Jan 10, Colombo: Potential improvements in credit profiles of sovereigns like Sri Lanka which have received assistance form International Monetary Fund (IMF) will depend on the country's level of compliance with IMF conditions, as implementation risks are often high, Fitch Ratings said.
Support from the IMF has helped to mitigate external liquidity risks and reduced the medium-term default risks in several frontier markets that entered into new programs in 2016, Fitch Ratings said in a statement.
In the two years leading up to their IMF loans, Fitch took negative rating action on five countries including Sri Lanka out of the eight sovereigns that entered Standby Arrangements or Extended Fund Facilities in 2016.
Fitch Ratings said that a lack of currency flexibility was also a factor in pushing some frontier markets into IMF agreements. Egypt, Sri Lanka and Suriname all ran down foreign-exchange reserves at unsustainable rates trying to resist currency depreciation in a global environment of US dollar strength.
"However, they have allowed more flexibility since beginning discussions with the IMF, which has helped reduce pressure on their external balance sheets," Fitch said.
The rating agency noted that 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.
However, all of these countries according to Fitch, still have either large current-account or fiscal deficits, or both.
"Reducing these vulnerabilities will be key to stabilizing or improving their ratings," the rating agency advised.