georgia Russia Romania Kazakhstan Micronesia* China Financial assets Nonfinancial assets Liabilities Net worth Net financial worth

EM : General Government Balance Sheets (percent of GDP)

Source: October 2018 Fiscal Monitor. * = central government data

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I taly: General Government Balance Sheet, 2016 (percent of GDP)

General Government Balance Sheet Italy

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Total assets 79.2

  • f which: Nonfinancial assets

51.6 Financial assets 27.6 Total liabilities 157.6

  • f which: Debt

132.0 Net Financial Worth

  • 130.0

Net Worth

  • 78.4

Source: IMF staff estimates *Excludes land and natural resource assets and pension liabilities.

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Germany

Aggregate Public Sector Balance Sheet (in percent of GDP)

Assets Liabilities

Financial Assets 145.7 % Others 190.3 %

Pension Liabilities 39.4 %

Infrastructure 62.7 %

210 % 229.7 %

Negative Net Worth

  • 19.7 %
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France

Aggregate Public Sector Balance Sheet (in percent of GDP)

Assets Liabilities

Debt 90.8 % Others 83.8 %

Pension Liabilities 54.3 %

Infrastructure 100 %

Financial Assets 81.4 %

186.9 % 228.9 %

Negative Net Worth

  • 42 %
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Finland

Aggregate Public Sector Balance Sheet (in percent of GDP)

Assets Liabilities

Financial Assets 163.5 %

Infrastructure 83.1 %

Pension Liabilities 103.3 %

Others 63.3 %

Debt 57.2 %

Net Worth 30.3 %

254.1 % 223.8 %

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United Kingdom

Aggregate Public Sector Balance Sheet (in percent of GDP)

Assets Liabilities

Others 92 %

Pension Liabilities 87.4 % Debt 81.7 %

135.4 % 261.1 %

Financial Assets 65.2 %

Infrastructure 62.1 %

Resources 7.4 %

Negative Net Worth

  • 125.7 %
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Spain

General Government Sector Balance Sheet (in percent of GDP)

Assets Liabilities

Debt 95 % Infrastructure 56.9% Financial Assets 33.6 % Others 36.7 %

90.5 % 131.7 %

Negative Net Worth

  • 41.2 %

Back

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SLIDE 36

Netherlands

Assets Liabilities

General Government Sector Balance Sheet (in percent of GDP) Debt 57.5 %

Infrastructure 64.5 %

Financial Assets 34.7 % Resources 15.4 % Others 16.3 %

Net Worth 39.3 %

114.6 % 75.3 %

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SLIDE 37

Belgium

Assets Liabilities

General Government Sector Balance Sheet (in percent of GDP) Debt 105 % Others 22.5 % Pension Liabilities 44.5 % Infrastructure 36.5 % Financial Assets 31.1 %

67.6 % 172 %

Negative Net Worth

  • 104.4 %
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SLIDE 38

EU Aggregate

Austria, Finland, France, Germany, Portugal, UK

Aggregate Public Sector Balance Sheet (in percent of GDP)

Assets Liabilities

Financial Assets 115.7 % Others 140.5 % Pension Liabilities 79.9 % Debt 38.3 % Infrastructure 82.9 %

203.3 % 258.7 %

Negative Net Worth

  • 55.4%