Identifying the Fiscal Risk of Subnational Governments in Peru

This study uses two methods to identify those subnational governments that contribute most to aggregate fiscal risk: clustering analysis and the development of quantitative indicators (scoring). These methods make it possible to monitor the fiscal risks of subnational governments efficiently, taking into account their contribution to aggregate risk and the heterogeneity among them, with the goal of ensuring sound and sustainable fiscal accounts. To this end, the study analyzes three dimensions that capture the contribution to aggregate fiscal risk: economic size, the degree of leverage, and the degree of dependence of their revenues on funding sources beyond their control. The analysis is conducted for the 1,861 subnational governments for which data was available as of 2015. The first methodology identifies the 134 subnational governments with the greatest impact on aggregate fiscal risk, and the second methodology refines this classification, establishing a more transparent ranking among the subnational governments.