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Asian Regional
Public Debt Management Forum
Surinder D. Kathpalia
Managing Director
November 4, 2009
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Copyright (c) 2008 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
Growth of S&P’s Sovereign Ratings between 1975 and 2009
140
120
100
80
60
40
20
0
1975 2008
Source: Standard & Poor’s Global Fixed Income Research
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2.
Distribution of S&P’s Sovereign Ratings by Rating Category
140
SD
120 CCC to C
B
100 BB
BBB
80 A
AA
60 AAA
40
20
0
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
Source: Standard & Poor’s Global Fixed Income Research
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3.
S&P’s Sovereign Ratings
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5.
Assessing Sovereign Creditworthiness
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6.
The Ratings Criteria
1. Policy environment
2. Economic growth
3. Economic structure
4. Fiscal revenue, expenditure, and balances
5. Debt and interest burden
6. Contingent liabilities
7. Monetary stability
8. External liquidity
9. External debt and contingent external liabilities
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7.
Description of Main Data and Information Requirements
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8.
Behind the Ratings
• Appraisal is both:
• Quantitative: looking at measures of economic and financial
performance
• Qualitative: as our ratings indicate future debt service capacity
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9.
Stability of Sovereign Ratings: 10 year average transition rates
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10.
Comparison of Sovereign Default Rates with Private Sector (over 10 Years)
Sovereign Private
AAA 0 0.55
AA+ 0 0.34
AA 0 0.76
• Private Sector defaults exceed AA- 0 1.07
Sovereigns in most rating A+ 0 1.56
A 0 1.95
categories A- 0 2.32
BBB+ 0 3.58
• Sovereign ratings show more
BBB 3.49 4.56
stability than private sector BBB- 10.6 7.88
ratings over the longer term BB+ 8.7 10.16
BB 5.59 14.45
• Relative rank ordering is BB- 34.06 20.72
broadly consistent across both B+ 34.31 25.95
sovereigns and the private B 26.1 29.3
B- 21.68 35.67
sector CCC/C N/A 50.33
Investment grade 1.17 2.62
Speculative grade 23.53 23.86
All rated 6.74 9.46
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11.
Asia Sovereign Ratings, October 2009 – negative bias is increasing
Cambodia B+
China A+
Hong Kong AA+ AAA
India BBB-/neg B 6%
19%
Indonesia BB-/Pos
AA
Japan AA 19%
Korea A
Malaysia A-
Mongolia BB-/neg
Pakistan B-
Philippines BB- BB
Singapore AAA 24%
A
Sri Lanka B/Pos 19%
Taiwan AA-/neg
BBB
Thailand BBB+/neg
13%
Vietnam BB/neg
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12.
S&P’s New FMA Service for Asia’s Sovereigns?
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13.
ASEAN Scale – Sovereign Ratings as of October 30, 2009
ASEAN Global
FC LC
Malaysia ax AAA A- A+
Cambodia ax BB B+ B+
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14.
Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity
of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received
during each analytic
Permission process.
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15.
FMA for Local and Regional Governments
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16.
WHAT IS FMA?
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17.
Background – Why FMA?
AND
• Desire to leverage on S&P’s global experience and expertise in assessing quality of
public finance management
• S&P participation in the WB project in Russia 2001-2004: Code of Good Practices and
over 50 other deliverables
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18.
Nine analytical elements of FMA for LRGs
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19.
Examples: Progressiveness vs Performance
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20.
Analytical Framework & Scope LRGs
1 & 2. Annual Budgeting, Financial Policy and 4 & 5. Revenue and Expenditure management
medium-term framework Revenue forecasting & revenue policies (taxes, tariffs,
Budgeting basis, scope/coverage and structure; one-offs etc.); quality of revenue forecasting;
budget consultations; information systems consistency in taxes and user charges revisions;
collection
Timely approval; actual vs budgeted numbers;
frequency & rationale of changes Expenditure controls; pay policy; administration of
transfers; capital expenditure & procurement
M-T policy basis & adequacy; investment policy;
expenditure allocations; fiscal targets; frequency and Accuracy & quality of expenditure execution
rationale for revisions (overspending, unsettled, interbudgetary etc.)
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21.
Example: Annual budgeting
Progressiveness:
Budgeting basis: cash, accrual or mixed?
Budgeting methods: indexation, norms, zero-based budgeting, program-based
budgeting etc?
