work-in-progress: economic analysis for integrated risk management
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Work-in-Progress: Economic Analysis for Integrated Risk Management Carter Brandon, Latin America Region, World Bank. Average losses from extreme weather events for selected Latin America and Caribbean countries from 1992-2011. Average Annual Losses per GDP (%). Deaths per 100,000 inhabitants. - PowerPoint PPT PresentationTRANSCRIPT
Work-in-Progress: Economic Analysis for Integrated Risk Management
Carter Brandon, Latin America Region, World Bank
Average losses from extreme weather events for selected Latin America and Caribbean countries from 1992-2011
Source: Harmeling, S. and Eckstein D. “Global Climate Risk Index 2013”. Germanwatch, November 2012. http://germanwatch.org/fr/download/7170.pdf
• () indicate Global Rank of 183 countries or territories evaluated. Showing the top 12 for the region.• Sorted by Losses per GDP (%)
Average Annual Losses per GDP (%) Deaths per 100,000 inhabitants
Grenada
Dominica
St. Kitts & Nevis
Belize
AB
Honduras
St. Lucia
Nicaragua
Guyana
Haiti
Paraguay
El Salvador
0510
(26)
(1)
(4)
(5)
(10)
(15)
(16)
(23)
(29)
(20)
(8)
(7)
0 2.5 5
(8)
(52)
(43)
(2)
(26)
(4)
(3)
(90)
(28)
(128)
(14)
(19)
Select Damages from Disasters as a % of GDP
Belize - 1961
Nicaragua - 1972
Dominica - 1979
St Lucia - 1980
Jamaica - 1988
AB - 1995
Dominica - 1995
St. Kitts & Nevis - 1995
Honduras - 1998
St. Kitts & Nevis - 1998
Grenada - 2004
Guyana - 2005
Haiti - 2010
St Lucia - 2010
0%
100%
200%
Hurricanes:David & Frederick
Hurricane:Allen
Hurricane:Hattie
Hurricane:Luis
Hurricane:Georges
Hurricane:Ivan
Flood
Earthquake
Hurricane:Tomas
Hurricanes:Luis & Mari-
lynHurricane:
Luis
Hurricane:Gilbert
EarthquakeHurricane:
Mitch
Disaster events are increasing as are disaster losses
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0
40
80
Count of Disasters
Source: EM-DAT
1961 - 1970 1971 - 1980 1981 - 1990 1991 - 2000 2001 - 20100
300
600
Count of Disasters
Source: EM-DAT1961 - 1970 1971 - 1980 1981 - 1990 1991 - 2000 2001 - 2010
$0
$25,000
$50,000
Damages from Disasters (US$ millions)
Source: EM-DAT. Truncated for the 2010 losses.
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$0
$8,000
$16,000
Damages from Disasters (US$ millions)
Source: EM-DAT. Truncated for the 2010 losses.
Source: Planning Institute of Jmaica
Honduras – Growth impacts of Hurricane Mitch after 1998
The economic cost of disasters
• Negative economic impacts, especially on the poor:– Households sell assets– Children drop-out from school– Production systems/supply chains disrupted, sometimes for years
• Disasters are exogenous shocks to the budget and impact growth and development prospects: – Direct financial losses through damage to public assets and spending
for emergency response and recovery; – Indirect costs through loss of growth and revenue generation
But countries face many sources of exogenous risk:
Many advances, but still most risks are analyzed and managed sectorally, e.g., disaster risk management (DRM) investments and
insurance, agricultural insurance, commodity price hedging
Physical Risks
• Natural Disasters• Climate Change
Economic Risks
• Commodity price fluctuations
Financial Sector Risks
• Liabilities from guarantees, PPPs
Physical Risks• Natural Disasters• Climate Change
Economic Risks• Commodity price
fluctuations
Financial Sector Risks• Liabilities
from guarantees, PPPs
Needed, a common economic and fiscal framework to better quantify, compare, and prioritize risk
Integrated Risk Management:
These types of risks can be grouped and addressed with different instruments
TYPE OF RISK
FINANCIAL TOOLS COUNTRIES THAT HAVE USED THIS TOOL
Food price Loan indexed to food prices NoneOil price Options
Loan indexed to oil prices: for oil importers, if oil prices rise, the cost of the debt diminishes
Providing TA to Chile, Morocco, and Dominican Republic; initiating advisory with Panama and Ghana
Natural disasters
- CAT-SWAP (if certain conditions occur, e.g. natural disaster) can stop debt payments during a predetermined period - CAT-Bond - CAT-DDO -for short term liquidity for disasters
- Pacific Island and Caribbean and currently working with Colombia - Mexico - Costa Rica, Colombia, Guatemala, Peru, El Salvador, Philippines, Panama
Climate change
Weather derivative Malawi, Mongolia
Guarantees for PPPs?
