Credit rating agencies such as Standard and Poor’s (S&P) Global Ratings, Fitch Ratings, Moody’s Investors Service and DBRS Morningstar are NOT always 100% correct and reliable. It is established that there is sometimes a conflict of interest between bond issuers and these rating agencies.
“The conflict of interest between credit rating agencies and the bond issuers from whom they receive fees genuinely undermines the ability of credit rating agencies to provide an unbiased assessment of credit risk.
It is inappropriate to entrust credit rating agencies with the power and relevance to determine only the creditworthiness and fate of sovereign countries and national governments.
Credit rating agencies, in particular S&P Global Ratings, were instrumental in causing the global financial crisis of 2008. The credibility and integrity of credit rating agencies was severely tarnished by their involvement in:
1. Asian financial crisis
2. Financial collapse of New York City in the mid-1970s.
3. Enron scandal
The Financial Crisis Inquiry Commission in the United States of America and European Union officials have largely blamed credit rating agencies for the global financial crisis and European sovereign debt crisis, respectively. The failure of credit rating agencies in this case has been attributed to incompetence and negligence.
According to Gary Witt (formerly of the CDO unit of Moody’s), during his testimony before the Financial Crisis Inquiry, he said that, and I quote: “Moody’s did not have a good model on which to estimate the correlations between mortgage-backed securities, so they invented them.” “Rating agencies sometimes promote inferior products knowing the quality of those products. the titles are not really AAA yet they have passed them AAA”. This is purely a conflict of interest and is one more reason why some leading experts suggest that credit rating agencies should be required to work or operate under the Investor-Pays model to avoid conflicts of interest in their operations.
A S&P Global Ratings of Ghana as CCC+ halts implementation of:
1. Free SHS and government TVET policies? Certainly not.
2. 1 District 1 Factory Policy? Certainly not
3. Road and infrastructure construction projects across the country? Certainly not.
4. Regular supply of electricity throughout the territory? Certainly not.
5. Payments of wages to public sector workers? Certainly not.
6. A government policy or program? Certainly not.
Moving forward, there is a need to accelerate the process of establishing an African credit rating agency, as reiterated by President Macky Sall of Senegal and President Akufo-Addo of Ghana during the 54th session of the Conference of African Ministers of Finance, Planning and Economic Development and 35th Summit of the African Union respectively.
The establishment of an African Credit Rating Agency (ACRA) would help African countries access capital and integrate the continent into global financial markets which still refer to credit ratings from the United States of America/London and Canada.
It is only an inferior mind that thinks these credit rating agencies are 100% perfect and cannot make mistakes in their dealings with sovereign governments around the world. Some of these errors led Moody’s Investors Service to wrongly downgrade Ghana from B3 to CAA1 by omitting key information.
There is a certain type of bias against African economies on the part of US credit rating agencies.
Sri Lanka, a totally collapsed economy, was rated CC by S&P Global Ratings on April 13, 2022, then downgraded to SD on April 25, 2022. Fitch Ratings rated Sri Lanka C on April 13, 2022 and Moody’s on April 18, 2022 rated Sri Lanka. like that.
The Gambia relied on the Central Bank of Nigeria to print its legal tender due to severe currency shortages among other monetary challenges in The Gambia, but Fitch Ratings rated The Gambia as CCC, CCC+ and B-.
Cape Verde has declared a social and economic emergency driven by unprecedented food security and the effects of the Russian-Ukrainian war, the COVID-19 pandemic and drought, but Fitch Ratings claimed that Cape Verde was B- with a stable outlook.
Some have argued that investors always consider analyzing the balance sheet of a country’s economy before investing. This cannot entirely be the true narrative. Russia, Ukraine, South Africa, Nigeria, Egypt, Malta, etc. have a better record, but Benin, the Bahamas, etc. are rated higher than them by S&P Global Ratings. There are more investors in Russia, Ukraine, South Africa, Nigeria, Egypt and Malta than in Benin and the Bahamas.
Others also say that the rankings have a positive correlation with the economic outlook for each economy. It’s never true. The economic prospects of the United States of America, China, the United Kingdom, Japan, France and Russia are much better and excellent than those of Australia, Denmark, Liechtenstein, Luxembourg , the Netherlands, Norway, Sweden and Singapore, but they do not have better ratings than them according to S&P Global Ratings.
Credit scores are good for borrowing, but they don’t determine the success of an economy.