Exploring Risk-Adjusted Fiscal Sustainability Analysis for Asian Economies

The paper explores risk-based fiscal analytical approaches to complement a standard debt sustainability analysis when applied under conditions of risk and uncertainty. To outline a possible road map for risk-adjusted fiscal sustainability analysis, the paper first examines the types of vulnerability faced by different emerging economies in Asia and reviews a range of stochastic methods that attempt to explicitly incorporate risk in their analysis. Drawing on international experience, we note that the usefulness of applying a stochastic approach hinges on policy makers’ capacity to identify the sources and extent of risks in assessing fiscal sustainability, which should then allow them to simulate the impact of a hypothetical corrective action on the baseline trajectory of debt or net worth and on its stochastic distribution, including fat-tail risks of default.