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Financing for Development Risk Mitigation & Capacity Building: A Ratings Perspective

This article discusses the key components of risk mitigation in financing for development, including sovereign and regional/local government risk assessment, country risk environment assessment, project-specific assessment, private sector risk mitigation, and the role of the public sector in risk mitigation. It also emphasizes the importance of capacity building and highlights examples of successful risk mitigation strategies.

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Financing for Development Risk Mitigation & Capacity Building: A Ratings Perspective

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  1. Financing For Development Risk Mitigation & Capacity Building: A Ratings PerspectiveLaura Feinland KatzManaging DirectorChief Credit Officer, Latin America Ratings June 23, 2005

  2. Investor Information Needs: Many Layered RISK MITIGATION

  3. Sovereign Risk Assessment: Key components • Sovereign ratings: default risk • Assess several components: - Political Risk - Income and Economic Structure - Economic growth prospects - Fiscal flexibility - General government debt burden - Offshore and contingent liabilities - Monetary flexibility - External liquidity - Public and Private-sector external debt burden

  4. Sovereign credit ratings: Comparative tool • Sovereign credit ratings and research provide: - Indicator of relative default risk - Comparative analysis of risk components across global peer group - Explanation of factors which could lead to improved or worsened creditworthiness - Specific government reform challenges

  5. Regional/Local Government Risk Assessment: Key Components REGIONAL AND LOCAL GOVERNMENT RATINGS ADDRESS: • Economic base, socioeconomic indicators • System supportiveness, predictability • Management, transparency, disclosure • Fiscal performance • Liquidity • Direct and Contingent debt

  6. Country Risk Environment Assessment • Country risk environment assessment: goes beyond government default risk • Reviews country or regional specific risks relevant to domestic projects: - Macroeconomic volatility (FX, interest rate, inflation, GDP) - Regulatory risk - Legal risk - Governance/transparency/disclosure

  7. Project Specific Assessment: Key components • Economic considerations: service area • Rate/tariff criteria • Financial performance, debt levels • Construction risk • Operational characteristics • Management and governance assessment • Legal provisions

  8. Financing for development: Risk mitigation - Private sector • Private sector risk mitigation - traditional: - Transfer and convertibility risk - Partial credit guarantees - Currency swaps - Bond insurance wraps Can give significant rating credit • Private sector risk mitigation – on the horizon?: - CDO technology: combine credit enhancement, credit pooling, and geographical diversification

  9. Financing for development: Risk mitigation - Public sector • Public sector role in risk mitigation, short-term: - Government covers certain project risks ex.: Chilean toll roads, government traffic guarantees - Official sector: consider covering regulatory, legal risks - Coverage of these risks can be critical to reach investment grade ratings - Care should be taken not to put provider ratings at risk

  10. Financing for development: Risk mitigation - Public sector • Public sector role in risk mitigation, long-term: - Reform agenda: no substitute! - Local capital market development - Example: Mexico: low-income housing, toll-roads, achieving local debt market funding. Use national scale ratings to benchmark for domestic pension funds.

  11. Financing For Development Risk Mitigation & Capacity Building: A Ratings PerspectiveLaura Feinland KatzManaging DirectorChief Credit Officer, Latin America Ratings June 23, 2005

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