IMF loan deals in frontier markets ease pressure on default risks

IMF loan agreements with frontier market countries eases pressure on risks of default, Fitch says.

Egypt, which boasts the biggest economy among the frontier markets cited by Fitch in its research note, sealed a US$12 billion aid package with the IMF in November. David Degner / The National

A spate of recent IMF loan deals in frontier markets including Iraq, Kenya and Egypt has eased the pressure on default risks in those countries, according to the ratings agency Fitch.

Fitch said that improvements in credit rating profiles of those nations, however, which also number Sri Lanka, Suriname and Tunisia among them, would depend on their ability to carry out what the IMF has asked of them – such as reducing deficits through cutting back on subsidies and selling off state assets.

“IMF loans should alleviate external liquidity pressures and reduce the risk of sovereign default, particularly where IMF assistance has been supported by other multilateral assistance or has improved access to global bond markets,” said Jan Friederich, a senior director at Fitch.

“However, all 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.”

Egypt, which boasts the biggest economy among the frontier markets cited by Fitch in its research note, sealed a US$12 billion aid package with the IMF in November that was contingent on the country moving to a flexible exchange rate and reducing energy subsidies.

Since a popular uprising in 2011 that ousted the long-time ruler Hosni Mubarak, Egypt has been in the grips of an economic crisis that has largely manifested itself in a shortage of much-needed hard currency that the import-dependent nation requires to feed its people and keep its factories ticking. That was largely thanks to the central bank using its foreign reserves to artificially prop up the value of the Egyptian pound. Even after the flotation of the pound in early November, the country’s economy is expected to take a while to recover, economists say.

Private sector business sentiment remained severely depressed in Egypt in December, according to Emirates NBD data, with sharp rises in material costs weighing on output.

Egypt’s non-oil PMI score stood at 42.8 in December, the country’s 13th consecutive negative rating, although an improvement on November’s score of 41.8. December’s ranking rounded off the country’s worst quarter on average since data collection began five years ago.

Sharp inflation resulted in purchasing costs rising at a near-record pace, restricting output, according to Emirates NBD, with the resulting higher prices hurting demand.

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