Accessing Capital Markets

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

What is a S&P Sovereign Rating

• Addresses credit risks of national governments

• Globally consistent against standard scale
• Measure of default
• Assigned in local and foreign currencies
What a Sovereign Rating Is Not

• It is NOT a country rating

• Does NOT address specific default risks of other issuers
• NOT a recommendation to buy, sell, or hold securities
• NOT an audit
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4.
 Benefits of S&P’s Sovereign Ratings

• Enable sovereigns to differentiate themselves from peers

• Influence capital and investment flows
• Impact the pricing and terms of bonds and borrowings
• Set benchmark for pricing of country’s issues
• Improve liquidity in secondary markets

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5.
 Assessing Sovereign Creditworthiness

• Aim is to make an opinion on the ability AND

willingness of a government to meet its
commercial debt obligations in full, and on time.
• Three groups of variables:
– Political factors and policy environment
– Economic and financial factors
– External environment

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6.
 The Ratings Criteria

Formally, the ratings are assigned, and changes

are made on the basis of assessment of the
following factors :

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

• Main data requirements:

– Economic: National Accounts (Current Price and Constant Price), Consumer
Prices, Population, Employment, Unemployment
– Fiscal Accounts: Government Accounts (National, Central Government and Local
Government), Social Security and Other Off-budget Funds, State-owned
Enterprises
– Monetary: Exchange Rates, Central Bank Balance Sheet, Banking Sector
Balance Sheet
– External: Balance of Payments, External Assets and External Debts, Foreign
Direct Investment in Country
• Information requirements:
– Explanation of key domestic developments in the economy, government finances,
monetary and other policies
– Government plans for fiscal, monetary, financial regulation and other economic
policies

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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

• We use the following approaches:

• top down: analyzing global systemic factors
• bottom up: focussing on credit fundamentals

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9.
 Stability of Sovereign Ratings: 10 year average transition rates

Ratings Number AAA AA A BBB BB B CC/CC SD NR

AAA 265 76.60 21.51 0.00 0.00 1.13 0.75 0.00 0.00 0.00
AA 141 36.88 56.03 6.38 0.00 0.71 0.00 0.00 0.00 0.00
A 74 0.00 21.62 55.41 21.62 1.35 0.00 0.00 0.00 0.00
BBB 75 0.00 2.67 50.67 22.67 12.00 2.67 0.00 9.33 0.00
BB 85 0.00 0.00 12.94 24.71 30.59 11.76 1.18 18.82 0.00
B 27 0.00 0.00 3.70 7.41 40.74 11.11 0.00 37.04 0.00
CCC/CC 3 0.00 0.00 0.00 0.00 0.00 0.00 0.00 100.00 0.00

• The higher the rating, the lower is the default rate

• Higher ratings are more stable than lower ratings
• Large ratings movements – in either directions –
are rare in sovereign ratings even over several years

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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?

FMA = Financial Management Assessment, is a comprehensive assessment of

the financial management sophistication and quality of a public sector entity.
• FMA service is designed to:
– Help understand specific strengths and weaknesses in key areas of an LRG/GRE
financial management;
– Benchmark against peers and global good practices in public finance;
– Help understand adequacy of the entity’s policies in the local context;
– Improve transparency of LRG/GRE finances, operations and management practices;
– Track progress in financial management.

•The Need for FMA is driven by

• Focus by Multilateral Institutions and Central Governments on building financial
management capacity and accountability at subnational level
• Growing demand for public sector transparency and accountability in emerging markets
• Continuing public finance reforms across emerging markets
• Growing need for global benchmarking of public finance quality
• Need to enhance information provided by a credit rating/credit report
• Need to assess LRGs/GREs which are not yet ready for capital markets

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13.
 ASEAN Scale – Sovereign Ratings as of October 30, 2009

ASEAN Global
FC LC

Singapore ax AAA AAA AAA

Malaysia ax AAA A- A+

Thailand ax AA- BBB+ A-

Philippines ax BBB+ BB- BB+

Indonesia ax BBB+ BB- BB+

Vietnam ax BBB BB BB+

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?

FMA = Financial Management Assessment, is a comprehensive

assessment of the financial management sophistication and quality of
a public sector entity.
Public sector entities include local and regional governments (LRGs) and
government related entities/companies (GREs).

FMA service is designed to:

– Help understand specific strengths and weaknesses in key areas of an
LRG/GRE financial management;
– Benchmark against peers and global good practices in public finance;
– Help understand adequacy of the entity’s policies in the local context;
– Improve transparency of LRG/GRE finances, operations and management
practices;
– Track progress in financial management.

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17.
 Background – Why FMA?

