The paper aims to combine balance sheet analysis at the firm level with the International Monetary Fund’s public debt sustainability assessment framework to assess state-owned enterprises’ (SOE) leverage as a contingent liability to the public sector. Based on company data and the interest coverage ratio as a measure of debt at risk, aggregate baseline scenarios are projected to gauge the magnitude of SOE debt as a contingency. SOE’s financial and debt ratios are first bootstrapped to generate firm-level distributions and then averaged into a fan chart of the economy-wide SOE contingent liability. Applied to the People’s Republic of China as an example, the study finds that by the end of 2015 SOE leverage had grown to a substantial liability. However arbitrary the assumptions underlying these projections, it would appear that even if authorities had to mop up as much as 20% of SOE debt at risk gone bad, this would have been manageable at roughly 2.7% of the gross domestic product in 2016 or 5.5% by 2021. This projection framework is fully amenable to alternative assumptions and settings, which makes it a useful analytical tool to monitor contingent liabilities from non-financial corporate debt that have been building in emerging and advanced economies alike.

Abstract
 1. Introduction
 2. Debt Sustainability Analysis with SOE Contingent Liabilities
 3. State-Owned Enterprise Debt at Risk: Data Sources and Definitions
 4. State-Owned Enterprise Contingent Liabilities Projections and Fan Charts
  4.1. Baseline, Shocks, and Historical Scenarios
  4.2. SOE Debt as a Contingent Liability
  4.3. Fan Chart Analysis
 5. Conclusion
 References

• Benno Ferrarini(Economic Research and Regional Coordination Department, Asian Development Bank) Corresponding Author
• Marthe Hinojales(Verisk Maplecroft)