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Published on October 1, 2007

They assess debt, ask if it will reach critical levels and consider the sustainability of the country's fiscal position.

Songtum Pinto, Boonyawan Manvichachai and Thitima Chucherd will present their paper, "Assessing Fiscal Vulnerability: Fiscal Risks and Policy Implication", at the bank's annual symposium on Wednesday and Thursday.

The paper proposes an appropriate mix of monetary and fiscal policy that can help achieve long-term fiscal sustainability and price stability.

Following the 1997 Asian financial crisis there have been fiscal-policy developments and changes to the overall fiscal environment.

Other than monitoring the fiscal risks of government liabilities, like previous studies, the new paper presents another aspect of fiscal-vulnerability assessment. It considers structural fiscal risks as the key factor in sustainability analysis.

It looks at risk from the aspect of government revenue consistent with the trend of free-trade agreements, dependency on taxes sensitive to economic conditions and the effects of generous tax deductions.

It asks if the government's revenue structure is in harmony with its expenditure, which will expand with economic development because of the need for more social services.

The paper will propose policy recommendations for the management of fiscal vulnerability that could help governments to adjust to changing economic, financial and fiscal environments over the medium term.

Given governments' role in promoting economic growth and stability, appropriate fiscal approaches can lessen internal imbalances and enhance state readiness for future external shocks, they said.

"Ignorance of existing fiscal risks stems from over-expansionary fiscal policy or unawareness of the exact amount of explicit and contingent government liability," the economists explain.

"This has led many countries to plunge into fiscal crises, situations in which governments' ability to repay public debt is doubted," they add.

This can eventually escalate into economic crises as occurred in Mexico in 1994, Argentina in 1995, the Czech Republic in 1997 and Brazil in 1998.

In the case of Thailand in 1997, the financial crisis was not triggered by fiscal vulnerability, they said.

Vulnerabilities in the financial and corporate sectors were the main factors that triggered fiscal vulnerability for many years after, they explained.

The government had to implement expansionary fiscal policies in successive years to stimulate the economy.

This is seen in budget deficits between 0.9 per cent and 2.9 per cent of gross domestic product.

The government had to absorb financial-sector losses from 1998, and this generated a significant rise in the public-debt-to-GDP ratio from a pre-crisis level of 11.9 per cent to 57.2 per cent in 2001.

Of this, Financial Institution Development Fund debts were 13.6 per cent of GDP.