• Focus by Multilateral Institutions and Central Governments on building financial

management capacity and accountability at subnational level
• Growing demand for public sector transparency and accountability in emerging
markets
• Continuing public finance reforms across emerging markets
• Growing need for global benchmarking of public finance quality
• Need to enhance information provided by a credit rating/credit report
• Need to assess LRGs/GREs which are not yet ready for capital markets

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

1. Annual budgeting Analytical questions:

2. Financial policy and medium-term • What business processes, systems

and policies are in place?
fiscal framework
• How do they stand against principles
3. Financial reporting and disclosure of good practice and peer
government practices? Are they
4. Revenue management adequate to the current environment
and government’s needs?
5. Expenditure management • What is the performance level of
these sets of business processes?
6. Liquidity and cash management
Analytical outcome:
7. Debt management
• Opinion on strengths, weaknesses
8. Governance of LRG owned/ and risks of the government’s
controlled entities; asset financial management systems and
management practices in the context of global
good practices and local
9. Performance focus and measurement environment.

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19.
 Examples: Progressiveness vs Performance

Progressiveness of Performance indicators

Systems and Policies
Auditing Existence of internal and/or Qualifications, sudden changes
external audit of government of auditors, severe delays in
financial statements, completion…
government entities…

Budgeting Accounting basis, methods, Deviations from original budgets,

coverage of budgeting, … timeliness, sudden revisions, …

Liquidity Existence and sophistication Overdue payables, cash

management of treasury systems, cash flow shortages, average transaction
planning, … turnover, …

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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.)

3. Financial Reporting & Disclosure 6 & 7. Liquidity & Debt management

Key accounting policies (basis; classifications; Cash planning; overdraft arrangements; liquidity policies
measurement; consolidation); software; audit; & tools; technical support of cash management
financial statements, annual report and website; Liquidity issues; transaction turnover time
Auditor change and qualifications; timeliness of Debt policy basis, instruments, risk, profile, use of
financial reporting; restatement; proficiency of guarantees, management practices; consistency
accounting staff

9. Performance focus 8. Governance of LRG entities and assets

Performance management basis, quality, Planning & monitoring; corporate governance;
monitoring/reporting, coverage, accountability; organizational and technical capacity; asset policy,
Expenditure reviews inventory and management
Performance targets achievement & measures Financial relations between government and its entities;
performance; audit opinion

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21.
 Example: Annual budgeting
Progressiveness:
ƒ Budgeting basis: cash, accrual or mixed?
ƒ Budgeting methods: indexation, norms, zero-based budgeting, program-based
budgeting etc?
ƒ Financial resources and entities controlled by the government in/outside of the budget.
ƒ Transparency of the appropriations structure.
ƒ Internal and external budget consultations.
ƒ Information systems.

Performance:

ƒ Timely approval of annual budgets?

ƒ Deviations of actual numbers from initially budgeted figures?
ƒ Significance, reasons and frequency of budget revisions.
ƒ Conflicts on budget issues between legislative and executive branches?

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22.
 Evaluation scale

Each of these 9 elements is assessed in terms of

Progressiveness of Systems and Policies and their
Performance:

5 Advanced level of practices

4+
4 Sophisticated (mostly sound and advanced)
3+
3 Sound level of practices
2+
2 Intermediate (mostly basic and sound)
1+
1 Basic level of practices in most areas
0 Lack of many basic practices

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23.
 ASEAN Regional Rating Scale

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24.
 S&P ASEAN Regional Credit Rating Scale – What Is It?

– Provides an opinion on relative creditworthiness within ASEAN context

– Has been developed on a bottom up approach

– Issuers have the option of getting rated on the regional or global scale

– Uses the prefix “ax” to differentiate it from global scale

– Is based on the same rigorous criteria and methodology as

Standard & Poor’s global scale

– Complements existing global rating scales offering finer credit risk

differentiation within a regional context

– Features both long-term and short-term ratings

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25.
 ASEAN Rating Scale

The main difference between the two scales resides in their

calibrations and the basis for comparison:
– A regional scale rating is based on credit-risk comparisons within a specific region,
while a global rating is based on global comparisons.

The procedure for obtaining an ASEAN scale rating is similar to

that for a global scale rating. The stages are:
– Rating request
– Assignment of analytical team
– Collection of information
– Management meeting
– Rating committee
– Communication of rating to issuer
– Rating dissemination
– Surveillance

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26.
 ASEAN Rating Scale: Summary Of Ratings Definitions

Rating Definitions for Long-term Issuer Credit Ratings

axAAA An obligor rated 'axAAA' has a VERY STRONG capacity to meet its financial commitments relative to that of other ASEAN
obligors. 'axAAA' is the highest issuer credit rating assigned according to the Standard & Poor's ASEAN regional scale.

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

Offering greater comparability in an increasingly integrated market…

readily mapped to S&P’s global scale

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)

– Could potentially lead to the creation of an ASEAN Fixed Income

Asset Class
Global investors could follow the ASEAN scale ratings in addition to global
scale ratings and national scale ratings to get a finer distinction of credit quality
on a much wider list of companies, banks, insurance companies and
government owned entities

– Large institutional investors (pension funds, provident funds,

insurance companies and sovereign wealth funds) could develop an
ASEAN bonds portfolio using ASEAN scale ratings

– These drivers could be harnessed in promoting pan ASEAN

investments and could represent an important step in the ASEAN
integration agenda

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31.