What about the role of rating agencies?


This is part 3 of a 5 part series

“A detailed analysis showed that 61 of the 154 rated sovereigns were downgraded by at least one of the three main rating agencies during the Covid-19 pandemic. Developing countries were [affected] by almost all sovereign downgrades, negative outlooks and rating reviews,” says the 2022 Financing for Sustainable Development Report, released on April 12.

The report, which devotes a long section – and largely silenced – to the harmful impact of the decisions of rating agencies, was produced by the United Nations Inter-Agency Working Group on Financing for Development and some 60 multilateral institutions, including the IMF, the World Bank, the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors and the Financial Stability Board.

Partial gravity

The study establishes a parallel between the severity of the main global financial rating agencies – Moody’s, Standard & Poor’s and Fitch Ratings – towards the countries of the South, and their relative indulgence towards the rich countries.

“Developed countries, which have experienced a much larger increase in debt and an economic downturn, have largely escaped the downgrades, boosting their access to abundant and affordable market financing,” the report’s authors say, noting “the importance of transparent methodologies to avoid undermining confidence in ratings”.

United Nations Financing for Sustainable Development Report 2022

“All Fitch sovereign rating decisions are made solely on the basis of globally consistent and publicly available rating criteria,” a spokesperson for the New York-based agency tells us.

The representative of Fitch also insists on the transparency of its decision-making. “Rating factors and sensitivities are clearly identified in our public comments. Rating decisions are based on independent, robust, transparent and timely analysis,” he says.

Developed countries have a high debt tolerance and lower borrowing costs than economies lacking these credit fundamentals

On the rating gap between developed countries and those of the developing or emerging world, our interlocutor recalls that the former have, among other things, “high incomes, strong governance standards, diversified economies, deep local capital markets“, as well as “foreign reserves and debt denominated largely in their own currency”. Hence their “high debt tolerance and lower borrowing costs compared to economies without these credit fundamentals.”

Standard & Poor’s said it could not immediately respond to our request for comment. Moody’s, which recently took over the pan-African rating agency Global Credit Ratings (GCR), did not react.

Suspension of debt service

The latest edition of the report on financing for sustainable development also raises the question of the attitude of rating agencies towards the Debt Service Suspension Initiative (DSSI). In mid-2020, the UN strongly contested the “putting under scrutiny” of the ratings of several African countries, including Senegal and Cameroon, before their participation in the program with public lenders. Moody’s had said that participation in the DSSI “increases the risk of private sector creditors incurring losses.”

More dialogue between countries and rating agencies could have helped avoid misunderstandings

“Fitch has has not downgraded any country for its participation in the DSSI, and we have regularly explained our approach in our publications and in discussions in numerous forums,” the agency spokesperson tells us. However, the study itself notes that “some developing countries, particularly those at high risk of debt distress, have been deterred from joining the program for fear that their participation could trigger downgrades”.

“More dialogue could have helped to avoid such misunderstandings, both from countries and from rating agencies. A permanent, formal structure or framework to facilitate continued dialogue could be considered,” the report says. For its authors, “public sector debt relief can help strengthen countries’ balance sheets and their ability to repay all of their debt over the medium term”.

Has the climatic factor been taken into account?

The April report presents a new set of arguments against international agencies for their insufficient consideration of climate change. The authors of the study acknowledge that these financial analysis institutions “already integrate climate risk into their ratings”, but they argue that “a country’s efforts to invest in development objectives, including resilience and l ‘climate adaptation’ should be considered “favorably in the ratings”. , in the same way as “capital expenditure”.

We predict that climate change will trigger more rating changes as the effects become clearer, closer and more meaningful.

“Ideally, rating methodologies should incorporate longer-term factors, such as environmental and social risks and improvements,” say the authors, which would “capture the positive effects of investments in climate and environmental resilience.”

Fitch Ratings insists it takes climate change into account in its sovereign ratings, “as it does for all factors it considers relevant and important to creditworthiness”. However, he acknowledges that the ratings “generally give more weight to current developments than to uncertain long-term projections”. According to his rep, however, Fitch expects “climate change to trigger more rating changes as the effects become clearer, closer and more meaningful.”


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