A Look Inside the Mind of Debt Managers - A Survey on Contingent Liabilities Risk Management

Governments around the world are increasingly exposed to fiscal risks. Debt levels have risen, and debt sustainability has been challenged in many countries. With the potential to further impair debt sustainability, fiscal risks from contingent liabilities have gained attention. This paper sets out to identify how debt managers perceive the importance of contingent liabilities in their countries, their governments’ capacity in managing risks, and the risk management practices employed.

The findings in this paper are based on a survey of debt managers the World Bank conducted in 2016. Out of a sample of 43 responding countries, 91 percent indicated that contingent liability risk management was important or very important. However, only 41 percent believe that their government’s capacity in managing risks was good or very good. The most common type of contingent liability debt managers identify as important was credit guarantees (70 percent) followed by debt from state-owned enterprises (SOEs) and subnationals (60 percent) and guarantees in public-private partnerships (40 percent). To manage risks, governments were more likely to employ risk monitoring, analysis, and reporting (each used by at least 50 percent of respondents), than guarantee fees, exposure limits, reserve accounts, or financial hedging instruments (ranging from 9 to 42 percent). Of debt managers from countries that employed two or more risk monitoring or mitigation tool responded, fewer than 50 percent believed that their government’s capacity in managing risk were average, limited or very limited. This is compared to 72 percent for countries employing one tool and 100 percent for countries employing no tools.

The results from the survey suggest that: (i) most debt managers recognize that contingent liabilities risk management is important but many perceive that their governments have limited capacity to manage corresponding risks; (ii) most debt managers are primarily concerned with contingent liabilities that are relatively easily monitored; (iii) more governments employ risk monitoring rather than risk mitigation tools and (iv) debt managers’ confidence in their governments’ capacity to handle contingent liability risks is correlated to the number of risk mitigation and monitoring tools employed. Survey results raise important issues for further research, such as the relative effectiveness of alternative risk management practices.