are rating agencies still credible?

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While Ghana has seen its rating downgraded by the rating agencies, the role of the latter raises questions. Are Moody’s, Fitch and S&P too hard on African countries?

Rating agencies have not spared Ghana. At the time of seeing its sovereign debt described by three rating agencies as “speculative”, the government fears the worst. The Ghanaian Minister of Finance also said he was “disappointed by the decision of S&P (one of these three agencies, with Moody’s and Fitch Ratings, editor’s note) to downgrade Ghana’s rating despite the bold policies put in place in 2022 to addressing macroeconomic challenges and ensuring debt sustainability, significantly exacerbated by the impact of these global external shocks on the economy”.

Without siding with the Ghanaian government, the severity of the rating agencies raises questions. One has the impression, for several years, that these same agencies have been tracking African countries. “Very few issuing countries in the region have failed in their repayment obligation, but they are still considered speculative by the rating agencies, which makes their access to international capital markets more difficult and above all more expensive”, summarizes the agency Ecofin, this Thursday, which does not fail to deplore the “strange severity” of the rating agencies.

Agencies firing on ambulances?

Is it just an impression or a reality? Rating agencies are not really popular. But they may have looked for it a bit… In 2011, three economists from the International Monetary Fund (IMF) studied the influence of sovereign debt rating downgrades on the economic and financial environment. They concluded that the agencies encouraged financial instability. Christine Lagarde, the boss of the IMF at the time, also mentioned the possibility of supervising the rating agencies a little more.

Especially since, voluntarily or not, rating downgrades by agencies lead countries to seek help… from the IMF. While Ghana hoped to be less dependent on the Bretton Woods institution, it will now have to negotiate with it. This necessarily implies interference in national politics by the IMF, which will have a say in the weight of the civil service in Ghana’s finances.

For finance specialist Michel Gabrysiak, Moody’s, S&P and Fitch do not hesitate to “shoot on the ambulances”, as during the deterioration of the Greek debt. “It seems that the agencies not only accept but take a kind of pleasure in being criticized by everyone. After all, it’s a form of advertising like any other,” he summarizes.

Beyond the agencies themselves, the specialist raises the question of the complacency of financial institutions with these agencies. For decades, he recalls, “governments, banks, credit organizations, surveillance agencies, have easily adopted the classification criteria of rating agencies, so as not to have to assume the responsibility themselves. ultimate responsibility for their investment actions towards their constituents or clients”.

Towards the creation of an African agency?

In Africa, the end of the diktat of rating agencies could go through the creation of a continental agency. Macky Sall, chairperson of the African Union, believes that the exaggeration of the assessments of the risk of investment in Africa by the existing agencies justifies it. “In 2020, while all economies were suffering the effects of Covid-19, 18 of the 32 African countries rated by at least one of the major rating agencies saw their rating downgraded. This represents 56% of degraded ratings for African countries against a world average of 31% over the period,” laments the Senegalese.

It is now up to African governments to do the job. Because the rating agencies certainly have more power than they should… “Studies have shown that at least 20% of the rating criteria for African countries are based on rather subjective factors of a cultural or linguistic nature, unrelated to the parameters that measure the stability of an economy”, summarizes Macky Sall.

And the most serious thing, specifies the head of the AU, is that “the perception of investment risk in Africa is always higher than the real risk. We thus find ourselves paying more than necessary in insurance premiums, which increases the cost of credit granted to our countries”.

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