With increasing liberalisation of the financial sector, the importance of credit rating has become a very important aspect raising capital to finance public spending and attracting foreign investments.
Standard & Poor’s (S&P), Moody’s and Fitch are important agencies for credit assessment and evaluation. The credit rating agencies assign grades to economies. For instance, S&P has a credit rating scale ranging from AAA (excellent) and AA+ to C and D. Moody’s assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C etc.
A debt instrument with low rating is considered to be a speculative grade and a country with such rating is more likely to default.
The rating agencies are paid by an entity that is seeking a credit rating for itself or for one of its debt issues. A weak rating will affect donor funding for developing countries and will also affect foreign investments.
Factors affecting credit rating of a country include the level of government borrowing, level of national debt, economic growth prospects, and debt interest payments as a percentage of Gross Domestic Product as well as investor confidence among others.
Need for credit rating
The rating rating can be done for both corporations and countries. Many countries rely on foreign investors to purchase their debt (bonds issue), and these investors rely heavily on the credit ratings given by the credit rating agencies.
Credit ratings for the country give investors an insight into the level of risk associated with investing in a particular country, including its political risk.
At the request of the country, a credit rating agency will evaluate the country’s economic and political environment to determine a representative credit rating.
Consequently, high credit ratings for a country will attract Foreign Direct Investment. A credit rating from one of the agencies can provide further transparency and demonstrate the country’s good standing.
The case for Africa
In 2017, majority of countries in Africa had a low credit rating by S&P, placing them under the junk category. This makes the cost of borrowing high for most African countries.
In 2018 South Africa’s credit rating outlook has been upgraded to stable due to economic recovery, a favourable government debt structure, deep local capital markets and a flexible exchange rate that helps to absorb external shocks.
Kenya’s credit rating remained stable at B+. Cote d’Ivoire’s has B+ credit rating supported by strong macroeconomic performance and low inflation and prudent macroeconomic policies.
According to Moody’s Investors Service report of October 2017, Rwanda has stable credit profile with B2 rating.
Rwanda’s credit profile balances its strong institutions and high economic growth potential against its narrow export base and large external imbalances.
The country’s ongoing reforms supports access to official sector funding on concessional terms while its high growth potential is backed by a favourable business environment and expanding market.
Good governance, improvements in infrastructure and skills in the workforce places Rwanda in a better position compared to other Sub- Saharan countries.
Rwanda ranks among the highest in Sub-Saharan Africa in the Worldwide Governance Indicators, with the country’s focus on the control of corruption being particularly strong relative to regional peers.
FDIs account for the largest source of Rwanda’s external funding.
With strong fiscal and monetary policies it could be possible for Rwanda to maintain stable credit Ratings and to achieve higher ratings in future.
High positive credit rating enables governments to raise capital in the international financial market.
The ratings act as a regulatory tool that compels developing countries to pursue more prudent monetary and fiscal policies for financial mobilisation.
Sovereign credit ratings serve as an incentive for sound monetary and fiscal policies.
Strong Monetary and fiscal policies and their performance affect the credit rating.
The writer is a Kigali based economist and consultant.