IMF support has played an important role in reducing external liquidity risks, medium-term default risks in Egypt, and several frontier markets that entered into new programmes in 2016, according to a Fitch Ratings press release on Friday.
However, the press release indicates that each country’s compliance with IMF conditions will decide the potential improvement in sovereign credit profiles, adding that the implementation risks in this case are often high.
During the two years leading up to their IMF loans, Fitch negatively rated five out of eight countries that entered Standby Arrangements or Extended Fund Facilities in 2016. The countries were Iraq, Kenya, Sri Lanka, Suriname, and Tunisia.
In Egypt’s case, Fitch’s Stable Rating Outlook in the period preceding its programme reflected existing Egyptian reform efforts prior to the IMF’s involvement. Jamaica, which signed a successor agreement in November 2016, had been upgraded by Fitch following their progress in fiscal deficit reduction and strengthening international reserves accumulation under its previous IMF programme.
Furthermore, according to the press release a lack of liberalised and flexible foreign currency exchange market played an important role in pushing some frontier markets into IMF agreements. Egypt, Sri Lanka, and Suriname drained foreign exchange reserves at unsustainable rates in order to prevent currency devaluation in a global environment of US dollar strength.
However, they have allowed more flexibility since beginning discussions with the IMF. In Egypt’s case the Central Bank of Egypt decided to float the Egyptian pound on 3 November, which has helped reduce pressure on their external balance sheets.
Moreover, political unrest has also been a factor affecting countries like Egypt and Tunisia who went through political revolutions in 2011. Both countries are still dealing with underlying tensions and security risks. Iraq is currently involved in an ongoing conflict with the Islamic State, as well as government instability, and a paralysed parliament, which led to mass protests.
The statement concludes that the IMF loans should mitigate external liquidity pressures, in addition to reducing the risk of sovereign default, especially in countries where IMF assistance has been supported by other multilateral assistance or has improved access to global bond markets. Yet, all of these countries still have either large current-account or fiscal deficits, or both. Reducing these vulnerabilities will be key to stabilising or improving their ratings.