A new report by Swiss Re Institute has called for countries to provide a more detailed picture of their ‘net worth’ that would give investors, including re/insurers, more visibility into their fiscal capacity and resilience.
According to the report, integrated public financial reporting that includes insights on national assets and liabilities would allow for better-informed policy decisions and unlock new public-sector revenue generation opportunities.
It would also provide global insurers and other private-sector investors an additional yardstick to assess sovereign credit risk.
“It is something every country can, but which nearly all, do not do,” Swiss Re noted. “The advanced economy sovereign bond market is liquid and transparent, but absent information on national assets and liabilities, it remains difficult to ascertain holistically a country’s true long-term creditworthiness.”
Accounting for assets and liabilities exposes what can be a fundamental shortfall of simple debt-to-GDP ratios, and COVID-19 may change this dynamic still further.
For example, the crisis has led to a huge expansion in government guarantees, typically backing corporate loans.
“An integrated approach to evaluating public finances would enable cleaner decision-making when considering trade-offs between fiscal policy choices, allowing governments to better manage their resources to meet economic and social goals,” Swiss Re went on.
“This is crucial because countries with weaker balance sheets – such as several euro area countries – experience recessions roughly twice as deep and long as those with stronger balance sheets, and recoveries only about a third as strong.”
Currently, the IMF estimates that governments could earn about 3% of GDP more in revenue each year if they knew what they owned and how to put their assets to better use.
“Integrated public financial reporting would enable investors to better understand a country’s true fiscal capacity, particularly as rating agencies typically only include a qualitative assessment of the reporting principles when rating a sovereign,” Swiss Re concluded.