Looking at the big picture: Sovereign Balance Sheet Risk Management Workshop introduces additional methods to account for both Assets and Liabilities

Looking out over the busy streets from her hotel room window, Thitiporn (Pom) Yongchaihirun tried to decide when to leave her room to navigate Jakarta’s heavy traffic to make it to the World Bank workshop in time. As a senior-risk manager and working for Thailand Public Debt Management Office (PDMO) for six years, Ms. Yongchaihirun decided to stay on the safe side, as she was also planning to go through her presentation, “Managing Fiscal Risks within an Asset and Liability Framework: Thailand,” one more time.

On her way to the workshop, Ms. Yongchaihirun reflected upon the horror stories from the Tom Yum Goong Crisis, which stemmed from currency mismatches between Thailand’s assets and liabilities, leading to the collapse of the local currency: baht. This historical phenomenon not only ended Thailand’s status as an Asian Tiger economy, but it created a domino effect in the region, leading to the 1997 Asian financial crisis.

Today, Thailand is keeping the foreign exchange exposure below 1% (measured by a share of unhedged external debt to public debt) to avoid making the same mistake. Still, government risk managers like Ms. Yongchaihirun are continuously looking for ways to improve the asset/liability mismatches and pursue a more holistic understanding of the Sovereign Asset and Liability Management (SALM) approach.

“This is precisely the reason why I came to Jakarta,” said Ms. Yongchaihirun. “I’m here because I have worked on the liability management side. The and find out how to address natural hedges.”

In almost every country, the institutions that manage the assets of a sovereign are different than the bodies that oversee the liabilities, often with mandates to optimize their specific deliverables. But the sound macroeconomic management requires many entities with different mandates to coordinate seamlessly, which will deliver economic growth and provide resilience against economic shocks. 

The Sovereign Balance Sheet Risk Management workshop was developed and delivered under the Government Debt and Risk Management (GDRM) Program, a World Bank Treasury initiative, supported by the State Secretariat for Economic Affairs (SECO) of Switzerland. Its objective was to increase participants’ awareness and expertise in identifying, measuring and mitigating different types of risks, which can affect both sides of a sovereign balance sheet. The workshop has brought together 27 fellow practitioners not only from finance ministries, but also from central banks, raising awareness about SALM, and painting a complete picture for analyzing and managing the potential risks and opportunities for the government. Also, for the first time in the world, advocacy about the SALM framework included additional risks: liquidity risk, credit risk and interest rate risk over and beyond the traditional currency risk.

“The SALM approach calls for analyzing any mismatches in the duration of the cash flows and the currency and interest rate composition, including sovereign credit guarantees and on-lending schemes,” added M. Coşkun Cangöz, the Manager of Public Debt Management Advisory, World Bank Treasury. “With awareness-building over time, different institutions of a country can choose the assets and liabilities with matching characteristics or opt to implement financial derivatives to more effectively manage risk. .”

The workshop was specifically designed with that in mind. Sharing examples of complete or partial SALM implementations via case studies, contributor presentations and hands-on exercises, the participants discussed the benefits and drawbacks of each execution during five days of intense training.

To Ms. Yongchaihirun, the implementation of credit risk was of particular interest, especially the possibility of loss on assets if a state-owned enterprise (SOE) does not fulfill its obligations.

In the months that followed the workshop, her team started to monitor and manage risks in the SOE sub-portfolio carefully. She hosted a risk management workshop for Thailand’s SOEs. In return, the SOE’s created quarterly reports on the portfolio benchmarks to PDMO, covering average cost as well as currency, interest rate and refinancing risks. Additionally, the team started developing an in-house risk model to quantify the size and impact of contingent liabilities. Finally, as it comes to the bigger picture of SALM, they are in the process of collecting data and defining the assets, as well as communicating with other agencies that hold the stake at SALM implementation.

The Sovereign Balance Sheet Risk Management workshop is only one of the many learning opportunities the World Bank Public Debt Management Advisory team recently added to its program. Through on-site technical assistance, workshops and webinars, in-person and virtual peer-to-peer events, the team supports member countries to build their capacity to manage debt.