A rating agency is a firm “that assigns credit ratings – ratings of the debtor’s ability to pay back the debt by making timely interest payment and of likelihood of default”.
Such an agency “may rate the creditworthiness of issuers of debt obligations, debt instruments, and/or, in some cases, the servicers of the underlining debt, but not in individual consumers”.
Fitch Ratings Limited, Moody’s and Standard and Poor’s are the three major rating agencies in the world.
The assessment of a nation’s economy by the rating agencies is significant in the sense that the ratings are used by other countries, financial institutions and investors to determine the credit worthiness of a country.
The results of the scrutiny of a country’s economic performance are published periodically. A higher rating is beneficial to a country because it attracts lower interest rates attached to a loan, and vice versa.
Results of assessment of economies of countries for 2015 by the three major rating agencies show that the highly developed nations, invariably, score higher ratings with positive or stable outlook or prospects.
The United States, United Kingdom, Germany, Australia, Canada and Belgium, among others, occupy the top spots on the list with “AAA” scores and their outlook described as “stable” by the rating companies.
Developing countries of Africa perform below the “A” notch and many reflect negative outlook.
Standard and Poor’s, Moody’s and Fitch rated Gabon “B+” with either stable or negative outlook. For the period under review, Gabon stands out as one of the best results for Africa.
The rating firms put Ethiopia’s economy at level “B”, with stable prospects.
For Latin American countries, Brazil is among the best performers. Brazil’s economy is put at “BB+” and “Baa” with stable or negative outlook.
Egypt and Ghana are among the worst performers in economic and financial management for the period.
Egypt’s economy is awarded grade “B-“(positive); “B3” (stable) and “B” (stable) – by Standard and Poor’s, Moody’s and Fitch, respectively.
Ghana’s grades are similar to those of Egypt.
Standard and Poor’s’ grade for Ghana is “B-“(stable); Moody’s, “B3” (negative); and Fitch, “B” (negative).
In downgrading Ghana’s performance, Standard and Poor’s stated that it doubted whether the Ghana government could reduce quickly the high fiscal deficits.
In his response, Ghana’s Finance Minister, Mr Seth Terkper, said he was surprised by the low rating from Standard and Poor’s.
He said the rating did not reflect Ghana government’s prospects in stabilising the macro- economy and prospects from the International Monetary Fund (IMF) deal.
But the Director of Standard and Poor’s, Ravi Bhati, did not agree with Mr Terkper’s Finance Minister’s response to his company’s assessment of Ghana’s economy.
“There has been a recent slight respite due to the issuance of Eurobond, there is not a clear path out of this high fiscal deficit situation”, he said.
According to Standard and Poor’s, Ghana’s economic growth between 2014 and 2017 will be six per cent, on average.
For lowering Ghana’s grade from “B2” to “B3”, Moody’s advanced the following as factors:
- “Deteriorating debt dynamics as reflected by increasing debt burden due to large fiscal imbalances and a sharp weakening of the country’s national currency, combined with reduced debt affordability stemming from a high cost of funding on the domestic market.”
- “Increased government liquidity risks as the government faces large gross borrowing requirements and more difficult domestic and external funding conditions”.
On the negative outlook, Moody’s said, it “reflects further downward risk to the country’s debt dynamics and liquidity pressure in a short term, if the country’s policy fail to successfully contain its fiscal deficit, stabilise its currency and address current impediments to higher economic growth, “Moody’s said.
According to Moody’s, Ghana’s interest cost now accounts for one-third of governments revenue. Cost of interest as a percentage of Gross Domestic Product (GDP) rose to 7 per cent in 2014, from 2.5 per cent in 2011.
Fitch Ratings Company said in a statement: “The outlook is negative; consequently, Fitch’s sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade.”
On prospects, Fitch said that the following, among others, could lead to a revision of the outlook for the economy from negative to stable: narrowing of the country’s current account deficit; improvement in international reserves; effective fiscal consolidation that would place debt-to-GDP firmly on a downward trajectory; and improvement in Ghana’s external position.
In his reaction to the rating agencies’ downgrading of Ghana’s economy, Mr Seth Terkper said, “We are positive of regaining our ratings because the country will grow back to a positive path.”
The Managing Director of InvestCorp, an investment bank, described the downgrading as “more speculative than otherwise”.
He said markets would respond to the government’s commitment to consolidation and the impact of the IMF deal on the plan to restore credibility.
Commenting on the lowering of Ghana’s grades, Mr Kwamena Essilfie Adjaye, Interim Chairman of Ghana Growth Development Platform, said the development should be of concern to Ghana.
“It doesn’t matter what we in Ghana think of the rating and changes in the rating by the rating agencies, “he said.
“They have their means of collecting data from nations and corporations and they review the ratings and occasionally, when they feel conditions merit a change in the rating, they change the rating: so it matters a great deal,” Mr Adjaye said.
The Chairman of Ghana Growth Development Platform, a group of non-partisan economists said, “We, as a nation, should be concerned that the assessment of economic conditions or prospects has been decreased by Moody’s, Standard and Poor’s or Fitch, which one will come out with a revision, and we should use these releases when we have downgrades to look seriously at what they proposed as the factors or the reasons for the downgrading and address them.”
Source: Graphic