Credit ratings don’t lie
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;