The Rating Game

Published 10 years ago

August, in South Africa, will long be remembered as that fateful month when platinum stocks tumbled, dragging the Johannesburg Stock Exchange down. This was the month the police shot 34 miners near Lonmin’s Marikana mine, in Rustenburg. It will also be remembered as the first time Credit Rating Agencies downgraded South Africa since democracy in 1994.

When a country loses its rating or is downgraded, it can hurt the country’s ability to borrow money on the markets.

Credit rating agencies (CRAs) are benchmarks for the regulation of financial markets and provide investors and debtors with information about the creditworthiness of an individual, corporation, or sovereign government. CRAs were established to help measure the quantitative and qualitative risks. They also allow investors to make wiser decisions by taking into account professional risk assessment.


But over the years, CRAs have lost their credibility and have been widely criticized for having too much clout in jittery markets. They’ve even been accused of contributing to the 2008/2009 global financial crisis on the grounds that they did not do a thorough job of rating some financial instruments. They are often attacked for failing to warn of the risks posed by certain securities.

Following the events at Marikana on August 16, 2012, the top three agencies—Standard & Poor’s (S&P), Fitch and Moody’s Investor Services—cut South Africa’s ratings and changed the outlook to negative or stable, citing instability in the mining sector and blaming government. They were concerned by a slowing economy and rising spending pressures.

A year on, the country had a glimpse of confidence from Moody’s. It affirmed South Africa’s investment grade credit rating of Baa1 and maintained the negative credit outlook. However, it says the government’s commitment to fiscal discipline, by ensuring that debt-to-gross domestic product stabilized below 45%, moves to reduce labor unrest and plans to boost growth.

The Baa1 rating is the third lowest investment grade level and places South Africa at the same level as Mexico, Brazil, Spain and Russia. S&P last upgraded South Africa in August 2005 and changed the credit outlook to negative in November 2008 following the global financial crisis.


The national treasury said that Moody’s decision is a sign of confidence in the country’s macroeconomic policy strategies, particularly given the current global economic climate. Treasury said government took proactive measures to address all the key concerns raised by Moody’s and remained committed to implementing such measures.

“Government is confident that the various measures that are being implemented will in time contribute to improved ratings for South Africa. These measures include the comprehensive reviews of both government expenditure and tax policy announced in February this year,” says treasury.

Andrew Canter, chief investment officer at Futuregrowth Asset Management, believes that credit rating agencies seem to wield a lot of power over investment decisions and that the industry’s regulator, the Financial Services Board, should have a firmer hand. He says it is important to regulate credit rating agencies to protect users and the integrity of capital markets. Canter hopes the Credit Rating Services Act, implemented in January, will enable CRAs to recapture their position of trust and credibility.

“By removing the requirement for instruments invested in to be rated, it puts accountability for investment decisions squarely on investors, instead of the false comfort of CRAs. If CRAs don’t do their jobs with diligence, care and independence they can now be held accountable for financial damages,” says Canter.


“The role of CRAs is inherently conflicted, and the new regulations reduce the role of the CRAs in markets and impose high standards on CRAs.”

However, South Africa’s political and socio-economic conditions have deteriorated in the past couple of years and risk is still on the downside. We can’t only place the blame on the global financial market crisis, but also on uncertainty surrounding critical policy decisions.

With all that said, until 1995, South Africa was the only country in Sub-Saharan Africa with a credit rating. By 2012, 17 years later, 20 countries had ratings from the three major CRAs. Foreign direct investment into Africa has increased over the last two decades. How much of this is down to their credit ratings?