UNCTAD Virtual Institute for Trade and Development
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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



Sovereign Asset and Liability Management Framework: Approach III

Approach III includes the integration of sub-portfolio balance sheets into one overall balance sheet management framework.  This might imply incorporating the balance sheet of the CB, Sovereign Wealth Funds (“SWF”) and State-Owned Enterprises (“SOE”).  The inclusion of SOEs on the asset side of the balance sheet also requires inclusion of their liabilities, namely guarantees on the debt of SOEs, on the liability side of the balance sheet.  In theory, by assessing the risk on the sub-portfolio level, the sovereign will gain a more complete understanding of all the risks it is facing and where possible.  However, institutional factors and limitations may result in the sub-portfolio approach being less than optimal.

Approach III demonstrates a more robust SALM framework in which greater integration of balance sheets throughout the entire government are being incorporated into the analysis.  This may allow the central government to develop a more comprehensive risk management strategy and develop policies that advance its long-term economic objectives.  Entities that are included on the sovereign conceptual balance sheet are often managed independently of the central government according to their own statutory authority, objectives, and risk tolerance.  The balance sheets of these units may then be integrated into the overall SALM framework. This raises the question as to what the appropriate level of integration of government wide balance sheets that will yield the most effective outcomes.

Box II: Consolidation vs. Non-Consolidation of Balance Sheets

Review of the literature suggests that partial consolidation of the balance sheet is the most utilized practice within SALM.  Due to a lack of a concise definition of the sovereign balance sheet and difficulty in identifying and quantifying government-wide assets and liabilities (i.e. Central Bank, Sovereign Wealth Funds, Public Pension Reserve Funds, State-Owned Enterprises, etc.) complete consolidation and integration is an unrealistic objective.  Proponents of fully consolidated balance sheets assert this allows the central government to make a more informed comprehensive risk assessment and may reduce redundancy of operations.  By identifying correlated risks between different units of the government, the central government can take action to hedge these risks.  “For example, in New Zealand [before the implementation of SALM] five separate units within the government were responsible for managing the financial flows arising from membership in the IMF.  No single unit had complete responsibility for risk management.  This became apparent when hedging activities by one institution, based on its own balance sheet exposure, turned out to be sub-optimal form the perspective of the overall balance sheet” (Wheeler, 2004).  Additionally, by using natural hedges that exist throughout the government, savings can be realized by reducing the transaction costs associated with purchasing financial instruments (options, swaps, etc.) for the purpose of hedging.

There is an opposing view that consolidation and integration of balance sheets may not be suitable for many sovereigns.  In sovereigns that lack strong institutions, balance sheet consolidation may reduce autonomy for these institutions and lead to imbalances throughout the government.  For example, if the Ministry of Finance dictates the balance sheet management of subnational governments, there could be an overconcentration of resources, namely assets, within the Ministry of Finance, at the cost of subnational government autonomy and financial viability.  Decentralization may maintain autonomy of the Central Bank (“CB”) and monetary policy.  “The core objective of monetary policy is to control inflation, but if it is also responsible for debt management, it may be tempted to hold interest rates low.  This will help to keep debt servicing costs low, but risks the costs of higher inflation in the future.  Alternatively, the monetary authority may be tempted to issue inflation indexed debt to enhance their policy credibility, but raises the risk of increasing debt service volatility” (Togo, 2007).  For these reasons, many nations have elected to pursue a coordinated framework instead of a fully consolidated balance sheet approach. “Although coordination between the fiscal and monetary authorities is usually supported by the existence of policy committees where representatives of both authorities discuss, or are informed of, their respective strategies regarding their asset and liability portfolios, these ‘not fully consolidated’ SALM frameworks may leave some diversification and hedging opportunities unexploited” (forthcoming UNCTAD research paper, Chile, 2014). 


“Most governments divide foreign exchange reserves into a liquidity portfolio, held in short-term or floating rate securities and deposits, and an investment portfolio that is invested in longer-maturity assets that are expected to generate higher returns” (Wheeler, 2004).  “The short-term or floating rate securities and deposits are used for interventions in the foreign exchange market and as part of monetary policy operations, and to absorb shocks during crises in order to maintain financial stability’ (Blomenstein and Kalkan, 2008).


Conceptual Balance Sheet





Present value of stream of taxes and other revenues

Present value of government outlays, net of debt servicing

Foreign exchange reserves held by Central Bank

Market value of net government debt

       Liquidity Portfolio

       Foreign Currency Debt

       Investment Portfolio

       Domestic Currency Debt

State-Owned Enterprises

State-Owned Enterprises: Guarantees on debt

Sovereign Wealth Funds



Generally, there are three (3) types of SWF, according to their objectives.

  1. Stabilization Funds: Cushion fluctuations in commodity or resource prices.
  2. Savings Funds: Accumulation and spreading of wealth for use by future generations to ensure intergenerational equity.
  3. Reserve Investment Funds: Preserve and boost purchasing power of foreign reserves without an explicit liability attached.  These funds attempt to obtain an investment return that will preserve the long-term purchasing power of the reserves

(Ervin, 2008; Bloomenstein and Kalkan, 2008).

Below is a hypothetical SWF that is being managed at the sub-portfolio level and incorporated into the central government balance sheet shown above.

Hypothetical Sovereign Wealth Fund Balance Sheet

Assets (Domestic and Foreign Currencies)




Fixed Income Investments


Equity Investments


Other Investments




* Will vary depending on the source of funding and objective of the fund


Source: Bloomenstein and Kalkan, 2008












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