The impact of the COVID-19 pandemic and subsequent economic downturn has hit government finances hard across the world. For many governments, in emerging and frontier markets in particular, this has been compounded by the fact that their overall financial health before the pandemic was weak, and their policy toolkit to weather this severe shock was modest. These vulnerabilities limit their ability to absorb the financial and social setbacks and draw attention to the role of members of the multilateral community and its institutions, such as the International Monetary Fund (IMF), in providing innovative and quick liquidity assistance to stabilize the global economy.
Below, S&P Global Ratings discusses the role of the IMF and other multilateral or bilateral lending programs in our assessment of sovereign ratings.
Frequently Asked Questions
How do sovereign ratings take into account credit facilities from multilaterals like the IMF?
We base our rating analysis and decisions solely on the overall economic, financial, and political conditions in a country. A sovereign's decision to obtain or accept financing facilities from the IMF or any other official creditor does not in and of itself trigger a rating action--either positive or negative. Nor is the presence of an IMF program by itself necessarily a sign of credit weakness or strength.
On the other hand, the need to receive balance of payments assistance from the IMF generally signals underlying external vulnerabilities of the economy in question. Sovereigns have typically entered into IMF lending programs during periods of economic stress. If the government fails to stabilize the economy under the auspices of an adjustment program, and its credit metrics decline, the credit rating usually declines, despite the availability of an IMF program.
Conversely, if the authorities succeed in stabilizing their economy with multilateral assistance, and the sovereign's credit metrics do not decline, the rating is likely to stabilize as well.
We certainly would not expect a sovereign rated in the 'A' rating category or higher to require external balance of payment assistance. But a 'B' rated sovereign that takes ownership of an IMF or any other credible economic adjustment program is likely to see its rating benefit from successfully implemented reforms.
More recently, in the aftermath of the global financial crisis of 2007-2008, governments entered into different kinds of programs with multilateral lenders, largely for precautionary reasons, seeking to boost market confidence and enhance their toolkit for dealing with potential adverse shocks. Such agreements, along with implementation of policies consistent with the commitments made under the program, could help stabilize a sovereign's economic and financial profile during periods of stress, likely sustaining the existing credit rating. In other instances, the sovereign's policies under a precautionary program could markedly improve economic outcomes and its credit metrics, resulting in a higher credit rating.
Does the type of credit facility offered by the IMF affect your sovereign ratings?
The nature of the credit facility is not a driver for rating actions. However, the differences between the various facilities are important for our analysis of a sovereign. Different IMF lending facilities are targeted at different needs. Hence, sovereigns in different segments of our credit rating scale are likely to seek different types of IMF support.
Much of the IMF's lending, especially under its Stand-By Arrangements (SBY) and Extended Fund Facility (EFF), goes to countries with macroeconomic imbalances, including balance-of-payments problems. These facilities are typically extended to sovereigns with modest to low credit ratings, as their macroeconomic imbalances usually reflect a higher risk of default. By the time a sovereign enters into these type of programs (such as an SBY), its credit quality may have already deteriorated, which could be reflected in negative rating actions prior to the signing of the agreement with a multilateral institution.
Examples Of Sovereigns Engaging In IMF SBY Or EFF Arrangements
- In 2002, Uruguay entered an SBY in the middle of a severe economic crisis that ended with a default in 2003. By the time the agreement was signed, in March 2002, we had already lowered the sovereign rating on Uruguay one notch to 'BB+' and assigned it a negative outlook. We did not take any rating action immediately following the signing of the IMF agreement. However, in the subsequent months, as the crisis worsened--and eroded the sovereign's credit quality--we continued to lower the rating until the government defaulted in May 2003.
- During the crisis in 2001-2002, by the time Brazil entered an SBY in August 2002, we had lowered the sovereign rating by one notch to 'B+' with a negative outlook. We took no rating action immediately after the signing of the IMF arrangement. Subsequently, the situation in Brazil improved, aided partly by policies implemented as part of the conditionality included in the SBY. In 2005, Brazil concluded the SBY. We upgraded the sovereign before then, in 2004, to the previous 'BB-' rating.
- In November 2016, Egypt entered into a three-year EFF arrangement for $12 billion with the IMF. Under the EFF, the government took difficult decisions, including eliminating all fuel subsidies, and floating the pound. As a consequence, the primary budgetary position improved by just under seven percentage points of GDP during the three-year lifetime of the EFF. One year after the launch of the EFF, in recognition of progress on reforms, we revised the outlook on Egypt to positive. Six months after that, we upgraded Egypt to 'B'.
- In early 2017, Mongolia was hit by a large decline of commodity prices and weaker demand of key export markets. The government tried to mitigate the slowdown using fiscal expansion but was unsuccessful. This resulted in deteriorated economic, fiscal, and external metrics. It agreed to a three-year extended arrangement under the EFF in March 2017. By the end of 2018, improvements in the external environment and implementation of the program had resulted in stronger metrics that led us to upgrade the sovereign to 'B' from 'B-'.
