The JP Morgan Sovereign Risk Advisory group advises government entities on credit rating and borrowing strategies. Contingent liabilities are often an important part of these assessments and yet disclosure is typically not transparent. Upon crystallization, these exposures can have a meaningful impact on public finances. 

To demystify this issue, the Capstone team first profiled the global best practices under two prominent public sector financial reporting standards - IPSAS and GFS. The team then assessed the accounting treatment of eight specific types of sovereign contingent liabilities. The team further compiled a proprietary accounting transparency database spanning across 51 countries. Regression analyses were performed to examine the relationship between accounting transparency and sovereign borrowing standing. Lastly, the team conducted three deep-dive country case studies focused on the United Kingdom, Malaysia, and South Africa. 

Key takeaways for issuing sovereigns included: (a) Greater fiscal transparency improves sovereign borrowing position provided underlying contingent liability exposure is also addressed; (b) Accrual accounting is more transparent than cash accounting, enhancing credit quality under certain circumstances; (c) Developing an international enforcement ecosystem would be beneficial. 

Key takeaways for sovereign lenders and investors included: (a) Assessing accounting frameworks and contingent liability exposure are both essential for sovereign debt analysis and; (b) Appreciate the degree of discretion that goes into sovereign liability disclosure.