The government’s Fiscal Strategy Report focuses on fiscal risk factors and the possible mitigation scenarios the government could employ to allay the impact of those risks. The government has identified three areas that are potentially severe risk factors: the impact of another natural disaster, the looming concerns over the National Insurance Board’s pension liability and the cost associated with state-owned enterprises (SOE), should those enterprises require financial intervention due to substantial losses.
“Fiscal risks are factors that may cause fiscal outcomes to diverge from forecasts and include potential shocks to government revenue, expenditure assets or liabilities that may not be reflected in the forecasts,” the report states.
Crystallization of such risks could generate additional unplanned costs to the government, increasing the public debt and worsening the fiscal situation. The government acknowledges the importance of identifying, analyzing and mitigating such risks in its fiscal planning exercises and recognizes that sound management of public finances is key to managing fiscal risks.
“There are a number of risks over the medium-term horizon that could affect the fiscal outcome. The principal risks are assessed according to their likelihood and their potential impact on the public finances and are accompanied by the various risk mitigation measures that the government has put in place and/or could implement should one or more of these risks materialize during the fiscal year.”
The government report cites the likelihood of SOE intervention and the possibility of pension cost overruns as “likely”, and the risk of another natural disaster as “possible”.
In terms of mitigating the effect of SOEs on the government’s fiscal turnaround, the report suggests: “Ongoing monitoring of fiscal conditions; a move towards greater cost recovery; and proposed debt management and public financial management legislation provide more rigorous oversight of borrowing activities.”
In terms of mitigating the effects of another natural disaster, the report suggests: “CCRIF SPC (Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company) insurance policy; continue building the disaster relief fund; the Inter-American Development Bank’s $100 million contingent credit line; improvement in building standards; and more comprehensive planning.”
To thwart the ill effects of a pension cost overrun, the report suggests: “Long-term actions to improve fund sustainability.”
The report adds: “The central government has an unfunded defined pension arrangement, with a growing liability which is a significant fiscal risk. The government acknowledges this exposure and is in discussion with advisors on initiatives to limit this exposure. As part of its mitigation initiatives during the fiscal planning horizon, the government is intending to introduce a defined contribution-type pension plan for new employees, which will allow for greater sustainability of these costs.”
The government is also paying close attention to those macroeconomic developments that “can alter assumptions used for key economic variables underpinning the government’s fiscal forecasts and cause significant deviations in outcomes”. The report notes that at the top of the watch list are global economic and trade environments; commodity price volatility; and the escalation of trade tensions and its corresponding drag on global economic growth.
The report states that these factors could soften tourism numbers and foreign investment activities, exposing government revenue and expenditure outcomes, employment and private consumption to negative results.
“The government recognizes these risks and seeks to, inter alia, ensure the prudent management of the public finances and the removal of structural impediments to growth, as buffers to variability in external global economic conditions,” the report states.