International Monetary Fund. Asia and Pacific Dept
Samoa has shown resilience to past economic shocks, underpinned by the authorities’ strong commitment to support the economy and financial assistance provided by the international community. Samoa was among the first countries in the world to secure its border to protect its citizens from COVID-19. The authorities’ quick response to the measles outbreak and the global pandemic has identified the policy priorities well. The international community also responded swiftly, including the IMF disbursement under the Rapid Credit Facility (RCF) in April 2020 which helped unlock record budget support grants by the Asian Development Bank (ADB) and the World Bank (WB). The authorities strengthened the health care system and provided support to the private sector, with assistance targeted to vulnerable businesses and households to safeguard livelihoods.
International Monetary Fund. Strategy, Policy, & and Review Department
A careful review has revealed significant scope to modernize and better align the MAC DSA with its objectives and the IMF’s lending framework. This note proposes replacing the current framework with a new methodology based on risk assessments at three different horizons. Extensive testing has shown that the proposed framework has much better predictive accuracy than the current one. In addition to predicting sovereign stress, the framework can be used to derive statements about debt stabilization under current policies and about debt sustainability.
International Monetary Fund. Monetary and Capital Markets Department
Non-Financial Corporate Sector. Non-financial corporate leverage as share of GDP in Korea remains higher than peer countries but has remained stable since 2013 at around 100 percent of GDP. The stock of non-corporate debt has become slightly more resilient due to the deleveraging of non-conglomerate affiliated firms. Average firm performance has remained resilient for conglomerate-affiliated corporates but weakened for all other firms. As a result, despite the low interest rate environment, around one-quarter of total corporate debt (around 28 percent of GDP) is registered ‘at-risk’. Banks balance sheets are at risk as over half of non-financial corporate debt-at-risk resides with SMEs; Stress tests show that (i) Korean firms which are more indebted, less profitable, smaller and have lower turnover are more likely to experience difficulties servicing their debt; (ii) corporate balance sheets are vulnerable to a sudden hike in interest rates, which combined with a profit shock, could double the amount of debt-at-risk held by non-SME firms and; (iii) exchange rate shocks appear manageable given low FX debt and natural FX hedges. Under a downside macro-financial stress test scenario, non-SME credit losses would total a touch over 2 percent of GDP. Bank stress tests suggest that the maximum cumulative bank losses from distressed SME loans in a stress scenario would total around 2 percent of GDP. Together, these losses would be broadly manageable for the financial system to absorb.
The COVID-19 pandemic is having a severe impact on Lesotho’s economy. Supply chains for major industries have been disrupted and a national shutdown to contain the virus curtailed economic activity with adverse social impacts. The economy is expected to be further hit by declining external demand for textiles and diamonds, shrinking remittances, and delays to major construction projects. The authorities are taking measures to contain the virus and are implementing plans to mitigate its health and economic consequences. The economic shock, as well as the additional required spending, have generated urgent balance-of-payments (BOP) needs. Lesotho does not have an arrangement with the Fund.
The consequences of large depreciations on economic activity depend on the relative strength of the contractionary balance sheet and expansionary expenditure switching effects. However, the two operate over different time horizons: the balance sheet effect hits almost immediately, while expenditure switching is delayed by nominal rigidities and other frictions. The paper hypothesizes that the overshooting phase—observed early in the depreciation episode and driven by the balance sheet effect—is largely irrelevant for expenditure switching, which is more closely aligned with ex-post equilibrium depreciation. Given this, larger real exchange rate overshooting should signal a relatively stronger balance sheet effect. Empirical findings support this hypothesis: (i) overshooting is driven by factors associated with the balance sheet effect (high external debt, low reserves, low trade openness), (ii) overshooting-based measures of the balance sheet effect foreshadow post-depreciation output losses, and (iii) the balance sheet effect is strongest early on, while expenditure switching strengthens over the medium term.
This paper discusses Requests for Disbursement Under the Rapid Credit Facility (RCF) and Rephasing of Access Under the Extended Credit Facility (ECF) Arrangement. The coronavirus disease 2019 (COVID-19) shock hit the economy hard amid an already challenging social and security situation. The decline in economic activity, spillovers from global trade and financing shocks, along with fiscal measures to combat the crisis have created an urgent balance-of-payments and fiscal financing needs. The authorities have responded quickly to the pandemic with containment measures, stepped up healthcare response, and emergency measures to support households and business affected by the outbreak. The regional central bank responded with measures to support liquidity in the banking system. Given the urgent balance of payment need caused by the COVID-19 pandemic and the infeasibility of completing a review under the ECF arrangement, staff supports these requests and welcomes commitments to safeguard transparency and accountability in the use of emergency funds. The RCF is expected to cover about 40 percent of the financing gap in 2020 and is expected to play a catalytic role. The authorities are actively engaged with other donors, including the World Bank, to cover the remaining financing needs.