There’s a need for an independent, diverse global credit ratings system which does not prejudice developing nations, writes JEFFREY NOORDIEN
The ratings agencies Moody’s, Fitch and S&P wield significant power and influence over the global economy.
As has been well-documenters in recent weeks, first S&P and then Fitch downgraded South Africa’s credit rating worthiness to junk.
These are the same agencies which rated Greece AAA+ in terms of their credit worthiness knowing full well the country was on the verge of a collapse and which was essentially a precursor to the global financial meltdown of 2008.
The South African economy over the past 12 months seems to have been held to ransom by these three agencies.
And while checks and balances are essential in making sure regulatory, political and economic systems function within specific frameworks and targets, these agencies cannot be solely used as a benchmark for a country’s economic health.
Contextually speaking, developing nations like South Africa must be judged against a different set of economic benchmarks given their developmental agendas of uplifting the poor and redress
Therefore, the BRICS (Brazil, Russia, India, China and South Africa) bloc is a crucial relationship.
As an analyst succinctly put it: “Ratings agencies are not concerned with social spending or the well-being of the average South African. Their mandate is simply to evaluate the ability of government to pay back its debt and therefore determine the risk of lending to it. They primarily look at government’s ability to raise tax revenue and whether it is enough to cover the planned spending – if not the country is left with a budget deficit and needs to make up the difference with borrowed money.”
Their function – to provide investors with reliable information on the riskiness of various kinds of debt, including countries’ sovereign debt rating, has come under sharp scrutiny following the 2008 economic meltdown, with calls from, especially within Europe and China, for greater transparency and in some instances the formation of other ratings agencies.
Post-2008, these agencies have been accused of exacerbating the financial crisis and defrauding investors by offering overly favourable evaluations of insolvent financial institutions and approving extremely risky mortgage-related securities.
While the US and Europe have taken steps to regulate the three main agencies in an attempt to ensure more transparency and competitiveness, questions remain over their role in the 2008 global economic crisis.
In the US, S&P paid a record $1.37 billion in a 2015 settlement with state and federal prosecutors, and Moody’s has been under investigation by the US Justice Department.
In June 2015, delegates at a World Credit Rating Forum in Beijing stressed the need for a more transparent credit rating system.
The forum discussed alternatives to Fitch, Moody’s and S&P which accounted for 96% of the ratings globally. Some at the forum called the current regulatory system flawed and urged for a more objective system.
The Chinese, for example, had commissioned a thousand scholars globally to research credit rating systems and to come up with an alternative structure.
The group said the 2008 global credit crisis showed that credit rating was “crucial to the sound development of humanity” and that “the credit ratings assigned by the incumbent credit ratings agencies cannot be relied on to rate the world”.
Others suggested that the world would suffer another financial meltdown if there were no reforms in the ratings agencies.
In the US, for example, student loans are creating issues, similar to the sub-prime loan market in 2008. Some delegates stressed that the role of Fitch, Moody’s and S&P in the 2008 financial catastrophe should not be understated. Their role continued to provide skewed credit ratings, which continue to allow “the affluent to hedge them against risk”.
Others called for an independent, diverse ratings agency, one which is not prejudiced against developing nations.
One thing is certain: the current flawed ratings system needs to be addressed. A new system is
needed for future global needs and wider access to global finance.
It is also a compete misnomer to say that South Africa would become an undesirable destination for investment. Foreign Direct Investment (FDI), for example, takes a long-game view – taking into account a country’s long-term economic forecast in terms of, among others, consumer spending, infrastructure projects and government stability.
But the circumstances we find ourselves in require that we re-double our efforts to radically transform our country’s economy. The government has been clear on this: we can no longer afford to be a country that relies on the production and export of primary commodities.
We need to continue working to bring about structural changes at two inter-related levels: first, we need to place our productive sectors firmly at the heart of a new growth path that will move us up the value chain – and second, we must significantly broaden the base of economic participation. These are commitments of the National Development Plan and provide the only plausible basis on which to secure higher rates of inclusive growth.
These objectives and imperatives are independent of the ratings agencies’ short-term view of the South African economy and our political landscape.
Noordien works for a state-owned company. He writes in his personal capacity.