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Mr. Johan Mathisen and Mr. Anthony J. Pellechio

Abstract

Delineation of sectors and financial instruments in a matrix of balance sheets for an economy is central to specifying the BSA framework for analysis of the potential for emerging liquidity or solvency problems. The sectorization and financial instruments in the 7 x 7 matrix presented in this paper provide a useful baseline for applying the BSA and can be adapted to focus on particular sectors to assess vulnerabilities in the economy. This framework can also be modified to accommodate data limitations and still be useful for vulnerability analysis.

Mr. Johan Mathisen and Mr. Anthony J. Pellechio

Abstract

A distinguishing feature of emerging market crises in the 1990s and early 2000s was the sudden disruption in the capital accounts of key sectors of the economy. Capital account crises typically occur as creditors quickly lose confidence, prompting sudden and large-scale portfolio adjustments such as massive withdrawals of bank deposits, panic sales of securities, or abrupt halts of debt rollovers. As the exchange rate, interest rates, and other asset prices adjust, the balance sheet of an entire economy can sharply deteriorate.

Mr. Johan Mathisen and Mr. Anthony J. Pellechio

Abstract

The purpose of the BSA is to analyze vulnerabilities of sectors and transmission mechanisms among them. Key vulnerabilities that the BSA framework aims to capture can be summarized as follows:4

Mr. Johan Mathisen and Mr. Anthony J. Pellechio

Abstract

The particular framework of a BSA application—a matrix of intersectoral balance sheets in terms of sectors of the economy and components of the balance sheet (Table 1)—depends on the focus of analysis and, as a practical matter, the availability of data. Allen and others (2002) provide a generic matrix encompassing four sectors (government, financial, nonfinancial, nonresident) with assets and liabilities broken down by (short- and long-term) maturity and currency (domestic, foreign). The framework presented in this paper uses the same breakdown of assets and liabilities but expands it to seven sectors.6

Mr. Johan Mathisen and Mr. Anthony J. Pellechio

Abstract

Recent improvements in statistical methodologies and data availability are enhancing the potential for detecting and monitoring macroeconomic balance sheet vulnerabilities. In particular, some of the datasets introduced in recent years permit a much more frequent, detailed, and up-to-date analysis.

Mr. Johan Mathisen and Mr. Anthony J. Pellechio

Abstract

The most important aspect of the new datasets is that they permit tracking the evolution of balance sheet vulnerabilities—the potential for liquidity or solvency problems—on a regular and timely basis for surveillance purposes. As the example of South Africa illustrated, the new datasets—particularly the SRF, JEDH, QEDS, and CPIS—provide financial data with greater periodicity, detail, and timeliness, enabling better tracking of current vulnerabilities using the BSA. These data can be mapped into the 7 x 7 BSA framework for a monthly analysis of sectoral vulnerabilities. If needed, the framework also allows for a detailed breakdown by assets and liabilities by currency, which can be very useful when analyzing particular vulnerabilities. Recent applications of the BSA using these new databases illustrate some of the advantages for IMF surveillance. However, the full potential for detailed examination of a country’s vulnerabilities and cross-country analysis based on comparable data will be realized in future applications of the BSA using these databases.

Mr. Johan Mathisen and Mr. Anthony J. Pellechio

Abstract

A distinguishing feature of emerging market crises in recent years has been the sudden disruption in the capital accounts of the economy. These crises have highlighted the need for closer attention to macroeconomic vulnerabilities in sectoral balance sheets. This book enhances application of the balance sheet approach to surveillance by taking advantage of new data sets that provide detailed, frequent, and timely financial statistics.