Rat­ings agen­cies have lost the plot

The sub­jec­tiv­ity of the rat­ings process leaves a lot to be de­sired, writes

CityPress - - Business -

As a busi­ness­man, I have seen the South African eco­nomic land­scape un­dergo a phe­nom­e­nal trans­for­ma­tion in the past 22 years. This trans­for­ma­tion has in­cluded mile­stone de­vel­op­ments that leave me per­plexed as to why there is a loom­ing down­grade to junk bond sta­tus.

Some of th­ese mile­stones have in­cluded the na­tional bud­get in­creas­ing al­most ten­fold from R100 bil­lion to R1 tril­lion, the re­mark­able rise from R700 bil­lion to over R5 tril­lion in the mar­ket cap­i­tal­i­sa­tion of the JSE, an av­er­age GDP growth rate of just over 3% and an av­er­age in­fla­tion rate of 5%. On the political front, we have en­joyed great sta­bil­ity, a sta­bil­ity that has en­abled us to con­duct five free and fair na­tional demo­cratic elec­tions.

That a coun­try like ours could face a down­grade to junk de­fies logic. It seems para­dox­i­cal, es­pe­cially if you con­sider that rat­ings agen­cies sup­pos­edly eval­u­ate a coun­try’s eco­nomic and political en­vi­ron­ment to de­ter­mine a rep­re­sen­ta­tive rat­ing.

What then has caused this dras­tic re­think of our rat­ing? Could it be the re­cent short-lived re­place­ment of one fi­nance min­is­ter with an­other? But the down­grade in De­cem­ber pre­ceded this event, so that can’t be it.

Un­less th­ese agen­cies can ac­tu­ally pin­point the ex­act so­cioe­co­nomic trig­gers re­spon­si­ble for this down­grade, I am left with no op­tion but to agree with the no­tion that the foun­da­tion of their de­ci­sions can be capri­cious, at best, and, at worst, a se­ri­ous cause for con­cern for a coun­try with oth­er­wise sound so­cioe­co­nomic in­di­ca­tors.

In its re­cent down­grade of South Africa’s credit rat­ing from BBB to BBB-, which is one level above junk, Fitch Rat­ings high­lighted a num­ber of rea­sons for the down­grade, in­clud­ing a weaker GDP growth per­for­mance be­cause “var­i­ous govern­ment poli­cies had weak­ened busi­ness con­fi­dence”, a neg­a­tive fore­cast of an in­crease in our debt-to-GDP ra­tio and con­cern about South Africa in re­la­tion to for­eign di­rect in­vest­ment (FDI) in­flows.

What is in­ter­est­ing to note is that Fitch lists the de­lay of the avail­abil­ity of new elec­tric­ity gen­er­a­tion ca­pac­ity as a key con­straint. What changed from De­cem­ber 2014, when Fitch left the coun­try’s rat­ing un­changed, to De­cem­ber 2015, where we are now on the brink of junk sta­tus? I would ar­gue that its re­ac­tion to Eskom’s gen­er­a­tion ca­pac­ity is­sues are de­layed – power gen­er­a­tion has im­proved re­cently, and Eskom has sta­bilised un­der new man­age­ment.

Look­ing at other key in­di­ca­tors that should guide any change in rat­ings, it is use­ful to re­fer to a re­cent ar­ti­cle by Roelof Botha, eco­nomic ad­viser to PwC. He con­tends that any change in rat­ings should be based on ob­jec­tively ver­i­fi­able in­di­ca­tors, in­clud­ing the qual­ity of a coun­try’s sov­er­eign debt and its size in re­la­tion to the coun­try’s debt-to-GDP ra­tio, as well as the coun­try’s abil­ity to at­tract FDI.

Ac­cord­ing to Botha, South Africa’s debt-toGDP ra­tio re­mains low by in­ter­na­tional stan­dards. Last year, this was stand­ing at 47%, which com­pares favourably to some of the coun­try’s emerg­ing mar­ket peers like Brazil (65%), Malaysia (53%) and Thai­land (44%).

Our sov­er­eign debt rate is less than half that of the US (102%), which con­tin­ues to en­joy an AAA rat­ing from Fitch. So how does ours be­come the source of a down­grade? This ab­sence of a com­mon stan­dard in as­sess­ing th­ese in­di­ca­tors ren­ders the rat­ings process sub­jec­tive.

Fitch also laments our abil­ity to at­tract FDI. But Botha quickly dis­pels this myth by re­veal­ing that South Africa claimed the top spot on the con­ti­nent for FDI in­flows, ac­cord­ing to the UN Con­fer­ence on Trade and De­vel­op­ment’s lat­est re­port. This is not sur­pris­ing af­ter the re­cent an­nounce­ment by Chi­nese Pres­i­dent Xi Jin­ping that China had al­ready com­mit­ted R97 bil­lion to iden­ti­fied projects in South Africa and would com­mit an ad­di­tional R1 tril­lion to the con­ti­nent.

I am not say­ing there are no chal­lenges in our econ­omy. There are many. But we are still far from the dark abyss that a down­grade to junk would im­ply.

Re­mem­ber that, not too long ago, agen­cies like Fitch played a role in the US sub­prime mort­gage cri­sis that led to the 2008 fi­nan­cial down­turn by giv­ing pos­i­tive rat­ings to fi­nan­cial in­sti­tu­tions that were over­ex­posed to bad debt.

My only fear is that a coun­try’s credit rat­ing in­flu­ences its costs of bor­row­ing, and its in­vestor and con­sumer con­fi­dence.

So whether the rea­sons for the down­grade are log­i­cal or not, it still has the po­ten­tial to ad­versely af­fect us. Mt­shali is CEO of Galela Hold­ings, and the founder and for­mer

CEO of iBurst

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