Importance of Assessing Both Sovereign Assets and Liabilities in Evaluating Sovereign Risk
A recent analysis by the International Monetary Fund (IMF) has shed light on the importance of a government's net worth in determining sovereign creditworthiness. The study found that a stronger net worth can lead to lower borrowing costs, faster recoveries from economic recessions, and better policy flexibility for public investment and growth.
The net worth of a government, which is calculated by subtracting liabilities from assets, provides a more comprehensive fiscal assessment than gross debt alone. It offers a more nuanced and economically intuitive measure of a government's fiscal health and creditworthiness, impacting borrowing rates and economic resilience.
The IMF study challenges the traditional focus on gross debt-to-GDP ratios, demonstrating that assets, especially liquid and commercial assets, play a significant role in creditworthiness assessments. Countries with stronger net worth tend to have lower borrowing costs and faster recoveries from economic recessions, providing greater fiscal space to achieve strategic objectives.
The study suggests implementing net worth targets within fiscal frameworks to promote sustainable public investment, even under high debt scenarios. This approach aligns with sovereign credit rating agencies’ broader evaluation criteria, which combine economic data (including assets and liabilities) with qualitative factors like institutional strength and policy credibility.
Singapore serves as a prime example of what can be achieved with effective balance sheet management. Despite having a high level of gross debt, the city-state's triple-A rating demonstrates the impact of good governance, strict fiscal discipline, and effective balance sheet management. Approximately one-fifth of Singapore's government expenditure is funded through investment returns from its sovereign funds, with the remaining half reinvested to strengthen long-term financial stability.
The IMF working paper also asserts that a net worth anchor encourages public investment and economic growth. Global public assets are estimated to be three times the value of global GDP, with half consisting of commercial assets, such as real estate and corporate holdings. Demonstrating diverse revenue streams, including both tax and non-tax sources, can reduce a government's risk profile.
In conclusion, the significance of net worth in determining sovereign creditworthiness cannot be overstated. It offers a more comprehensive fiscal assessment, impacting borrowing rates and economic resilience. As global public assets continue to grow, it is essential for policy-makers to focus on better managing the public balance sheet and the level of net worth to ensure sustainable prosperity.
- The International Monetary Fund (IMF) study emphasizes the role of net worth in determining a government's creditworthiness, suggesting that a stronger net worth can lead to lower borrowing costs.
- The net worth of a government, calculated by subtracting liabilities from assets, provides a more comprehensive fiscal assessment than gross debt alone, influencing borrowing rates and economic resilience.
- Singapore, with its triple-A rating, serves as an example of effective balance sheet management, despite having a high level of gross debt, demonstrating the impact of good governance and strict fiscal discipline.
- The IMF working paper suggests that achieving strategic objectives may be facilitated through promoting sustainable public investment, by implementing net worth targets within fiscal frameworks.
- Global public assets are estimated to be three times the value of global GDP, with half consisting of commercially valuable assets like real estate and corporate holdings.
- Demonstrating diverse revenue streams, including both tax and non-tax sources, can help reduce a government's risk profile, as seen in countries with stronger net worth.
- As the value of global public assets grows, policy-makers ought to focus on better managing the public balance sheet and the level of net worth to ensure sustainable prosperity, impacting borrowing rates and economic resilience.
