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Sovereign Asset and Liability Management: An E-Learning Training Course
II. Rationale
III. The Conceptual Balance Sheet
IV. Contingent Liabilities



The Conceptual Balance Sheet

The starting point of all SALM is the balance sheet; this allows the government to minimize risk at a reasonable cost with often limited resources.  Generally, governments do not produce comprehensive balance sheets.  Instead, they publish annual fiscal budgets which are based on revenues and expenditures over a certain period of time.  But for a comprehensive sovereign risk analysis, both budgets and balance sheets provide essential information on (a) assets, liabilities and the net worth of the government (in stock terms), as well as (b) cash flows driven by underlying changes in assets and liabilities.  This type of analysis offers valuable insights into the (potential) impact of changes in interest and currency rates on the (market) value of sovereign assets and liabilities (Bloomenstein and Kalkan, 2008).

SALM is based on the balance sheet approach to asset and liability management.  The SALM framework requires a conceptual economic balance sheet and not just an accounting balance sheet.  After development of the conceptual framework, a more rigorous accounting balance sheet can be developed for quantifying risk and developing risk reduction strategies.  SALM is a strategy to facilitate long-term economic growth and should be developed in accordance with a sovereign’s long-term economic objectives.

The conceptual balance sheet below is an example of an economic or expanded balance sheet.  The primary assets on the economic balance sheet are the present value of future revenues and foreign exchange reserves.  Liabilities consist of the present value of future government spending, sovereign debt, and contingent liabilities.  The inclusion of contingent liabilities is an attempt to capture and quantify risks to the sovereign that extend beyond traditional risk and balance sheet management.  This practice can also be understood as extended balance sheet management because it is not limited to the inclusion of liabilities that have historical value but events that could potentially result in financial outlays.

Conceptual Government Balance Sheet






Direct Liabilities

Present value of fiscal revenues

Present value of fiscal expenditures

Foreign exchange reserves

Net market value of sovereign debt

Marketable securities


Onlending (e.g. International Bank for Reconstruction and Development Loans

Contingent Liabilities

Investments in State Owned Enterprises

Explicit contingent liabilities

Investment in Infrastructure

Implicit contingent liabilities






Net worth of government estate

Source: Currie and Velandia, 2002



The value of assets and liabilities often depends on which accounting measure is used: mark-to-market valuation or historical cost or book value.  As bond prices move inversely with interest rates and changes in exchange rates affect the market value of external debt, mark-to-market valuation leads to larger fluctuations in the value of debt compared to the use of historical prices.  For contingent liabilities, such as unfunded pension rights, the value depends on assumptions regarding the discount rate, life expectancy, and inflation rate.  At least for some assets, the market value and historical value will yield a significant gap” (Das et al., 2012).

Management of the government balance sheet should focus on how macroeconomic shocks may impact the balance over longer periods of time. By taking this long term approach, the impact of these risks may be mitigated and not have the sharp impact on the sovereign’s financial position in the long term.

Historically, risks have been segregated and managed independently of one another.  This is the so called silo approach.  A holistic approach to management of not only risks but liabilities and assets can be understood as the portfolio approach.  “The all-inclusive, portfolio approach is that it implies a higher likelihood of identifying and perhaps better managing systemic risk scenarios, when the various sovereign exposures of both asset and liabilities are triggered at the same time.  This is the worst-case event that is rarely modeled, but that has the most important implications for macro-economic stability and growth” (Currie and Velandia, 2002).  The portfolio approach is an extension of techniques and practices already being utilized by sovereign debt management offices in managing their respective debt profiles.

While it is most beneficial to incorporate a complete SALM framework for managing assets and liabilities, utilizing foundational SALM concepts can reduce risk.  For example, by simply holding assets and debt instruments in the same currency, currency fluctuations will offset one another on the asset and liability side of the balance sheet.   The SALM conceptual framework doesn’t require quantifying all risks but an understanding of how particular risks will impact both assets and liabilities.

For more on currency matching, please see Module II, Sections II and III and Module IV, Section I (i.)

Traditional debt to GDP ratios and other measures of risk are incomplete.  By producing a balance sheet within the SALM framework, greater insight into the true financial position of a sovereign can be attained.  This is of significance because many risks are often overlooked and not measured or estimated in any reliable way.  However, SALM is not a panacea for all of the risks a sovereign may face as many of the risks often remain off the balance sheet even when SALM is being implemented. 

In order to comply with budgetary and statutory borrowing limits, many nations utilize off-balance sheet funding mechanisms.  Bypassing the usual budgetary process allows the government to obtain funding without having to disclose the borrowing cost.  This often results in greater costs to the government than direct lending. For example, public private partnerships may be selected as the financing mechanism of choice to undertake capital projects as they usually will not require immediate financial outlays by the government.  However, utilizing public private partnerships may ultimately be more costly than direct funding by the government if certain explicit contingencies are triggered that legally require the government to provide financial resources.

For more see, "Public-Private Partnerships in the New EU Member States: Managing Fiscal Risks".

Sovereign Asset Liability Management Components








  • Preserve positive sovereign net worth



  • Support sustainable macroeconomic policies






SALM Constraints





Sovereign Balance Sheet Constraints

Domestic Constraints

External Constraints

  • Initial sovereign debt level and composition
  • Interest rates, output growth, and inflation
  • Exchange rates
  • Initial sovereign asset level and composition
  • Contingent liabilities
  • External interest rates


  • Institutional organization
  • Commodity prices


  • Market development
  • Asset prices



  • Market risk appetite





SALM Tools



  • Simulation and Risk Models



  • Contingent claims approach



  • Intuitive risk management approach





Source: Das et al., 2012








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