Transcript Fiscal Policy

COUNTRY RISKS
• Most OECD & many non-OECD
countries have GSE’s insuring
FDI against political risk.
• Political Risk – World Bank
definition: Political risks are
associated with government
actions which deny or restrict
the right of an investor/owner
i) to use or benefit from
his/her assets; or ii) which
reduce the value of the firm.
Political risks include war,
revolutions, government
seizure of property and actions
to restrict the movement of
profits or other revenues from
within a country
OECD uses a variety of macro measurements to construct country risk classification for trade
credit insurance. Link
OECD COUNTRY RISK CLASSIFICATION 2013
8
7
6
5
4
3
2
1
0
Currency Controls: Malaysia
• In current financial markets, many emerging markets will impose
currency controls to keep hot money from entering the market.
• In 1998, Malaysia implemented controls to keep foreign investors
from exiting the market forcing them to wait 1 year to repatriate
financial income.
Link
Nationalization:
Venezuela
Venezuela FDI (% of GDP)
8
7
6
5
1
-1
Link
Chavez: Venezuela will
nationalize gold mines
-2
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0
1997
Venezuelan President Hugo Chavez said
Wednesday he had ordered the nationalization of
at least some of the operations of the U.S.-based
food giant Cargill and threatened to do the same
with the Caracas-based food maker Polar
2
1996
Chavez orders nationalization
of Cargill
3
1995
Link
x
4
Polity IV
Theories of Conflict World Development
Report 2011 Chapter 2
• Rapid Change and Rising
Expectations
• Voracity and Resource Curse
• Horizontal Inequality
• Lack of State Capacity
• Poor Institutions.
Political violence associated with:
• Rapid Urbanization
• Youth Unemployment
• Income Inequality
• Weak Governance
• Low growth, low income
countries with high natural
resource share more than 10
times as likely to experience
political violence.
Link
Link
Regimes
• Autocracy: Self-perpetuating regime with ability to strictly limit activities
of political opposition.
• Anocracy: Regime w/o electoral democracy but lacking means to
completely eliminate opposition or lacks direct instruments of selfperpetuation.
• implementing a staged transition from autocracy to greater democracy.
• institute piecemeal reforms due to increasing demands from emerging political
groups.
• weakened by corruption or dissension and losing their capacity to maintain
strict political controls and suppress dissent.
Anocracies are by far most likely to see
government threatening instability.
OECD Developing Country Risk
6.3
6.1
5.9
5.7
5.5
5.3
5.1
4.9
4.7
4.5
Democracy
Open Anocracy
Closed Anocracy
Autocracy
Global Report 2014 Conflict, Governance, and State Fragility
Link
Polity IV data set
Fiscal RISKS
Debt
IMF Fiscal Monitor
Figure 2. Sovereign Bond Yield Spreads over German Bunds
(Basis points)
1800
1600
C ountries w ith Program s Supported by
EU /IMF
1400
1200
G reec e
1000
Crisis spreads to other
countries
800
Irelan d
600
Po rtug al
400
Ro man ia
200
Latv ia
0
J an -10 Ap r-10 J ul-10 O c t-10 J an -11 Ap r-11 J ul-11
450
IMF Fiscal Monitor
Selected European C ountries
400
350
300
Sp ain
250
Background Reading
200
150
Italy
100
50
Belg ium
Neth erlands
Fin land
0
J an -10 Ap r-10 J ul-10 O c t-10 J an -11 Ap r-11 J ul-11
Sources: Bloomberg L.P.; Datastream.
Note: 10-year sovereign bond yields.
DebtEnd This Year
 DebtEnd
Last Year
 Overall DeficitThis Year
General ExpenditureThis Year

General RevenueThis Year
Overall DeficitThis Year
Overall DeficitThis Year  Overall BalanceThis Year
Primary Deficit
• Simplified Government Budget
Primary Revenue (less Interest Income)
- Primary Expenditure (less Interest Paid)
Primary Budget Deficit
+ Net Interest Payments on Existing Debt
Overall Budget Deficit
Sustainable Deficit
• If
Overall DeficitThis Year
g V DebtLast Year

