Credit ratings are punishing poorer countries for investing more in health care during the pandemic

31 August 2021 by Ramya Vijaya

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Economic recovery from the Covid-19 pandemic depends on sustained investment in health care and social services. But while rich countries like the U.S. can borrow and spend relatively easily, low-income nations face a major obstacle: their credit ratings.

A credit rating, like a credit score, is an assessment of the ability of a borrower – whether it’s a company or a government – to repay its debts. Lower credit ratings drive up the cost of borrowing.

This threat prompted some poorer countries to avoid tapping investors for vital financing during the pandemic, while other governments that made plans to spend more on public services were hit with credit ratings downgrades from private companies.

My forthcoming research shows that when credit ratings fall, countries tend to spend less on health care Care Le concept de « care work » (travail de soin) fait référence à un ensemble de pratiques matérielles et psychologiques destinées à apporter une réponse concrète aux besoins des autres et d’une communauté (dont des écosystèmes). On préfère le concept de care à celui de travail « domestique » ou de « reproduction » car il intègre les dimensions émotionnelles et psychologiques (charge mentale, affection, soutien), et il ne se limite pas aux aspects « privés » et gratuit en englobant également les activités rémunérées nécessaires à la reproduction de la vie humaine. . This should be a cause for concern as the delta variant of the coronavirus drives up case counts across the world.

 Punished for health care spending

A wide gap has emerged between rich and poor countries in terms of how much they are spending to fight the coronavirus’s impact and shore up their health care infrastructure.

Governments in rich countries have provided trillions of dollars in direct and indirect support for their economies, on average about 24% of their gross domestic product GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
. Developing economies, on the other hand, have been able to spend only a tiny fraction of that, an average of about 2% of their GDP.

Recent research found that a country’s credit rating was the largest factorin how much a government spent on Covid-19 relief. That is, the lower a country’s rating, the less it was able to spend on health care and other social services.

For instance, Ivory Coast and Benin are the only two countries in sub-Saharan Africa that have been able to borrow in international markets since the pandemic began. Others chose not to borrow, at least in part, it seems, out of fear of the ratings downgrades that might result. This has prevented them from financing much-needed spending.

The fear is justified. Countries that planned to increase spending, such as Morocco and Ethiopia, were punished for it. Morocco’s credit rating, for example, was downgraded to speculative grade, or “junk,” by Fitch and Standard & Poor’s because of its plan to spend more on social services. The ratings cuts will make it much harder, and more expensive, for it to borrow from international investors.

And Moody’s Investors Service slashed Ethiopia’s credit rating after the country sought debt relief from a new Group of 20 program so that it could spend more on supporting its economy and citizens.

Overall, despite spending far less during the pandemic, poorer countries were much more likely than wealthier ones to see their credit ratings cut by Fitch, Standard & Poor’s and Moody’s – the three biggest private credit rating agencies Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s :

Low-income countries are therefore forced to choose between keeping their credit ratings stable and undertaking critical social services spending.

In my own research, which is currently under peer review, I looked at ratings changes across a group of 140 countries from 2000 to 2018. I found that downgrades in credit ratings lowered public spending on health care.

International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
’s rating system

Even the International Monetary Fund, which is the main global agency that oversees development finance, uses a rating system that tends to penalize governments for any increase in public spending. That includes spending invested in their health care systems.

The IMF evaluates the creditworthiness of countries through a system it calls its debt sustainability framework. Countries are classified into three levels of “credit capacity” - strong, medium or weak.

Weak countries are deemed to have a low ability to handle additional debt based on their current levels of indebtedness. No distinction is made between debt that was a result of important long-term investments in social services like health and education and debt incurred by more wasteful spending. Countries are then required by the IMF to improve their ratings as a condition of aid, such as by putting the focus on debt repayment, short-term economic objectives and across-the-board spending cuts.

An op-ed in The Lancet blamed similar IMF-induced austerity in the early 2000s for a reduction in health care spending in Guinea, Liberia and Sierra Leone, leaving them susceptible to the Ebola crisis in 2014. The three were the worst-affected countries in an epidemic that lasted two years and led to over 11,000 deaths.

 Ratings reform

The IMF recently announced a plan to issue US$650 billion in reserve funds that low-income countries can use to buy vaccines and expand health care. While that should help more countries not to have to choose between credit ratings and the well-being of their citizens during the pandemic, it’s only a short-term fix.

A recent United Nations report urged reform of how private credit ratings agencies are regulated, arguing they lack accountability and make it hard for poor countries to fulfill their human rights obligations. A proposal to put a moratorium on the sovereign credit ratings of debt-burdened countries during crises would also help provide a buffer.

Permanent changes in how the IMF and private credit ratings agencies evaluate debt, however, may be needed so that they’re not penalizing countries for making important investments in health care and other public services. That would help countries can build their health care infrastructure so that they aren’t caught off guard by the next pandemic.

Ramya Vijaya

Professor of Economics, Stockton University



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