UNCTAD Virtual Institute for Trade and Development
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Sovereign Asset and Liability Management: An E-Learning Training Course
I. Balance Sheet Risks
I.i. Currency Matching
I.ii. Interest Rate Matching
I.iii. Maturity Matching
II. Methodologies
II.i. Initial Methodologies
II.ii. Advanced Methodologies


The SALM framework comprises an essential element of risk management for the sovereign as a whole.  Transforming risk management from theoretical models to practical applications based on country specific objectives is necessary.  The first decision the sovereign will need to make regarding risk management is if it wants to have a centralized or decentralized risk management framework.  “The degree of risk management centralization, both in policy and organizational terms, may depend on the macroeconomic context, on risk tolerance and risk management capacity, and on the type of institutional and political arrangements, such as the degree of political decentralization, etc.  The more vulnerable the sovereign is to shocks and the weaker its risk management capacity, as well as that of the rest of the public sector and indeed the private sector, the more stringent central government guidelines and monitoring should be.  This is particularly important with regards to contingent liabilities (“CL”), which are often hidden and unaccounted for.  The central government may end up not only monitoring and managing balance sheet risks, but also promoting a risk management culture in the rest of the public sector” (Currie and Velandia, 2002).

The trend is currently toward greater centralization of risk management. This allows the sovereign to assess its entire balance sheet risk more accurately.  Centralization also creates a more effective risk management framework if subnational and other entities within the government wide system lack the controls and procedures necessary to carry out their own risk management.  Each country will need to identify the specific risks they want to mitigate and then formulate the policy to attain these objectives.  Once the risks have been determined, the analytical tools and methodologies to be utilized will then be selected.  Decisions as to which tools and methodologies will be used should be decided based on available resources, existing risk practices, and the availability of data for forecasting.

In Module IV we will examine balance sheet risks, along with matching foreign currency, interest rates, maturities, and information on synthetic financial instruments to hedge risk.  We will then turn our attention to some of the SALM methodologies from basic approaches and provide resources on more advanced techniques.







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