Extend control guarantees. Ideally, not give any, in any case not give blanket guarantees. If do give guarantees, identify, quantify, budget and monitor them.
None
Key questions for countries trying to assess national priorities
We want to invest in risk management, but where will we get the biggest bang for the buck?What should we optimize– reduced uncertainty, reduced volatility, reduced costs/impacts, improved price stability, more targeted social protection?
Should we allocate more for hurricanes, earthquakes, droughts, import commodity price shocks, export commodity price shocks, flawed PPP projections, contractual liabilities?
How should we compare the marginal benefits of expenditures for infrastructure investments, price hedging instruments, insurance programs, catastrophe reconstruction bonds, or building retro-fitting?”
Key questions for the World Bank
How can we help improve household level resilience, highly correlated with poverty and vulnerability?
How can we improve the countries’ capacity to respond while protecting the budget and long term fiscal balance of the state?
How can we reduce the financial exposure (contingent liability of the state)?
How can we ensure funds are spend effectively in the aftermath of a disaster?
Requires multi-prong analysis• The economic impacts of physical impacts, on built assets, economic
output, and employment
• The explicit and implicit impact on fiscal expenditures of physical impacts, e.g., constructing and maintaining public assets, subsidies, public insurance programs, support of state-owned enterprises, social safety nets, and the need to respond to emergencies and help rebuild damaged communities:– Explicit contingent liabilities from contracts and regulations, credit
guarantees, public-private partnerships in infrastructure – Implicit contingent liabilities from political commitments (financial
bailouts), humanitarian grounds (disaster relief), or to finance public goods (environmental clean-up).
• Projected impact on government revenues, via tracing the impacts on reduced economic activity on direct and indirect taxes.
Requires multi-prong analysis of impacts
Type of Risk
Type of Impact
Economy-wide
Budget Expenditures
Fiscal Revenues
• Physical Risks
• Asset loss:
• Output loss:
• Contingent liabilities:
• Implicit liabilities:
• Tariffs on imports and exports
• Commodity-related royalties
• Income, value-added, and property taxes
• Economic Risks
• Financial Sector Risks
Direct damages to public and private sector assets
Incapacitation of other sectors, interrupted services, disruption of economic flows
Social programs e.g. subsidies, safety net payout
Recovery and reconstruction costs not explicitly budgeted
How much do we know?
Type of RiskType of Impact
Economy-wide
Budget Expenditures
Fiscal Revenues
• Natural Disasters
• Asset Loss: A LOT • Output loss:
LESS
• Explicit contingent liabilities: A LOT• Implicit contingent
liabilities: LESS• LESS
• Commodity output and price shocks
• Historical know-ledge: A LOT• Forecast specific
to sector/area: LESS
• Explicit contingent liabilities: A LOT
• If government royalty payments, export taxes are involved: A LOT• If not involved: LESS
• Under-funded state financial guarantees • LESS
• Explicit costs of guarantees: A LOT• Implicit demand-
side risks assoc. with PPPs: LESS
• LESS
Key knowledge gaps• Natural disasters: economic impacts of natural disasters on direct and indirect
output loss (esp. short- and medium-term employment) and public and private assets; the magnitude of contingent liabilities; and medium-term revenue implications. Trends and probabilities over time.
• Commodity output and price shocks: economic and fiscal dimensions of price movements in commodity sectors, expressed as deviations from expected expenditure and revenue streams. Needed for commodity price hedging or insurance schemes (for import-dependent countries). Probabilities but less clear trends unless climate-related.
• Under-funded state contractual guarantees (primarily PPPs and project-specific guarantees): explicit and implicit risks associated with state financial guarantees in the infrastructure sectors.
• Impact, effectiveness, and efficiency of risk management instruments, such as rate of return/value for money on risk management expenditures.
• Sequencing and trade-offs between key dimensions of a sovereign risk management program.
Conclusions/Next Steps
• Do country case-studies, starting with a small, high risk economy (e.g., Jamaica, a Central American country)
• Refine methodologies to assess the economic and fiscal impacts of risk
• Develop a tool-kit for countries to better address exogenous risks and use market-based approaches
• Expand/adapt the offerings of financial instruments, inc. CAT bonds, CAT DDO’s, CAT SWAPs, indexed loans, hedging instruments, weather derivatives, guarantees