Credit rat­ings don’t lie

Lesotho Times - - Leader -

A STORY in the Le­sotho Times of 28 April 2016 un­der the head­line “Agency down­grades Le­sotho” makes for very dis­turb­ing read­ing.

In that re­port, the global rat­ing agency, Fitch, has down­graded Le­sotho’s in­ter­na­tional credit rat­ings cit­ing the de­cline in South African Cus­toms Union (SACU) rev­enues and per­cep­tions of po­lit­i­cal in­sta­bil­ity which have im­pacted on in­vestor con­fi­dence in the coun­try.

The re­port goes on to men­tion that in its lat­est rank­ings re­leased last week, Fitch re­vised down­wards the coun­try’s long-term for­eign cur­rency Is­suer De­fault Rat­ing (IDR) from “BB” – to “B+” sta­tus.

The long-term cur­rency IDR was also re­vised down­wards from “BB” to a “Bb-“sta­tus. Fitch’s in­ter­na­tional credit rat­ings re­late to ei­ther for­eign or lo­cal cur­rency com­mit­ments and in both cases, as­sess the ca­pac­ity to meet these com­mit­ments us­ing a glob­ally ac­cept­able scale.

The lo­cal cur­rency rat­ing mea­sures the like­li­hood of re­pay­ment in the cur­rency of the ju­ris­dic­tion of the coun­try. On the other hand, the for­eign cur­rency rat­ings con­sider the profile of the is­suer or note af­ter tak­ing into ac­count trans­fer and con­vert­ibil­ity risk.

There are two main in­ter­na­tional global credit rat­ings that are rec­og­nized the world over, be­ing Fitch and Stan­dard and Poor’s Rat­ings Ser­vices (S&P’S)

Ow­ing to time con­straints, I could not lay my hands on S&P’S credit rat­ings on Le­sotho. How­ever, I thought it pru­dent to do jus­tice to this col­umn, to give a brief back­ground on S&P’S as well.

S&P’S started its credit rat­ing ac­tiv­i­ties in 1916 in which time it has rated hun­dreds of thou­sands of is­sues of se­cu­ri­ties, cor­po­rate and gov­ern­men­tal is­suers and struc­tured fi­nanc­ings over the years.

S&P’S be­gan its ac­tiv­i­ties with the is­suance of credit rat­ings on cor­po­rate and gov­ern­men­tal debt is­sues. Re­spond­ing to mar­ket de­vel­op­ment needs, S&P’S like Fitch, also as­sesses the credit qual­ity of, and as­signs credit rat­ings to, fi­nan­cial guar­an­tees, bank loans pri­vate place­ment, mort­gage and as­set-backed se­cu­ri­ties, mu­tual funds and the abil­ity of in­sur­ance com­pa­nies to pay claims and as­sign mar­ket risk rat­ing to man­aged funds.

These two global credit rat­ings agen­cies com­ply with cer­tain guide­lines and codes of con­duct, in order to en­sure in­tegrity and cred­i­bil­ity to their pro­cesses that in­clude stan­dards de­signed to pro­mote: a) In­de­pen­dence and ob­jec­tiv­ity of the Credit rat­ing process;

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