Financial resources and entities controlled by the government in/outside of the budget.
Transparency of the appropriations structure.
Internal and external budget consultations.
Information systems.
Performance:
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22.
Evaluation scale
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23.
ASEAN Regional Rating Scale
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24.
S&P ASEAN Regional Credit Rating Scale – What Is It?
– Issuers have the option of getting rated on the regional or global scale
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25.
ASEAN Rating Scale
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26.
ASEAN Rating Scale: Summary Of Ratings Definitions
axAA An obligor rated 'axAA' differs from the highest-rated obligors only to a small degree, and has a STRONG capacity to meet
its financial commitments relative to that of other ASEAN obligors.
axA An obligor rated 'axA' is somewhat more susceptible to the adverse effects of changes in circumstances and economic
conditions than higher-rated obligors. Still, the obligor has a MODERATELY STRONG capacity to meet its financial
commitments relative to that of other ASEAN obligors.
axBBB An obligor rated 'axBBB' has a REASONABLY ADEQUATE capacity to meet its financial commitments relative to that of
other ASEAN obligors. However, adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitments.
axBB An obligor rated 'axBB' denotes SOMEWHAT WEAK capacity to meet its financial commitments, although it is less
vulnerable than other lower-rated ASEAN obligors. However, it faces ongoing uncertainties or exposure to adverse business,
financial, or economic conditions, which could result in an inadequate capacity on the part of the obligor to meet its financial
commitments.
axB An obligor rated 'axB' is more vulnerable than obligors rated 'axBB'. The obligor currently has a WEAK capacity to meet its
financial commitments relative to other ASEAN obligors. Adverse business, financial, or economic conditions would likely
impair the obligor's capacity or willingness to meet its financial commitments.
axCCC An obligor rated 'axCCC' is CURRENTLY VULNERABLE relative to other ASEAN obligors and is dependent upon favorable
business and financial conditions to meet its financial commitments.
axCC An obligor rated 'axCC' is CURRENTLY HIGHLY VULNERABLE to defaulting on its financial commitments relative to other
ASEAN obligors.
axC An obligor rated 'axC' is under REGULATORY SUPERVISION owing to its financial condition. During the pendency of the
regulatory supervision, the regulators may have the power to favor one class of obligations over others or pay some
obligations and not others. Please see Standard & Poor's debt credit ratings for a more detailed description of the effects of
regulatory supervision on specific issues or classes of obligations.
SD or D An obligor rated 'SD' (selective default) or 'D' has failed to pay one or more of its financial obligations
(rated or unrated) when it came due.
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27.
Mapping of ASEAN Scale to Global Scale Local Currency Ratings
ASEAN Regional Scale Global Scale
Short-term Rating Long-term Rating Long-term Rating
axA-1+ axAAA A and above
axA-1 axAA+ A- to A
axAA A-
axAA- BBB+ to A-
axA+ BBB to BBB+
axA-1 to axA-2 axA BBB
axA-2 axA- BBB- to BBB
axBBB+ BB+ to BBB-
axA-2 to axA-3 axBBB BB to BB+
axA-3 axBBB- BB
axB axBB+ BB- to BB
axBB B+ to BB-
axBB- B to B+
axB+ B- to B
axB B-
axB-
axC axCCC+ CCC+
axCCC CCC
axCCC- CCC-
axCC CC
axC C
SD SD SD
D D D
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28.
Potential Benefits of the ASEAN Rating Scale
Building blocks for creating a new ASEAN fixed income asset class
Issuers Investors
– Access to wider group of investors: – Finer distinctions of credit quality
regional, local and global to support investment decisions
– Greater financial flexibility – Greater comparability of issuers
across region
• Choice of markets: local, regional and
global – Access to a wider and deeper
• Choice of currencies: national, regional pool of issuers
and global
– Investment choices in regional
– More meaningful comparisons currencies to match investment
with peer group needs
– Can be mapped to global scale
and probability of default
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29.
Impact of S&P’s ASEAN Scale on the Market
Ratings distribution
Same criteria and Map-able
Attributes tailored to concept of
methodology as to global
a broad investible
global S&P scale S&P scale
ASEAN asset class
Promotes retention
Facilitates participation Fosters the
of savings within
Benefits of global and regional development of
the region and
investors in local domestic capital
the formation of
capital markets markets
integrated markets
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30.
Impact of ASEAN Scale on the Market (continued)
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31.