S&P: International Development Association Assigned 'AAA/A-1+' Ratings; Outlook Stable
Our ratings on IDA are based on its very strong business profile and an extremely strong financial profile. We combine these to derive a stand-alone credit profile (SACP) of 'aaa' and a 'AAA' issuer credit rating. IDA has no callable capital.
IDA was established in 1960 to provide development assistance to the poorest developing countries by offering cheaper and more flexible products than thoseof its sister institution, the International Bank for Reconstruction and Development (IBRD; AAA/Stable/A-1+). IDA shares staff, pension plans, and governance structures with IBRD, but the entities and all of their obligationsare legally separate. The entities do not lend to each other and do not have equity in each other.
That said, IDA manages some of its derivatives exposures through IBRD and holds a bond of the International Finance Corp. (IFC; AAA/Stable/A-1+). Both IBRD and IFC provide annual grants to IDA. We expect related-party transactions within the World Bank Group, which also includes the unrated Multilateral Investment Guarantee Agency--to increase over time.
IBRD membership is a precondition of IDA membership and IDA has 173 member countries. To be eligible to borrow from IDA on the most favorable terms, a country's gross national income (GNI) per capita must be below an established threshold (currently US$1,185)and it must be unable to access IBRD lending. Currently, 48 member countries borrow under these criteria at extremely long maturities (typically 38 years, previously 40-50 years). Their loans do not carry interest, but there is a 75 basis point (bps) annual service charge.
A further 24 countries borrow on somewhat stricter terms (called "blend terms"), with a 25-year maturity and a 1.25% interest rate in addition to the 75bps service charge. Of these 24 countries, 13 are borrowing from IBRD and IDA simultaneously (these are called "blend countries"), and 11 have GNIs thatslightly exceed the IDA threshold and do not borrow from IBRD. There are five small island nations that are ineligible on other criteria, but also borrow onIDA-only terms.
Typically, countries graduate from IDA to IBRD via the blend stage, although they may also relapse back to IDA. Notably, India, accounting for 18% of IDA'sexposures, is not eligible for IDA's lending under any of the aforementioned criteria, but still receives transitional support from IDA, though on terms closer to IBRD.
Aside from concessional loans, IDA extends some loans on hard terms at interest rates which are fixed, but much closer to market levels; such loans are only given to members that are deemed to be fiscally sustainable by the International Monetary Fund (IMF). Countries below the GNI threshold that havesignificant debt sustainability risks are eligible for partial or full grant funding instead of concessional loans.
Therefore, our view of IDA's policy importance is supported by the fact that its mandate directs its activities toward borrowers that are not serviced by private sector entities and also not serviced by the main lending window of most MLIs. We understand that nonborrowing members generally view IDA as one of the most efficient institutions of its kind; although IDA is not the only concessional window in the MLI asset class, it exceeds the next-sized windows by a considerable multiple. Other institutions could not easily replicate IDA's activities, were they to be terminated.
Capital replenishments generally happen on a three-year cycle--IDA's track record includes 21 replenishments over 55 years, of which 17 were on a regularthree-year cycle. The amount of commitments in every cycle is closely linked to the amount of resources made available to it within a given replenishment. Disbursements are made on a nine-year cycle. Growth in replenishments has beensteady, averaging 10% per year over the past 50 years, although not every nonborrowing partner has contributed at every replenishment stage. IDA is in the midst of the negotiations for its latest replenishment (known as IDA18). Key priorities for this replenishment include assisting fragile states, addressing gender issues, combating climate change, catalyzing jobs and economic transformation, and strengthening public sector governance. IDA's owndefinition of a replenishment includes equity, debt, grants, and loan reflows, which together amounted to $52 billion in IDA17 (including $31 billion of equity). We expect the next replenishment to raise a similar or higher amount of resources, including an equity amount of an order roughly comparable to IDA17.
The replenishments discussions are governed by IDA Deputies (that is, representatives of IDA contributing partners) plus borrower representatives, who participate in the replenishment discussions every three years. During these meetings, participants discuss issues such as the size of the replenishment, relative burden-sharing among donors, and the policy framework for the replenishment.
As with other World Bank Group institutions, we view IDA's articles of agreement as a treaty equivalent, and IDA enjoys the same exemptions as IBRD on tax. No shareholders have withdrawn from IDA (IDA was partly established toaddress the concerns that led to Cuba and other Eastern Bloc countries withdrawing from the IBRD) and shareholders' payments of replenishments have generally been timely and full. Approximately 0.6% of total commitments are overdue.
