This presentation was made by Masayuki Omote, OECD Secretariat, at the 18th Annual Meeting of OECD Senior Financial Management and Reporting Officials held at the OECD Conference Centre, Paris, on 1-2 March 2018

1. FISCAL RISKS AND CONTINGENT LIABILITIES
1-2 March 2018
Masayuki OMOTE
Budgeting and Public Expenditures Division
Public Governance Directorate, OECD

2. A concept which make budget officials feel.....
Fiscal risks?
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3. 9. Identify, assess and manage prudently (…) fiscal risks, through:
i) clearly identifying, classifying by type, explaining and, as far as possible,
quantifying fiscal risks, including contingent liabilities, so as to inform
consideration and debate about the appropriate fiscal policy course adopted in the
budget;
ii) applying mechanisms to promote the resilience of budgetary plans and to
mitigate the potential impact of fiscal risks, and thereby promoting a stable
development of public finances;
iii) making explicit the mechanisms for managing these risks and reporting in
the context of the annual budget.
OECD Recommendation of the Council on
Budgetary Governance (February 2015)
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4. • Definition:
– What is the difference between fiscal risks and contingent liabilities?
• Overview of disclosure practices:
– What and how well do fiscal risk statements disclose?
• For further discussion:
– How can finance professionals help better identifying and managing fiscal risks?
Content
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5. • Fiscal risks is an economic , broad concept :
– Factors that may cause fiscal outcomes to deviate from
expectations or forecasts (IMF)
– A potential deviation from the government forecasts for
public sector spending, receipts, borrowing and debt (UK)
– A range of factors that have an unanticipated effect on
government finances (Finland)
What are fiscal risks? (1/2)
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6. Fiscal Risks
Macroeconomic
GDP growth
Commodity price
Interest rate
Exchange rate
…
Contingent Liabilities
Explicit
(legal obligation)
State guarantees
…
Implicit
(moral or social obligation)
Bailout of the financial
sector, SOEs, SNGs, etc.
Natural Disasters
Others
Political instability
Global issues
...
What are fiscal risks? (2/2)
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7. • Contingent liabilities is an accounting concept:
– Past event creating the possible or present obligation (legal or
contractual)
– The realization is uncertain or depends on the occurrence of a particular
event
• Types of obligations (IPSAS 19):
– legal obligation: obligation that derives from a contract or other
operation of law (similar to “explicit”)
– Constructive obligation: obligation that derives from an established
pattern of past practices that created a valid expectation on the part of
those other parties (almost similar to “implicit”)
What are contingent liabilities? (1/2)
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8. What are contingent liabilities? (2/2)
Source: Overview of Central Government Risks and Liabilities (Finland).
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9. A great variety of practices
(UK, Finland, Chile, Peru, the Philippines, New Zealand)
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0 1 2 3 4 5 6
GUARANTEE
1.1 Guarantee to SOEs
1.2 Guarantee on the bank deposit
1.3 Guarantee on export
1.4 Guarantee on minimum revenues in PPPs
1.5 Guarantee on housing loans
1.6 Guarantee on student loans
1.7 Guarantee to subnational governments
1.8 Debt guarantee on PPPs
LITIGATION
2.1 International investments
2.2 PPPs
2.3 Tax
2.4 Clinical negligence
IMPLICIT CLs
3.1 Natural disasters
3.2 Bailout of the financial sector
3.3 Pandemic diseases
3.4 Wars and terrorist attacks
OTHER
4.1 Uncalled capital
4.2 Nuclear decommissioning
4.3 Environmental degradation

10. Disclosures in fiscal risks reports (1/3)
Typical Content of FR report
• Definition of concepts
• Overall fiscal risk management
• Macroeconomic analysis
• Disclosure of contingent liabilities
- Nature (Basic description)
- Quantification (maximum exposure)
- Quantification(most probable values)
- Breakdown of individual CLs
- Mitigation measures
- Past materialization
• Fiscal impact simulation
• Challenges in the future
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11. 11
Disclosures in fiscal risks reports (2/3)
State loan guarantees to state-owned enterprises (SOEs)
Description (definition, purpose, beneficiaries etc)      
Quantification    
Maximumexposure    
Estimation of the most probable values 
As a percentage of GDP   
Breakdown   
Past materialization   
Mitigation measures   
NewZealandPhilippinesItem / Country FinlandUK Chile Peru
• Coverage depth differs depending on the fiscal risk considered, but usually
information is more detailed than in disclosures to financial statements.

12. • Mitigation strategies can aim at:
– Reducing probability of risk occurring (regulations, ceilings,…)
– Reducing financial exposure to risk (ceilings on guarantees, hedging
instruments,…)
– Creating fiscal space to absorb retained risk (reserves, funds,…)
• Mitigation measures are not always disclosed in fiscal risks reports, but when
they are variety of practices:
– Financial sector (UK): regulations such as establishment of the Financial Policy
Committee; Banking Reform Act 2013 requiring largest UK banks to separate
core retail banking services from their investment banking activities by 2019,…
– Guarantee to SOEs (Finland): obligation for SOEs to prepare annual report
including information on financial position and performance, the risks
(operational, financial, and damage risks), risk management measures, and
uncertain factors.
– Natural disasters (Peru): securing financial capacity through budget reallocation,
contingent reserve, contingent credit line, and the Fiscal Stabilization Fund.
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Disclosures in fiscal risks reports (3/3)

13. • Shared definition and typology of contingent liabilities
(explicit/implicit) between finance professionals, budget
officials and economists.
• Reporting in financial accounts, with possibly more
quantitative/qualitative information.
• Ex-post reporting and measurement of implicit
contingent liabilities.
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How can finance professionals help
improve fiscal risk management? (1/2)

14. • Financial processes as a mean for identifying/mitigating
contingent liabilities (incl. guidance and coordination
with line ministries).
• Next step: balance sheet risks analysis?
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How can finance professionals help
improve fiscal risk management? (2/2)

15. THANK YOU FOR YOUR ATTENTION
http://www.oecd.org/gov/budgeting/
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