The IMF established the SDDS in 1996 to help its member countries provide timely and reliable economic and financial data to the public and markets (see box below). The request to establish a statistical standard came from the Group of Seven (G7) countries, which were reacting to the debt crisis in Mexico, Cady said. “The idea was that more transparency in the area of economic and financial statistics could help avert similar crises in the future.” Because of the crisis in Mexico, the initiative was originally aimed at emerging market countries wanting to tap international capital markets. So far, 57 countries have subscribed to the standard. A significant number are emerging market countries, but the list also includes many industrial countries.
Why statistics matter
The steady flow of economic and financial data can make a big difference to countries seeking to reduce their borrowing costs and make more room for spending on development. According to Cady, “the provision of statistics allows the public as well as the markets to formulate their own opinions about a country’s economic policies.”
For the more statistically advanced countries, markets generally conduct their own economic analysis. But forecasting how specific policies will affect a country’s economic outlook becomes more difficult when reliable and timely statistics are in short supply. These problems are often compounded by a challenging economic environment. For example, inflation makes projection very difficult, which, in turn, affects investment plans and other economic decisions. “The more transparent a country is in terms of the current situation and its economic policies, the more concrete the private sector can be about its investment decisions.
SDDS at a glance
Subscription to the SDDS is free but could entail costs in terms of upgrading statistical systems to meet the requirements of the standard.
Once a country has decided to subscribe, it commits to providing data according to a specified format and its own release calendar. It must also provide a comprehensive description of how data are collected and disseminated (this information is known as metadata). All this information is then posted on the IMF’s website (www.dsbb.imf.org/ Applications/web/sddshome).
The SDDS applies to 18 categories of economic and financial statistics and covers four sectors of the economy.
The real sector covers national income accounts, industrial production, the labor market, and consumer and producer prices.
The fiscal sector covers the public sector and the operations of the central government, as well as central government debt.
The financial sector covers interest rates and the stock market, as well as analytical accounts of the central bank and the banking sector.
The external sector looks at the balance of payments, international reserves and foreign currency liquidity, merchandise trade (imports and exports), the international investment position, exchange rates, and external debt.
The IMF does not check the accuracy or quality of data provided by SDDS subscribers, but it does ensure that countries release information according to the standard and their own preannounced release schedule.
How the SDDS discount works
The SDDS discount is best explained through a hypothetical example.
Let’s say that a country plans to issue bonds worth $1 billion and that the interest rate on U.S. 10-year treasury bonds (often used as a benchmark for emerging market debt) is approximately 400 basis points, or 4 percent.
If the country has a spread over the U.S. interest rate of 300 basis points, its borrowing costs will amount to 700 basis points, or 7 percent a year.
But if the country is benefiting from the SDDS discount, the interest rate would be only 625 basis points, or 6.25 percent.
Rather than paying interest equivalent to $700 million over the full 10 years of the $1 billion bond issue, the country would be paying only $625 million.
The total savings that can be attributed to SDDS subscription would amount to $75 million—or $7.5 million on an annual basis.
We know that investment is generally an engine of growth, so data transparency, in my view, can have a beneficial impact on the growth potential of a country,” Cady said.
How are interest spreads determined?
Cady investigated the effect of SDDS subscription on foreign currency borrowing costs of new bond issues for seven emerging market countries—Argentina, Brazil, Colombia, Mexico, the Philippines, South Africa, and Turkey. A number of factors influence interest rates and, by extension, interest rate spreads. These include the pace of growth, the rate of inflation, and the government deficit and debt. Country-specific shocks may also influence interest rates. For example, if a particular country is experiencing a crisis, foreign investors can either refuse to buy its debt or demand a higher risk premium. In his study, Cady sought to account for the effects of macroeconomic variables and specific bond characteristics before measuring the effect of the SDDS. He found that the seven countries experienced an average reduction of 75 basis points in their interest rate spreads following their subscription to the standard. From late 1996 to 2002—the time period of the study—this reduction amounted to a discount of approximately 20 percent over the average spread (see box below).
Primary versus secondary markets
Cady focused his research on the issuance of debt in primary markets, something that sets his study apart from other recent studies on the impact of the SDDS. Countries issue bonds (usually denominated in dollars, euros, or yen) in the primary market, whereas bonds that have already been issued trade in the secondary market. This distinction is important because it identifies who reaps the benefit from the SDDS discount, Cady explained. If the yield on a country’s bonds declines in the secondary market, the country itself does not benefit. But if interest rates in the primary market decline, “it is the country itself that captures that reduced interest rate, so the costs of borrowing are going to be reduced, and the treasury—and ultimately the taxpayers—will benefit.”
According to Cady, the gains accrue to the country immediately upon subscribing to the SDDS, but apply only to new debt. For the gains to apply to all debt, countries must undertake a debt rollover—that is to say, they must replace old debt with new bonds. Interestingly, “other researchers who have studied the secondary market found that the discount applies immediately to secondary market transactions,” Cady said.
Does transparency elsewhere matter?
The SDDS was the first in a series of internationally agreed initiatives developed in the 1990s stemming from the realization that reliable and timely information about a country’s economic situation could help prevent future crises. It also appears to deliver the most immediate and long-lasting benefits to countries. Other transparency initiatives, such as the publication of IMF country reports, also have an effect, but it is much more transient, Cady said (for more information, see IMF Survey, January 19, page 12). “If a staff report contains some news relevant to capital markets, spreads react immediately, but the impact tends to dissipate quickly. In contrast, the SDDS appears to have a continuing and stable effect on spreads. Why is that? I hypothesize that the SDDS gives markets an assurance of a continued flow of information, be that good or bad—and apparently markets are willing to compensate countries for that continuing flow of information”
Copies of IMF Working Paper No. 04/58, “Does SDDS Subscription Reduce Borrowing Costs for Emerging Market Economies,” by John Cady, are available for $15.00 each from IMF Publications Services. Please see page 168 for ordering information. The full text of the paper is also available on the IMF’s website (www.imf.org).