In contrast, the Flexible Credit Line (FCL) and the Precautionary and Liquidity Line (PLL) are directed to sovereigns with much stronger economic profiles (the FCL has a higher bar than the PLL for countries to qualify). The IMF recently established a Short-Term Liquidity Line (SLL), similar to the FCL. Both of these facilities provide a liquidity backstop for sovereigns with very strong policy frameworks and fundamentals, who face potential moderate, short-term liquidity needs because of external shocks that cause balance-of-payment difficulties.
Facilities like the FCL are directed to sovereigns that are likely to have relatively higher credit ratings. Entering into such a credit line would not, by itself, necessarily signal credit weakness or strength and trigger any rating action.
Examples Of Sovereigns Engaging In IMF FCL Programs
- In 2009, Poland accepted the IMF's offer of a one-year FCL arrangement. The rating on Poland had been 'A-' since 2007. We did not take any rating action following the signing of the FCL agreement. In fact, our rating on Poland stayed at 'A-' for seven more years, until 2016 when, for reasons unconnected with access to external liquidity, we lowered it to 'BBB+'. Subsequently, we upgraded the sovereign to 'A-'. Up until November 2017, Poland maintained the FCL arrangement with the IMF.
- Colombia has continued to have an FCL arrangement since May 2009, when the credit rating was 'BB+'. We did not change the rating following the signing of the FCL agreement. In fact, the sovereign rating remained at the same level until we raised it to 'BBB-', investment grade, in 2011.
What is the impact of the FCL on the ratings on those sovereigns that have obtained it?
The availability of an FCL can be a modestly positive element of a sovereign's external profile. However, the sovereign's external profile is itself just one of several factors that determine the credit rating.
We have cited the availability of the FCL as a factor in supporting Colombia's external liquidity. However, we revised the outlook on Colombia to negative from stable in March of this year due to concerns about its vulnerability to negative external shocks (following the sharp drop in exports after the price of oil fell) that could undermine GDP growth prospects, contributing to worsening public finances, or pose further risks to Colombia's external liquidity. Similarly, we have cited the FCL in our analysis of the sovereign rating on Mexico. However, we also downgraded Mexico in March 2020 due to weak trend GDP growth dynamics that partly reflect low private-sector confidence and poor investment dynamics. In both cases, the potential benefits of the FCL did not offset negative developments in other segments of our analysis that could worsen the sovereign ratings.
What is the impact of a possible debt moratorium on sovereign ratings? Do you view this as the same as an IMF program?
No, we view a debt moratorium differently from an IMF program. The G-20 governments have announced a debt moratorium for low-income countries suffering from economic stress. Many of those low-income sovereigns that qualify for the program are likely to have low credit ratings, if they are in fact rated. As the details of a moratorium become available, we will assess the impact on sovereign ratings on a case-by-case basis.
That said, there are important differences between an IMF program and the G-20 debt moratorium initiative. The most obvious difference is between offering a moratorium and offering an FCL or SLL. Countries that meet the high standards for qualifying for either of these two IMF facilities are likely to have robust overall credit metrics. Hence, most of these sovereigns are likely to be rated investment grade.
In contrast, the debt moratorium initiative is offered to sovereigns that, in most cases, have weak balance sheets and, in today's context, could use the funds freed up by the moratorium to address the negative effects of the COVID-19 pandemic. Nevertheless, even in this case, participation in the G-20 initiative in and of itself wouldn't automatically trigger a rating action. A potential moratorium on bilateral or multilateral debt does not constitute an event of default under our methodology (see "COVID-19 And Implications Of Temporary Debt Moratoriums For Rated African Sovereigns," April 29, 2020).
Our sovereign ratings address a sovereign's ability and willingness to service financial obligations to nonofficial (commercial) creditors. The issuer credit rating on a sovereign does not reflect its ability and willingness to service other types of obligations, such as obligations to other governments (Paris Club debt or intergovernmental debt) or to supranationals such as the IMF or the World Bank. We assess the willingness and ability of the sovereign to service its financial obligations to nonofficial creditors on time and in full.
Nevertheless, if a sovereign decided to default to official creditors, our analysis would take into account the reasons and circumstances surrounding that decision. Such defaults typically suggest financial stress and other challenges, which would be reflected in our ratings.
- Sovereign Rating Methodology, Jan. 22, 2019
- COVID-19 And Implications Of Temporary Debt Moratoriums For Rated African Sovereigns, April 29, 2020
- Sovereign Ratings And The Effects Of The COVID-19 Pandemic, April 16, 2020
This report does not constitute a rating action.
|Primary Credit Analyst:||Roberto H Sifon-arevalo, New York (1) 212-438-7358;|
|Secondary Contacts:||Joydeep Mukherji, New York (1) 212-438-7351;|
|Frank Gill, Madrid (34) 91-788-7213;|
|KimEng Tan, Singapore (65) 6239-6350;|
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