LocationsFrequently Asked Questions
Governments need various information about the credit ratings process, including understanding the roles of different actors such as credit rating agencies, international organizations, and investors. They also need to know about the responsibilities involved, the benefits and costs of getting a credit rating, potential risks, and how the credit ratings process aligns with other financial aspects such as national budgeting, investment, and trade regimes.
Different actors play various roles in the credit ratings process. Governments provide a legal and social framework, engage with credit rating agencies, international organizations, and investors, and strive for transparency. Credit rating agencies offer opinions on the creditworthiness of entities, while international organizations provide support to countries. Investors, including private and official creditors, play a crucial role in lending capital and assessing risk.
Sovereign states have responsibilities such as ensuring transparency, providing accurate data, and communicating effectively with credit rating agencies and investors. Transparency and data accuracy are essential for reducing borrowing costs and improving credit ratings.
Sovereigns must also align their budgeting and planning processes with the credit ratings process and maintain a good relationship with international organizations and investors.
Obtaining a credit rating can lead to increased investment, reduced uncertainty, and less dependence on bank financing. It legitimizes a country's economic operations, encourages investment in data transparency, and enhances engagement with investors. However, there are costs associated with obtaining a credit rating, including fees for rating services and other expenses related to issuing bonds and engaging with investors.
Sovereign ratings can pose risks, especially for developing nations. These risks include downgrades, increased borrowing costs, and challenges in renegotiating debt obligations with private creditors. Sovereign ratings can also affect local, municipal, or firm-level ratings and impact investment and trade regimes. Reputational costs and legal constraints further contribute to the risks associated with sovereign ratings.
The credit ratings process aligns with various financial aspects such as national budgeting, investment, and trade regimes. It influences the borrowing costs of sovereigns and affects the lending behavior of investors. The credit ratings process also impacts local, municipal, or firm-level ratings and can signal important information to the capital markets. Alignment with international organizations and transparency in data reporting are crucial for navigating the complexities of the credit ratings process.
Necessary information and data, macroeconomic indicators, regional and country comparators, necessary capacity, and necessary resources.
Rating agencies develop their own methods based on various metrics such as economic strength, institutions of governance, adaptability, and more. They also compare countries within rating categories and across regions.
Technical skills for government officials, support from external partners such as UNDP or AfriCatalyst, a broader community of practice on credit ratings, statistical and technical resources, and dedicated budget lines for credit rating endeavors.
Building technical skills and resources is crucial for sovereigns engaging with credit rating agencies as it helps in negotiating ratings, responding to reports, and building trust with rating agencies.
Utilizing the credit ratings process, beyond the interaction with agencies, to engage with investors and demonstrate the country’s proactive approach to its risk-perception and risk-assessment.
Whether or not a sovereign is rated by a credit rating agency, a sovereign can utilize the credit ratings themselves to communicate to the capital markets. This is because the credit rating is the chosen signal that the capital markets utilize. Research has shown quite clearly that, in relation to examining developing nations, investors often look for ‘shortcuts’ in order to examine sovereigns that they do not have full and transparent information for, and the best way to do this is to group countries together. This, for the sovereign itself, is rarely appropriate and can lead to misunderstandings. In order to combat this, the sovereign can instead point to comparisons globally via credit rating (or prospective credit rating) to encourage investors to have a fuller picture. It can also aid the sovereign in developing strategies that may not need to be based on the activities of a neighbor, for example, who may be in a very different stage of development. Africa’s diversity across the continent should be emphasized whenever possible when communicating with the capital markets. Also, for the sovereign, being able to differentiate and look at other countries with similar rating profiles across the globe means the sovereign can identify instances where similarly-rated sovereigns have been upgraded, and seek to understand what contributed to that upgrade.
One advantage is the ability to compare methodologies and proactively choose the agency that is most suitable for a particular country. Since the Global Financial Crisis, leading international credit rating agencies have been forced to publish their rating methodologies online. The methodologies are often secured behind a registration-wall, but never a pay-wall. This means that all sovereigns who have, or who are trying to obtain a credit rating, should have incorporated and analyzed the credit rating methodology of the rating agency(s) they have chosen to engage. It is common practice for an issuance of any kind to have at least two credit ratings attached to it. Therefore, a sovereign should seek to better understand the composition of the methodologies and the approaches of the rating agencies, and also their standing in the eyes of investors, and feed all of this into their decision-making processes. Information contained in this web portal will provide support in making that decision, but ultimately there are a variety of factors that may be important for the sovereign to consider; some rating agencies are more quantitative-focused while others are more qualitative-focused. Also, there is a distinct split within the credit rating marketplace, with S&P and Moody’s being out and ahead of Fitch Ratings in terms of market share and levels of issuances rated.
Spreading resources and staff thinly across more than one agency can be a risk. As a sovereign will need two ratings (at least), it is therefore important to allocate resources appropriately. It is often the case that the idea of having a point of contact within the sovereign is promoted, but a more sustainable strategy is required. Sovereigns should dedicate a particular department within a particular ministry as perhaps the point of contact, or even create a new department that can sit above particular ministries and collate the right information. Irrespective, it is vital for a developing sovereign to allocate the right level of resources to this engagement, as anecdotal instances of sovereigns losing a point of contact and not immediately replacing them have been noted by rating agencies. The investment of resources into the engagement with the agencies will bear fruit as it formalizes the relationship, signals the sovereign’s intent to the rating agencies and, ultimately signals the sovereign’s intent to the capital market. The relationship between sovereign and agency is of the utmost importance, perhaps even before the sovereign considers the data, transparency, etc.