GDPThis Year
(1  g V ) GDPLast Year
then Debt-to-GDP ratio stays stable.
• If
> then deficit is “unsustainable”
A growing economy allows the government
to borrow some money every year and still
keep debt in line with overall GDP
Sustainable Primary Deficit
Overall DeficitThis Year Primary DeficitThis Year Net InterestThis Year


GDPThis Year
GDPThis Year
GDPThis Year
~
DebtLast Year
i

(1  g V ) GDPLast Year
Average Interest
Net InterestThis Year
GDPThis Year
• If
Primary DeficitThis Year
g V  i DebtLast Year

GDPThis Year
(1  g V ) GDPLast Year
then
( Net ) Debt
GDP
stays stable.
Primary Balance
% of GDP
•
1/1/2013
1/1/2012
1/1/2011
1/1/2010
1/1/2009
1/1/2008
1/1/2007
1/1/2006
1/1/2005
1/1/2004
1/1/2003
1/1/2002
1/1/2001
1/1/2000
1/1/1999
1/1/1998
1/1/1997
1/1/1996
1/1/1995
1/1/1994
1/1/1993
1/1/1992
1/1/1991
1/1/1990
1/1/1989
1/1/1988
1/1/1987
1/1/1986
1/1/1985
1/1/1984
1/1/1983
1/1/1982
1/1/1981
1/1/1980
% o GDP
Net Debt to GDP, Greece
200
180
Value, 181.837
160
140
120
100
80
60
40
20
0
http://www.imf.org/external/pubs/ft/fm/2011/02/fmindex.htm
32.9062534.5
34.5
Debt as % of GDP
Gross Debt
Net Debt
233.1
165.6
72.3
94.6
79.984.1
52.5
22.8
7.7
109.3
101.2 98.8
86.9
81.082.6
50.2
41.1 44.3
34.9
67.1
57.2
31.6
0.0 1.8 6.0
0.0 0.0
121.1
71.1
67.5
130.6
106.0
101.8
93.5
100.4
65.5
55.4
32.0
30.8 30.635.3
7.8
100.0
44.9 43.6
80.8
72.9 72.6
67.4
56.0
52.4
50.8
36.0
0.0 0.0 0.0
-1.7
-20.8
-59.7
-161.0
Consequences of Deficits
• Austerity
• Financial Repression
• Seignorage
• Default
Link
GDP per capita (constant LCU)
20000
19000
18000
17000
16000
15000
14000
13000
12000
11000
10000
2008 [YR2008]
2009 [YR2009]
2010 [YR2010]
2011 [YR2011]
2012 [YR2012]
2013 [YR2013]
Financial Repression
• Indebted governments often draw
financing from captive financial
institutions to keep interest rates low.
• Domestic banks, public pension funds
• Increased reserve requirements
• International capital controls.
Link
Seignorage - Central Bank prints money to buy government debt.
Link
Default
Link
Final Exam
• Saturday, December 13th, LG5201 12:30-3:30.
• Cumulative. Similar to mid-term and practice exams.
• Bring writing instruments and a calculator.
• Semi-open book – Bring 1 A4 size paper with handwritten notes on
both sides.
• Office Hours: Standard TR 4:30-5:30 and MW 2-3:30.
Can you run a deficit every year?
DebtThis Year
Debt Last Year Overall DeficitThis Year
1


V
GDPThis Year (1  g ) GDPLast Year
GDPThis Year
DebtThis Year DebtLast Year


GDPThis Year GDPLast Year
Debt Last Year (1  g V ) DebtLast Year Overall DeficitThis Year
1


V
V
(1  g ) GDPLast Year (1  g ) GDPLast Year
GDPThis Year
Overall DeficitThis Year
g V Debt Last Year


GDPThis Year
(1  g V ) GDPLast Year