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Sovereign Asset and Liability Management: An E-Learning Training Course
I. The Accounting/Financial Balance Sheet
II. Sovereign Asset and Liability Management Framework: Approach I
III. Sovereign Asset and Liability Management Framework: Approach II
IV. Sovereign Asset and Liability Management Framework: Approach III
V. Contingent Liabilities
i. Explicit Liabilities: Guarantees
ii. Implicit Liabilities: Financial Sector Bailouts and Natural Disasters
iii. Managing and Mitigating Contingent Liabilities

Conclusion

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Conclusion

There are numerous SALM frameworks to be utilized by the sovereign depending upon available resources.  A basic approach in which assets and liabilities are simply denominated in a common currency and have a common maturity structure will mitigate risk and produce benefits.  More advanced approaches incorporate currency matching and active management of foreign reserves and the debt portfolio to offset exposure to currency risk, namely the devaluation of the domestic currency.  The sovereign balance sheet can be managed in a consolidated and integrated manner by the central government or in an independent manner by the entities that comprise the government.  While the favored practice is to have centralized management of the balance sheet, there are pros and cons to each method.  The institutional framework, risk preferences, along with fiscal and economic objectives of the sovereign will dictate if and the degree to which the balance sheets are consolidated. 

CL, both explicit and implicit, pose great threats to sovereign financial stability and economic growth.  While explicit CL, such as guarantees, are the most widespread, implicit CL in the form of financial sector bailouts are the most costly.  Reducing explicit CL is a matter of reducing or eliminating the incentives that lead to their issuance by creating competition amongst all methods of financing.  The management of CL, especially implicit CL, must be proactive in all aspects, from estimating their value to developing policies and procedures for mitigation if they occur.  This must be done before the CL occurs in order to avoid responses that are costly and ineffective.  Evidence indicates that many of the responses to CL have led to the same or similar events occurring again in the future because of the signal that the response sent to the markets.  As stated in Module I and Module II, more disclosure is generally better than less disclosure regarding CL except in instances where disclosure may lead to moral hazard (i.e. disclosure of an implicit guarantee to support financial institutions) or negatively impact a sovereign’s position in litigation. Coordinating these various components of CL management within the SALM framework is multi-faceted but necessary in order to reduce the latent risks associated with CL.

 

 

 

 

 

 

 

 

 

 

 

 

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