Understanding credit rating agencies
A credit rating agency is “a company that assigns credit ratings of the debtor’s ability to pay back by making timely interest payments and the likelihood of default”.
Advertisement
A credit agency “may rate the creditworthiness of issuers of debt obligations, debt settlement and/or, in some cases, the servicers of the underlining debt, but not in individual consumers”.
Credit ratings assigned by the rating firms may be in the very high, high, low or lower grades. Higher ratings attract lower interest rates on loans and vice versa.
There are three top credit rating agencies – Moody’s, Standard and Poor’s and Fitch Ratings Limited. Others include JP Morgan and Trading Economics.
It is regarded that the three top credit agencies command about 95 per cent of the world’s rating business.
Credit ratings may be indicated in alphabetical or numerical symbols.
Moody’s, Standard and Poor’s (S and P’s) and Fitch Ratings Limited present their ratings in alphabetical letters such as AAA, BBB, AA, BB and so on.
Trading Economics (TE) indicates its ratings in figures from 100, the highest, to the lowest which is zero.
TE explains why it assigns ratings in figures: “The Trading Economics Credit Rating (TE Rating) scores the creditworthiness of a country between 100 (riskless) and zero (likely to default).
“Unlike the ratings provided by the major credit agencies, our index is numerical because we believe it is easier to understand and more insightful when comparing multiple countries.
“Arguably, our ratings are less likely to be manipulated because they are unsolicited and we are not paid in any way to provide countries with ratings,” the TE rating agency further explained.
It added, “technically, our ratings are based on a forward-looking macro-economic model which takes into account several leading economic indicators, financial markets and very little discretion.”
In comparing credit ratings of countries, I will, therefore, use TE numerical ratings as a base for better understanding and appreciation.
Comparatively, a TE score of 100 is equivalent to AAA at Standard and Poor’s (S and P’s); Aaa at Moody’s and AAA at Fitch. A score of 100 is classified as a “prime” grade.
Scores of 95, 90 and 85 at TE are equal to AA+, Aa1, AA+; AA-, Aa2, AA- at S and P’s, Moody’s and Fitch, respectively. These are described as belonging to the “high” grade.
Ratings of 80, 75 and 70 by TE represent A+, A1, A+; A, A2, A and A-, A3, A- at S and P’s, Moody’s and Fitch, respectively. Scores of 80, 75 and 70 are classified as “upper medium” grade.
Ratings of 65, 60 and 55 at TE are equivalents of BBB+, Baa, BBB+; BBB, Baa2, BBB and BBB-, Baa2, BBB- at S and P’s, Moody’s and Fitch, respectively. This class of scores fall within the “lower medium” grade.
Scores of 50, 45 and 40 at TE is equal to BB+, Ba2, BB+; BB, Ba2, BB; and BB-, Ba3, BB- at S and P’s, Moody’s and Fitch, respectively. Ratings of 50, 45 and 40 are put in the “non-investment” grade.
Ratings of 35, 30, and 25 at TE is the same as B+, B1, B+; B, B2, B; and B-, B3, B- at S and P’s, Moody’s and Fitch, respectively. This class of scores fall within the “highly speculative” grade.
A score of 20 at TE is equivalent to CC+, Caa1, CC at S and P’s, Moody’s and Fitch. These scores belong to the “substantial risk” grade.
Advertisement
A rating of 15 at TE is equal to CCC, Caa2 and CC at S and P’s, Moody’s and Fitch, respectively. This class of rating is within the “extremely speculative” grade.
A score of 10 at TE is equivalent to CCC-, Caa3, CCC at S and P’s, Moody’s and Fitch, respectively. This level of rating belongs to the “in default with little prospects of recovery” grade.
A rating of 5 at TE is the same as C, C, C, at S and P’s, Moody’s and Fitch, respectively. A 5 score also belongs to the “in default with little prospects of recovery” grade.
A zero score is equivalent to D, / (slash), DDD at S and P’s, Moody’s and Fitch, respectively. This belongs to the “in default” grade.
Advertisement
Nations placed in the “prime” or “riskless” grade are: Denmark, Germany, Liechtenstein, Luxemburg, and Switzerland.
Australia, Austria, Bermuda, Canada (99), Finland, France, Hong Kong, Isle of Man, Kuwait, New Zealand, Norway (99), United Arab Emirates, United States and United Kingdom belong to the “high” grade.
African countries received the following ratings as at present: Angola (41); Burkina Faso (30); Cameroon (30); Cape Verde (35); Egypt (28); Ethiopia (34); Gabon (40); Ghana (31); Ivory Coast (38); Kenya (20); Morocco (54); Mozambique (30); Namibia (55); Nigeria (28); Republic of Congo (20); Senegal (35); Seychelles (30); South Africa (39); Tunisia (44); Uganda (33); Zambia (34) and Kenya (20).
The credit rating agencies have rated Ghana’s economy as follows: Moody’s – B3 with stable outlook (September, 2016); S and P’s – B- with stable outlook (October, 2014); Fitch – B with negative outlook (March, 2014) and Trading Economics – 31 (April, 2016).
Advertisement
It should be noted that Moody’s last month, changed Ghana’s economic rating outlook from B3 (negative) to B3 (stable or positive).
This latest rating has been misinterpreted by a section of the Ghanaian mass media and some government officials in a way that sent out wrong signals.
The rating does not mean that Ghana’s economy has been upgraded or that the grade has changed. What has changed is the outlook of the economy from negative to positive.
As outlined earlier, Ghana’s economy, presently, belongs to the “highly speculative” grade.
That explains why the country’s Eurobond issues have attracted high interest rates of 10.5 in 2015 and 9.5 in 2016.
Ghana’s think-tanks, government officials and some individuals have commented on the recent Moody’s rating and the International Monetary Fund (IMF) Extended Credit Facility (ECF) to Ghana and the Debt-Gross Domestic Product (GDP) ratio.
The Finance Minister, Mr Seth Terkper, said the rating would influence Ghana’s economic outlook.
Dr Joe Abbey, Executive Director of Centre for Policy Analysis (CEPA), said the ECF was restoring economic stability but not reducing poverty.
The Member of Parliament for New Juabeng South, Dr Mark Assibey, said “in any case, under the IMF our economy is not going to grow. It just stabilises.”
In its 2015 State of the Economy Report, the Institute of Statistical, Social and Economic Research (ISSER) pointed out that it was necessary to diversify Ghana’s economy with massive investment in agriculture and infrastructure.
Ghana’s economy risked moving into recession, like Nigeria, if successive drop in economic growth was not stopped.
Prof. Newman Kwadwo Kusi, Executive Director of the Institute for Fiscal Policy, said Ghana’s debt–GDP ratio had reached a level considered to be above the sustainability threshold – posing serious difficulties to macroeconomic stability and growth.
