IMF sees rising fiscal risks in emerging markets

Immediate pressures on the public finances in emerging markets have eased in recent months as sovereign-bond yields and volatility have declined, but fiscal risks are on the rise in most emerging market economies, said the International Monetary Fund (IMF) on Wednesday in a newly-released report.

"The first risk relates to a possible reversal in investors' sentiment when U.S. interest rates begin to rise," the Washington- based IMF said in its Fiscal Monitor report. "This could have large fiscal implications in emerging markets with high gross financing needs, large holdings by nonresidents, or limited budget space to absorb higher financing costs."

Secondly, there is increasing evidence that public contingent liabilities are on the rise in emerging market economies and in many cases already account for several percentage points of gross domestic product (GDP), the report showed.

"If you look at past episodes in which countries had to manage crisis, the emergence of contingent liabilities materializing in the general government budget and in the public debt stock was quite significant. You do have examples of double-digit impact in terms of percentage to GDP," Vitor Gaspar, director of the IMF's Fiscal Affairs Department, told Xinhua at a press conference.

Gaspar said this type of issue was really a priority for the Fiscal Affairs Department of the IMF, noting "we are launching fiscal transparency valuations that are really meant to guarantee that countries produce and report the information we see necessary to have an assessment of these risks and are able to cope with them."

"That fits well with the general point of the Fiscal Monitor, which is that risks and vulnerabilities have accumulated, but it is incumbent on the authorities to be ready to control and manage them," he added.

The report showed a number of emerging market economies are already implementing "quasi-fiscal stimulus" via off-budget items and government guarantees to support economic growth, but creating budgetary risks, which require strict monitoring and transparent reporting.

Geopolitical conflicts in Ukraine and the Middle East could also raise fiscal risks, but they are difficult to measure at this point in time, the report said.

The IMF concluded that the buildup of risks calls for prompt policy action to restore fiscal buffers and the scope for fiscal policy action in emerging market economies, although the urgency and specifics vary across countries.