By Vitor Gaspar and Agencies

What is the state of your personal finances? You probably think first about your debts: your mortgage, your credit card balance, and your student loans. But you probably also think about how much cash is sitting in the bank, the value of your house, and the rest of your nest egg.

Surprisingly, most governments do not approach their finances this way.

Our research in the new Fiscal Monitor shows that few governments know how much they own, or how they use those assets for the public’s well-being. Knowing what a government owns and how they can put their assets to better use matters because they can earn about 3 percent of GDP more in revenues each year and reduce risks, all at once. That’s as much revenue as governments make from corporate income tax receipts in advanced economies. Governments can put this money toward better schools, hospitals, or other priority spending.

These assets consist of public infrastructure such as roads, bridges, and sewer pipes, as well as the money governments have in the bank, their financial investments, and payments owed to them by individuals and businesses.

Natural resource reserves in the ground are also part of assets, something that is particularly important for natural resource-rich countries. But assets also include state-owned enterprises such as public banks and, in many countries, utilities such as public electricity and water companies.

We also show that total liabilities are much larger than debt alone. They come to about 198 percent of GDP, less than half of which is general government public debt. Pension obligations to civil servants are a large part of the remainder, yet few countries record them as such.

Another part is debt owed by public corporations. Most standard measures of general government debt do not include this, meaning that significant amounts of public debt are classified as private debt.

Emerging markets’ debts and assets

In emerging market economies private debt has risen much faster than public debt, as shown in the chart below. Take China, for example. Total debt is 247 percent of GDP. But the dividing line between what is public and private debt in China is blurry. This blurriness reflects the very large number of public units and corporations, the complex layers of government, and widespread subnational off-budget borrowing.

As a result, estimates of 2017 public debt vary considerably: the official government debt figure is 37 percent of GDP, while the data reported in the latest World Economic Outlook show it at 47 percent of GDP, and the ‘augmented’ debt measure, which includes more off-budget borrowing by local governments, stands at 68 percent of GDP. As China works to compile a full general government balance sheet, this picture will come into clearer focus.

So, how resilient is China’s government balance sheet?

China has substantial government assets, reflecting years of high infrastructure investment. These assets are larger than its liabilities, putting net worth—the difference between assets and liabilities—well above 100 percent of GDP, the highest among emerging economies.

This is a significant buffer when compared to total debts of public corporations, particularly considering that public corporations also have assets. So, while debt-related risks in China are large, there are also buffers. Moreover, the government is taking steps to contain risks by reining in off-budget borrowing and strengthening oversight, resulting in a slowdown in the buildup of debt.

However, most of China’s government assets are nonfinancial, like buildings, roads, and railways. While they can generate revenues through fees and rents, they are not easily available to cover liquidity needs. Also, the valuation of these assets is surrounded by uncertainty. With no official estimates available, we use an estimate from our capital stock database. Net financial worth, which excludes these nonfinancial assets, is much smaller. It still positive and higher than the emerging market average, although it has declined in recent years, mainly due to developments at the subnational government level.

Improve resilience

More generally, our research illustrates that public sector assets could act as a buffer that allows governments with high public wealth to weather recessions better than those with low public wealth. Stronger balance sheets—a statement of what you owe and own at a given point in time—allow governments to boost spending in a downturn.

This cushions the impact of the shock and results in shorter and shallower recessions. Take Kazakhstan in 2014, when it faced a halving of oil prices and a slump in external demand. The government responded by using part of its financial assets in the National Fund to ease the downturn.

Doable for all

All governments can better manage their resources. They should start by bringing data together to come up with a rough estimate of public sector assets, liabilities, and wealth. Over time, better accounting and statistical collections can improve the accuracy of these estimates. Governments can use them to do basic balance sheet risk and policy analysis, using the framework presented in this report.

Once this exercise is completed, governments will be able to show their citizens the full extent of what they own and owe, and better use public wealth to meet society’s economic and social goals.

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By Rudolfs Bems and Agencies

Since the mid-2000s, inflation in emerging market economies has been remarkably low and stable, in sharp contrast to the 1990s. But rising interest rates in advanced economies like the United States have triggered currency depreciations in emerging market economies over the past few months—quite sharp in some cases—and are testing their ability to fend off inflationary pressures.

In Chapter 3 of the October 2018 World Economic Outlook, we analyze the recent improvements in inflation performance in emerging economies and show that these gains can be maintained if central banks’ commitment to low inflation is credible and expectations of future inflation remain under control.

Expectations of future inflation are key
Our study looks at 19 emerging market economies from 2004 to 2018 and finds that inflation remained low and stable despite sharp swings in commodity prices, periods of sustained U.S. dollar appreciation, and the global financial crisis. However, this recent inflation performance is not uniform, as some countries continue to struggle to keep inflation under control.

The main driver of inflation in emerging market economies during the past decade and a half is changes in longer-term inflation expectations. We find that longer-term inflation expectations were particularly important in exerting inflationary pressure in countries where inflation has remained above the target. Other commonly explored drivers of inflation—such as excess capacity in economic activity and external price pressures—also matter but played less of a role.

Motivated by these findings, our analysis explores how the extent of anchoring of inflation expectations in emerging markets—a proxy for the credibility of their monetary policy—has evolved over time and differs across countries. The concept of anchoring of expectations is measured using several indicators, such as the impact of inflation surprises on expectations and the extent of agreement among experts about future inflation. The data shows that longer-term inflation expectations have become increasingly anchored in emerging economies over the past two decades. At the same time, there are sizable differences across emerging economies and relative to advanced economies. The extent of anchoring in, for example, Chile and Poland is comparable to the average of advanced economies, but expectations are much less anchored in Russia and Argentina.

Building greater resilience to external shocks
External shocks that depress economic activity while also triggering temporary increases in inflation pose a dilemma for policymakers in emerging economies. But we find that this dilemma is less pronounced when inflation expectations are well anchored.

A good example of that kind of shock is what happened during the taper tantrum in 2013—when the United States suddenly announced it was thinking of beginning to increase interest rates.
During the taper tantrum, countries with more-anchored inflation expectations saw larger short-term exchange rate depreciations than those with less-anchored expectations. Interestingly, however, sharper depreciations in the former group did not translate into higher (imported) domestic inflation. As the impact of the exchange rate on inflation was substantially larger in less-anchored countries, which also faced worse output prospects, central banks in less-anchored countries could not afford to pursue looser monetary policies.

These findings have implications for the period of monetary normalization in advanced economies. A temporary increase in inflation rates in emerging economies is to be expected if global financial conditions tighten and emerging market currencies depreciate. But, if expectations are well anchored, price stability would not be jeopardized.

Improving fiscal and monetary policy frameworks
How can central banks improve the extent of anchoring of inflation expectations? Our analysis as well as the evidence in the literature indicate that the soundness of both monetary and fiscal policy frameworks is key for well-anchored inflation expectations. Policymakers should therefore keep improving the long-term sustainability of public finances, including by adopting rules that limit the scope for policies that threaten debt sustainability and building fiscal buffers in good times that can then be relied on during bad times. Equally important is their commitment to improving the credibility of central banks, by consolidating and enhancing their independence, as well as through improvements in timeliness, clarity, transparency, and openness in their communications.

Anchoring inflation expectations takes time, so continuous effort is needed even in countries that have already made significant progress. In countries where the credibility of monetary frameworks is relatively low, the emphasis should be on ensuring that fiscal sustainability is not a threat for their monetary objectives and on communicating clearly the reasons for their monetary policy actions, including those taken in response to global developments.

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