Why credit rat­ings mat­ter

Three of the world’s ma­jor rat­ings agen­cies – Moody’s, Fitch and Stan­dard & Poor’s – are re­view­ing SA’s credit rat­ing. The Con­ver­sa­tion Africa’s asked Mam­pho Modise to ex­plain the sig­nif­i­cance of the re­views

CityPress - - Business - Charles Leonard Modise is a post­grad­u­ate re­searcher at the Univer­sity of Pre­to­ria and is af­fil­i­ated with Na­tional Trea­sury. This piece first ap­peared on The Con­ver­sa­tion’s web­site

What do the agen­cies look at in the process of re­view­ing a coun­try?

In their rat­ing method­olo­gies, rat­ings agen­cies have de­vel­oped rat­ing cri­te­ria for as­sess­ing the per­for­mance of key macroe­co­nomic and so­cioe­co­nomic in­di­ca­tors.

By as­sess­ing the in­di­ca­tors, the agen­cies are able to de­ter­mine the bor­rower’s abil­ity and will­ing­ness to hon­our debt obli­ga­tions.

When re­view­ing the sov­er­eign rat­ings, rat­ing agen­cies hold dis­cus­sions with var­i­ous stake­hold­ers in gov­ern­ment, labour, civil so­ci­ety and the pri­vate sec­tor.

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 cred­it­wor­thi­ness.

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.

Se­condly, for cor­po­ra­tions and gov­ern­ments that 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 the 2016 lo­cal gov­ern­ment elec­tions is one. The rat­ings 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 Fi­nance Min­is­ter Pravin Gord­han that were later with­drawn. This threat­ened the in­sti­tu­tional sta­bil­ity and in­tegrity of 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 ANC in 2017 is rais­ing a con­cern on pol­icy con­ti­nu­ity and pre­dictabil­ity.

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 a sov­er­eign has to avoid be­ing down­graded to a junk, or subin­vest­ment grade.

For fund man­agers [that 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.

Is it pos­si­ble for a gov­ern­ment to sim­ply ig­nore its 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.

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