Nabih Maroun is a partner, Jihad Azour a senior executive advisor and Mazen Ramsay Najjar a principal at Booz & Company
The global financial crisis may be in the rearview mirror but it’s not yet out of sight. This is particularly true for emerging markets. The BRIC economies (Brazil, Russia, India and China) have returned to warp-speed growth, yet they remain susceptible to external shocks that could threaten their economic expansion and erode their fiscal foundations.
Russia is vulnerable to swings in the price of oil, Brazil to commodity prices and India and China to global demand. China faces additional challenges from potential changes in exchange policy, which could have ramifications for its trade position. All four countries are facing massive capital inflows and overheating, with monetary policies not effectively aligned with fiscal policies. Also, they lack standardized, consistent public statistical data, which renders their economies largely opaque to outsiders.
The emerging economies of the Arab Gulf are in a similar situation; they are strong but with key vulnerabilities. Wealth from natural resources has sheltered these countries from the worst of the financial crisis and, unlike most developed economies, they have maintained fiscal surpluses.
However, the Gulf countries have made significant overseas investments in recent years through government related entities or sovereign wealth funds, which have exposed them to contingent risks arising from the crisis, and have yet to figure out an approach for managing those assets.
These countries also suffer from a lack of transparent economic statistics that would allow an independent evaluation of their economic and fiscal situations, particularly those related to state-owned enterprises, which represent in many cases the bulk of their economies. They also have public sectors that are top-heavy and less productive than they could be.
Good governance
Finance ministries have a key role to play in addressing the challenges emerging in the post-crisis period. Yet, as in other parts of the world, the finance ministries in these emerging markets now have a vastly expanded slate of responsibilities. They still retain their traditional role of public finance management, by controlling taxes and spending at the national level, but finance ministries now must also oversee the sizable assets that many countries had to buy in order to stabilize their economies, such as banks, securities and manufacturers. They are increasingly responsible for economic management — ensuring that the national economy is enjoying healthy growth in the face of a weak global recovery — while preserving the stability of their financial sectors.
In conjunction, they must enhance accountability and transparency measures in order to boost confidence in their countries’ economic stewardship and to strengthen their fiscal credibility. In short, finance ministries must do more, and address more complex issues, than at any time in recent economic history.
Finance ministries in emerging markets have taken some noteworthy steps to address their fiscal and economic vulnerabilities head-on.
India centralized its public debt in 2009 in a newly created debt office. Brazil consolidated its debt and liquidity management functions, amended its fiscal law and opened its budget to public scrutiny. China updated its budget management law (though questions remain about the quality of its economic data). In the Gulf, the United Arab Emirates, Saudi Arabia and Kuwait have all taken steps to streamline their public sectors, by outsourcing certain non-core government functions, restructuring some municipal agencies and privatizing others.
The UAE has strengthened its debt management and risk-management functions and established stabilization funds and facilities. Qatar is reviewing its regulation and supervision framework for the financial sector and Kuwait recently introduced risk assessment and early-warning capabilities to safeguard the stability of its banking sector.
Although these are laudable measures, their degree of success has been marginal because they represent isolated steps taken by ministries that continue to operate within the same setup they employed before the crisis.
Instead, finance ministries need to make more sweeping, fundamental reforms in their institutional setup and operational capabilities. There is no one-size-fits-all approach to reform of this scope and magnitude. Instead, priorities will vary widely, depending on the fiscal and economic situation in each country.
In that light, the finance ministries in BRIC countries have three clear imperatives. First, they must quantify and mitigate contingent risks within their economies, such as swings in commodity prices, currency fluctuations, private demand and financial exposure, among others. Second, these countries must make their economic systems more transparent. This requires accepting independent opinions — such as those of parliament, specialized agencies, or markets — on economic targets and fiscal and expenditure projections. Third, BRIC finance ministries must better coordinate fiscal and monetary policies. Without such coordination, they will continue to experience volatile economic swings, often requiring corrective measures with high costs.
Gulf priorities
The imperatives for finance ministries in the emerging countries of the Arab Gulf are significantly different. Their greatest priority is to develop institutional capabilities in the management of modern budgets, public debt and state-owned assets — in some cases by using talent and techniques borrowed from the corporate world.
In addition, these ministries should implement more rigorous and transparent economic statistics, which will significantly improve the quality of policymaking and encourage accountability. They must also continue to improve the productivity of government operations.
These reforms will not be easy to implement, but finance ministries have few alternatives. More important than any single policy measure, they must rethink their overall operating and institutional models and develop new capabilities that are more in line with their expanded slate of responsibilities. Only by developing the right set of instruments for fiscal, debt, and asset management, along with risk prevention tools, will they be able to navigate the post-crisis economy, signal a clear commitment to economic stability and allow their countries to truly thrive.
Finance ministries need to make more,sweeping, fundamental reforms in their institutional setup
