OPINION : WHY AFRICA CANNOT IGNORE CREDIT RATINGS agencies to get an independent view on government policies and strategies .
What do they do with their results ?
Once their reviews are concluded , the agencies will announce credit rating opinions which will reflect the borrower ’ s credit worthiness . That is the likelihood that the borrower will pay back a loan within the confines of the loan agreement , without defaulting . A high credit rating indicates a high possibility of paying back the loan in its entirety without any issues . A poor credit rating suggests that the borrower has had trouble paying back loans in the past , and might follow the same pattern in the future . The credit rating opinions are used by various stakeholders and for different reasons .
Firstly , investors use credit ratings as a guide to their investment decisions . Credit ratings provide an independent and objective assessment of the credit worthiness of countries and corporations . This assists investors to decide how risky it is to invest money in a certain country or corporation . Secondly , for corporations and governments who want to raise money in the capital market , a favourable rating means a country will be able to obtain funds at a lower cost .
Lastly , governments could also use credit ratings as a measure for gauging their performance relative to peers to effect improvements .
Which political developments in South Africa are likely to have an impact on the reviews ?
A few areas of concern have been cited . The outcome of South Africa ’ s 2016 local government elections is one . The rating agencies are concerned that a drop in the voter percentage could result in fiscal loosening to draw votes back to the ruling party . Another concern is the charges instituted against the Minister of Finance Pravin Gordhan and later withdrawn . This threatened the institutional stability and integrity of the National Treasury . And the political disagreements on the findings of the state capture report threatened the institutional independence of the office of the Public Protector and the courts . Finally , the upcoming elective conference for the governing African National Congress ( ANC ) in 2017 is raising a concern on policy continuity and predictability .
Do the agencies operate in every country around the world ?
Not necessarily . Rating agencies can operate unsolicited . But major rating agencies such as Moody ’ s Investors Service ( Moody ’ s ), S & P Global Ratings ( S & P ) and Fitch Ratings ( Fitch ) are solicited by countries to provide credit ratings . Moody ’ s operates in 36 countries , S & P in 28 , and Fitch in more than 30 countries .
What happens to a country downgraded to junk status ?
Junk status is associated with high risk . Therefore , high borrowing costs . This is the main reason why a sovereign has to avoid being downgraded into a junk , or sub-investment grade . For fund managers ( who are representing the investors ) a downgrade to junk status means they will have to sell the assets ( bonds ) they hold . Their mandates require that they only invest in investment grade assets . For an ordinary person it means paying more interest , leaving little money for savings and expenditure on rent , school fees and food . For governments it means allocating more to debt servicing costs ( interest payment ). Less money will be available for social grants , investment priorities , creating jobs and ultimately reducing the GDP growth potential of the country . More interest payment also crowds out other critical spending . Social services is an example . Is it possible for a government to simply ignore their ratings ? Not really . Solicited credit ratings ensure easy access to international capital markets . Favourable credit ratings imply low borrowing costs . The South African government has solicited credit ratings from the top agencies to ensure that it can easily and cheaply access foreign funding needed to accomplish its economic development agenda . South Africa therefore can ’ t ignore the credit ratings assigned to it , especially given that foreign investors hold more than 30 % of government debt .
Which agency is taken most seriously ?
Sovereign credit rating is the most concentrated industry . There are approximately 70 rating agencies globally . But most investors base their investment decisions on the credit ratings published by Moody ’ s , S & P and Fitch . These three control approximately 95 % of the rating business .
2016 | Business Times Africa 19