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 (%)
10
•
•
5
Deaths per 100,000 inhabitants
0
0
2.5
(1)
Grenada
(8)
(4)
Dominica
(52)
(5)
St. Kitts & Nevis
(43)
(7)
Belize
(19)
(8)
AB
(14)
(10)
Honduras
(2)
(15)
St. Lucia
(26)
(16)
Nicaragua
(4)
(20)
Guyana
(128)
(23)
Haiti
(3)
(26)
Paraguay
(90)
(29)
El Salvador
(28)
() indicate Global Rank of 183 countries or territories evaluated. Showing the top 12 for the region.
Sorted by Losses per GDP (%)
Source: Harmeling, S. and Eckstein D. “Global Climate Risk Index 2013”. Germanwatch, November 2012. http://germanwatch.org/fr/download/7170.pdf
5
Select Damages from Disasters as a % of GDP
Hurricane:
Ivan
200% Hurricane:
Hattie
Hurricane:
Georges
Hurricanes:
David & Frederick
100%
Earthquake
Earthquake
Hurricanes:
Luis & Hurricane:
Marilyn Luis Hurricane:
Mitch
Hurricane:
Hurricane:
Hurricane:
Luis
Allen
Gilbert
Flood
Hurricane:
Tomas
0%
Belize - Nicaragua Dominica St Lucia - Jamaica - AB - 1995 Dominica St. Kitts & Honduras St. Kitts & Grenada - Guyana 1961
- 1972
- 1979
1980
1988
- 1995
Nevis - 1998
Nevis 2004
2005
1995
1998
Haiti 2010
St Lucia 2010
Disaster events are increasing as are disaster losses
Count of Disasters
Damages from Disasters (US$ millions)
600
$50,000
300
$25,000
$0
0
1961 - 1970
1971 - 1980
1981 - 1990
1991 - 2000
1961 - 1970
2001 - 2010
Source: EM-DAT
1971 - 1980
1981 - 1990
1991 - 2000
2001 - 2010
Source: EM-DAT. Truncated for the 2010 losses.
Count of Disasters
Damages from Disasters (US$ millions)
80
$16,000
40
$8,000
0
$0
1961
Source: EM-DAT
1971
1981
1991
2001
2011
1961
1971
1981
Source: EM-DAT. Truncated for the 2010 losses.
1991
2001
2011
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:
Physical
Risks
Economic
Risks
Financial
Sector Risks
• Natural Disasters
• Climate Change
• Commodity price
fluctuations
• Liabilities from
guarantees, PPPs
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
Integrated Risk Management:
Physical
Risks
Economic
Risks
• Natural Disasters
• Climate Change
• Commodity price
fluctuations
Financial
Sector
Risks
• Liabilities from
guarantees,
PPPs
Needed, a common economic and fiscal framework
to better quantify, compare, and prioritize risk
These types of risks can be grouped and
addressed with different instruments
TYPE OF
RISK
Food price
Oil price
Natural
disasters
Climate
change
Guarantees
for PPPs?
FINANCIAL TOOLS
COUNTRIES THAT HAVE USED
THIS TOOL
Loan indexed to food prices
None
Options
Providing TA to Chile, Morocco, and
Loan indexed to oil prices: for oil
Dominican Republic; initiating
importers, if oil prices rise, the cost of the advisory with Panama and Ghana
debt diminishes
- CAT-SWAP (if certain conditions occur,
- Pacific Island and Caribbean and
e.g. natural disaster) can stop debt
currently working with Colombia
payments during a predetermined period
- Mexico
- CAT-Bond
- Costa Rica, Colombia, Guatemala,
- CAT-DDO -for short term liquidity for
Peru, El Salvador, Philippines,
disasters
Panama
Weather derivative
Malawi, Mongolia
Extend control guarantees. Ideally, not
None
give any, in any case not give blanket
guarantees. If do give guarantees, identify,
quantify, budget and monitor them.
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 stateowned 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
• Physical
Risks
• Economic
Risks
• Financial
Sector Risks
Type of Impact
Economywide
• Asset loss:
Budget
Expenditures
• Contingent
liabilities:
Fiscal
Revenues
• Tariffs on imports
and exports
Social programs e.g.
• Commodity-related
subsidies, safety net
royalties
payout
• Income, value• Output loss:
• Implicit liabilities:
added, and property
taxes
Recovery and
Incapacitation of
Direct
damages to
public and
private sector
assets
other sectors,
interrupted
services,
disruption of
economic flows
reconstruction costs
not explicitly
budgeted
How much do we know?
Type of Risk
Economywide
Type of Impact
Budget
Fiscal Revenues
Expenditures
• Natural
Disasters
• Asset Loss:
A LOT
• Output loss:
LESS
• Commodity
output and
price shocks
• Historical knowledge: A LOT
• Explicit contingent
• Forecast specific
liabilities: A LOT
to sector/area:
LESS
• Underfunded state
financial
guarantees
• Explicit costs of
guarantees: A LOT
• Implicit demandside risks assoc.
with PPPs: LESS
• LESS
• Explicit contingent
liabilities: A LOT
• Implicit contingent
liabilities: LESS
• LESS
• If government
royalty payments,
export taxes are
involved: A LOT
• If not involved: 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 projectspecific 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