credit rating agency interview
Post on 18-Mar-2016
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Credit rating agencies – companies that offer opinions on bonds issued by government or corporates – will soon be regulated in South Africa if Parliament passes the Credit Rating Services Bill. LIESL PEYPER spoke to Roy Havemann, acting chief director in the tax and financial sector policy unit at National Treasury, about the bill’s proposed objectives
What happened
Should we care if South Africa or any South African institution gets a negative credit rating?Yes. A bad credit rating means a country would be less able to finance debt. SA has to borrow a percentage of what it spends every year from foreign and domestic capital markets.
Most of our money is borrowed from South Africans but we also borrow a portion of our money from overseas.
Generally in any given year SA borrows about R150bn locally and offshore. The poorer our credit rating, the higher the interest rate we have to pay.
What factors do these agencies base their ratings on? They have a complex ratings metho dologies. Generally they consider our overall debt/GDP [gross domestic product] ratio, which gives a sense of how much outstanding debt we have.
They look at things like overall GDP growth, tax revenue collection, overall socioeconomic conditions and inflation.
But probably the most important factors are the overall level of debt, the budget deficit and the proportion of foreign debt.
Credit rating agencies have a lot of power. Their calculations, which are sometimes wrong, can lead to markets collapsing (con-sider what happened with US home loans and in Greece). How did they become so influential? The agencies are almost like auditors – they are independent.
However, there are ways in which they exercise power, for example Regulation 28 of SA’s Pension Funds Act states pension funds must invest in highly rated instruments such as bonds, which are rated quite well by these agencies. That is an international trend
– pension funds in all countries must invest in instruments that are well rated.
When we have a situation as we saw in Greece, whose credit rating was downgraded in a very short space of time, the result was international pension funds [were compelled] to sell their Greek government debt.
That is an example of how the law stipulates that investors must consider the credit rating agencies’ opinions when determining how to invest their money.
Are these agencies currently ac-countable to anyone? Not before the recent financial crisis. But let me make it clear, the new bill doesn’t prescribe to credit rating agencies.
It is very similar to the Auditing Profession Act, which stipulates good governance and requires there should be no conflicts of interest. The bill doesn’t give us the power to tell agencies what credit rating to give.
Many of the agencies are not based in SA – would we be able to regulate them if they operate from Frankfurt or New York?The same law was introduced in almost every other G20 country.
Our bill is modelled almost word for word on European Union legislation. A credit rating agency that operates in Europe or a credit rating agency that operates in SA must comply with almost exactly the same law. Aren’t these regulations a case
of government being annoyed about the Moody’s Investors Ser-vice critique of the SA National Roads Agency (Sanral) e-tolling in Gauteng?I don’t think it should be seen as related at all. The draft of the bill was released in August 2011 and we tabled it in Parliament at the end of last year [before Moody’s lowered Sanral’s longterm rating].
Unfortunately there is no story there [laughs].
Will the law criminalise state-ments or sanction rating agencies that could impact negatively on our economy?No. The bill doesn’t outlaw having an opinion. But it will require that agencies must be officially registered.
If an agency is not registered, pension funds and banks, for example, would not be able to rely on its credit ratings for investments.
legislation
Rating agencies
You emphasise the importance of the independence of credit rating agencies. Has SA experi-enced a situation where a credit rating agency had vested in-terests or where employees of such agencies tried to improp-erly influence a credit rating?Yes, there is a section in the bill that deals with conflict of interest.
This is actually a major problem, particularly for the smaller credit rating agencies, who often have only two or three clients and therefore can be influenced to give them good ratings.
The bill requires all credit rating agencies to disclose their top 20 clients.
Before we go . . . is there any South African sport team you would downgrade? [Laughs]. The people who lost 240 against Sundowns the other day. Who was that again? I can’t even remember.
STANDARD & Poor’s became the third of three major credit rating agencies in four months to downgrade its outlook on SA to negative from stable. S&P cited fundamental structural economic and social problems such as unemployment for its decision.
Finance minister Pravin Gordhan had earlier lashed out when US agency Moody’s downgraded the SA National Roads Agency (Sanral) from A3 (upper medium grade) to Baa1 (lower medium grade), citing concerns over e-tolling income.
Credit rating agencies came under international regulatory scrutiny when they failed to foresee the US and European financial crises of 2008. In 2011 SA’s National Treasury tabled the Credit Rating Services Bill to bring the regulation of SA credit rating agencies, such as Global Credit Rating Co (GCR), in line with international standards set by G20 countries’ regulations.
The interview
ExTRA SouRCES: TIMES LIVE, BuSINESS DAY
Gauteng’s controversial
proposed e-tolling system led to a
downgrade in SA’s road agency’s
credit rating.
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