Within a broader context of international debt relief initiatives, IDA engagesin two debt write-off programs: the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI). MDRI is funded by earmarked dollar-for-dollar equity replenishments outside the three-year cycle, while HIPC is funded within the cycles. The write-offs were conditionalon program criteria. Nonetheless, their size was significant; cumulative write-offs represent almost a quarter of IDA's total exposures. This colors our view of IDA's preferred creditor treatment (PCT). To address the risk thatsovereigns could see similar debt problems re-emerging, they receive their assistance wholly or mainly in the form of grants if they are fiscally stressed. Grants, like concessional loans and debt write-offs, are funded by new IDA donor contributions.
Another consideration for PCT is that for many of the borrowing countries, IDArepresents one of the key sources of available lending. This makes countries more reluctant to default to it, but leaves little manoeuvre to choose to default to other entities instead. Most of the nonaccruals (currently, less than 2% of the loan portfolio) have arisen in cases of a prolonged civil war or a government breakdown, indicating that governments strive to pay IDA, evenin difficult situations. That said, some of the defaults were more political in nature; some of the defaulting countries continued to pay other MLIs.
We observe that IDA shares its governance and management with IBRD, to a significant extent. The top five member countries account for 34.3% of the total voting power, which include the U. S. (10.4%), Japan (8.4%), the U. K. (6.2%), Germany (5.5%), and France (3.8%). The U. S. has lower voting power than it has in IBRD (16.6% as of the end of June 2016).
The bulk of IDA's exposures are to sovereigns within purpose-related or treasury portfolios. The loan exposures have a high average credit risk and below-market interest rates, which is reflected in their fair value being 15.5% below their book value. When calculating our risk-adjusted capital ratio(RAC), we consider that using the fair value for the loans appropriately reflects IDA's unique features. We approximate it by making a uniform 15.5% cut on all outstanding loans exposures and reducing equity by the same cash amount.
Given the low ratings on most developmental exposures, average sovereign risk-weight before adjustments is quite high, at 96%. However, IDA is also characterized by a very high level of equity as it has virtually no debt, thusputting the RAC before adjustments at 77%. The difference between the RAC before and after adjustments is primarily due to the high-risk exposure cap adjustment. Owing to a very high capital ratio, many of the individual risk weights are being capped, accumulating to a significant downward adjustment tototal risk-weighted assets. Other adjustments to the RAC ratio mostly balance each other out, resulting in an overall RAC ratio after adjustments of 113%. The RAC calculation does not take into account the deficit in IBRD's pension schemes, part of which is attributed to IDA.
IDA is a non-for-profit institution that nonetheless strives to ensure basic financial sustainability. Concessional loans and grant disbursements are funded by equity increases, concessional loans from members, grants, or loan reflows. The consistent accounting net losses are partly explained by the factthat many distributions that are accounted for as expenses (debt write-offs and grants) are matched by increases in equity, rather than income. The revenue from guarantee fees, service, and interest charges is intended to cover operating expenses, and can be raised if it does not do so.
IDA does not currently issue debt, but does borrow limited amounts from its member countries, in maturities and at rates similar to the interest rates it charges on its development loans. The absence of market funding, in our view, represents nothing more than IDA's chosen funding model. Should IDA access thefinancial markets, we understand its borrowings would mostly be used to finance either liquidity or loan products on harder terms, the income from which would be sufficient to recover IDA's borrowing cost. We do not believe IDA would have significant difficulties accessing the market if necessary. Ourrating assumes that any future debt issuance of IDA would be done in a way that would not affect our assessment of its financial profile.
IDA's liquidity policy is to have minimum liquidity equal to 33% of a three-year annual moving average of gross disbursements. At the financial yearending in 2016 (FY2016), this minimum was equivalent to $4.4 billion. Core liquidity under IDA's definition constituted $10.3 billion at FY2016. Using our own ratios, we conclude that IDA is generally able to survive our extreme stress scenarios on all horizons up to two years.
The stable outlook on IDA signals that we do not see risks to its credit standing that would represent a greater than one-in-three probability that we would lower our rating in the next two years. Pressure on IDA's rating could build, however, if the IDA18 replenishment is markedly lower than expected or if IDA takes on liabilities in a manner that would lower its RAC ratio after adjustments below 23%. Pressure could also emerge if delays in payments of capital subscriptions increased materially from current levels.