AFTER the IMF Deal.
a BASE-RATE MODEL for CRISIS RECURRENCE

The IMF has completed approximately 180 upper credit tranche arrangements since 2000. The desk ran a base-rate analysis of post-programme outcomes across a sample of 60 programmes that completed between 2000 and 2020, tracking whether the country experienced a subsequent balance of payments or fiscal crisis within five years of programme completion.

The recurrence rate is higher than the standard narrative of IMF success implies. Approximately 38 percent of programme completions were followed by a new crisis or programme within five years. The recurrence was concentrated among programmes where: the exchange rate remained overvalued at programme exit; the fiscal adjustment was revenue-based rather than expenditure-based; political conditions deteriorated after the IMF austerity period; and reserve rebuilding was insufficient to provide a credible buffer.

The inverse lesson: the roughly 62 percent of successful outcomes shared a different profile. Successful post-programme countries typically had a competitive exchange rate at exit, structural spending reform that reduced mandatory expenditure commitments, political ownership of the adjustment (not just technocratic compliance) and a private sector access recovery that made the next rollover self-financing.

The most instructive case studies for the current EM sovereign landscape are the successful exits: Mexico 1995 to 1997, South Korea 1997 to 1999, Brazil 1999 to 2002, Ecuador (partial) and a selection of sub-Saharan programmes where success was genuine.

The common thread in successful exits is not programme compliance during the IMF engagement period, which virtually all programmes achieve to sufficient standard. It is what happens in the 18 to 36 months after the programme closes, when IMF conditionality no longer forces discipline and domestic political incentives to backslide are strongest.

South Korea's post-1997 success is the canonical case. The programme imposed severe austerity and forced corporate restructuring. The government complied, but more importantly, it used the crisis as the political capital to implement structural reforms to corporate governance, labour markets and financial sector regulation that had been politically blocked before the crisis. The crisis created the reform window; the government used it rather than waiting for it to close.

Argentina's 2018 to 2019 programme is the canonical failure case. The IMF engaged with a USD 57 billion programme, the largest in IMF history at the time. The exchange rate was overvalued, fiscal adjustment relied heavily on optimistic revenue projections and there was insufficient political consensus for the structural reforms required. The programme collapsed within 18 months and was followed by default, currency collapse and economic crisis.

The desk maintains a sovereign stress monitor for the 15 most significant EM sovereigns currently in or recently exiting IMF programmes. The monitor tracks five variables: reserve adequacy (months of import cover), current account trajectory, primary balance progress, exchange rate competitiveness and political stability.

Highest recurrence risk (current monitoring): Pakistan, Ghana, Sri Lanka. All three have completed or are completing programmes under conditions where reserve adequacy is still fragile, the exchange rate correction has been partial and political sustainability of the adjustment is uncertain.

Moderate recurrence risk: Egypt, Tunisia, Kenya. The programme frameworks are in place and being broadly followed. The risks are external (higher oil prices for energy importers, lower commodity prices for exporters) and political (each country faces elections or regime transition within 24 months).

Lower recurrence risk: Ecuador (dollarised, structural constraint limits monetary slippage), Ivory Coast (strong cocoa revenues and programme compliance), Senegal (new oil revenue starting 2025 provides external cushion).

The desk's most reliable leading indicator for post-programme stability is not the IMF's own assessment but the sovereign's ability to access private capital markets at spreads below 500bp. That threshold is a rough proxy for investor confidence that the sovereign can roll its external obligations without IMF support.

A sovereign exiting an IMF programme with market access below 500bp is demonstrating that private lenders believe the adjustment is durable. A sovereign exiting with spreads above 500bp is dependent on continued official sector support or facing the prospect of another restructuring.

EM sovereign credit investors need a framework for distinguishing programme-specific risk from structural country risk. The desk's approach: separate the stabilisation trade (buy at maximum distress, sell when IMF programme is agreed) from the structural recovery trade (buy after programme completion, hold through the private access recovery).

The stabilisation trade has better risk/reward at the point of maximum distress before programme announcement than at the announcement itself, when the easy re-rating has already occurred. The structural recovery trade requires patience and conviction that the exit conditions are durable.

For the current opportunity set: the desk sees the best risk/reward in the structural recovery phase for Egypt and Ivory Coast, where the programme framework is credible and the private market access trajectory is improving. The desk avoids Pakistan at current spread levels as insufficient compensation for the political risk.