By now you’re likely to have already seen the bashing of Britain’s balance sheet by press – citing the latest IMF Fiscal Monitor Paper. Indeed a minus two trillion pound net worth (3tn in assets minus 5tn of liabilities) is a great headline and a terrifying prospect for those likely to bear this future tax burden. It’s also an embarrassment for many governments (including the UK’s) that have weakened their country’s long-term financial health significantly since the Global Financial Crisis: privatising illiquid assets to create the illusion of lowering public debt and assuming corporate liabilities (UK by 189% of GDP from 2007-08). Although the Guardian highlight the IMF looking at “public debt and the publicly owned assets of 31 countries… the UK had among the weakest public finances of the lot” and how “neoliberalism has ripped you off and robbed you blind” – the IMF report isn’t primarily a hit piece on the UK Government or neoliberals.
In researching 31 countries in depth, and 69 countries in total more broadly (ex-land, natural resources and pension liabilities), the report primarily highlights how “balance sheet effects on net worth can be larger than the impact of increased fiscal deficits” (we’re checking to see if they’re quoting us on this) and “while deficits have been brought under control, net (financial) worth remains significantly below pre-crisis levels, leaving lower buffers to respond to future risks.” Of course this report is primarily on public net assets whereas our investment process focuses initially on a country’s total net foreign assets – to begin with a wider angle that doesn’t overlook contingent liabilities and the differing risks when debt is chiefly held by foreign parties (though stress tests also help account for these).
Such a “comprehensive view of public wealth… are little understood, poorly measured, and only partly managed” but they still offer a more representative picture as “the focus on debt misses large swaths of government activity and can fall victim to illusory fiscal practices.” For example, “Debt securities and loans are the main stock indicator of standard fiscal analysis, worth 95 percent of GDP” in the sample of 31 countries, but “existing pension obligations to public servants embody a stream of contractually required payments, yet are rarely reported in standard analysis; they amount to 46 percent of GDP in these countries.” The report also covers a range of key aspects for estimating true fiscal risks as well as plenty of insightful charts, and country case studies reminding readers of salient points like: Japan not only having a balanced net worth (despite having the highest government debt as a percentage of GDP) but the country also has the largest fraction of liquid assets at 62% of GDP versus the average of 16%.
The IMF report concludes “Analyzing public wealth brings a range of benefits by offering a broader fiscal picture beyond debt and deficits… This matters as governments with stronger balance sheets face lower financing costs and are better placed to weather recessions.” We certainly agree but tend to replace the terms “public” and “governments” with “total” and “countries” and likewise highlight how countries with stronger balance sheets (i.e. net foreign assets) are also “better placed to weather recessions”. Yet sometimes, because much of what the report highlights gets overlooked, sometimes their borrowing costs (our yields) aren’t always as low as they perhaps should be from a fundamental perspective. It’s these such risks and opportunities that we persist in actively evaluating.