Study dispels global credit rating bias claims

A new study has indicated that global rating agencies have not exhibited any notable bias against developing countries, including Ghana, contrary to recent suggestions.

The study – co-authored by Dr. Richmond Atuahene, a banking consultant and K.B. Asante, a financial analyst – chronicled the nation’s ratings between 2003 and 2023 and analysed the methodologies used by rating agencies such as Standard and Poor’s (S&P), Moody’s and Fitch, and found that multiple downgrading of the nation’s credit rating – particularly in 2022 – was justified based on empirical evidence.

“From both quantitative and qualitative data reviews, there is no evidence that S&P, Moody’s and Fitch have been reckless in downgrading the Ghanaian economy eleven times in 2022,” the paper reads in part.

“All bonds issued, including Ghana’s debut bonds, have risk rated either B+, or BB- and BB+ by Fitch, Standard and Poor’s or Moody’s. Successful issuance of the various bonds was testament to investors’ renewed confidence as well as positive ratings by the three credit rating agencies. Credit rating agencies had been incredibly important for Ghana for several reasons,” the authors posited.

They added that favourable and positive ratings over the past 16 years have enabled government to raise capital on the international financial markets.

The study also pointed out that credit rating agencies play a vital role in modern capital markets, with their evaluations of sovereign entities increasingly serving as benchmarks for regulators and global investors. Since 2007, international credit rating agencies have been instrumental in reducing information asymmetry between the state and investors, providing valuable insights into the country’s creditworthiness.

Notably, it continued that agencies such as Fitch, S&P and Moody’s have consistently assigned risk ratings of B+, BB- and BB+ to all bonds issued, including Ghana’s inaugural bonds. The successful issuance of those bonds serves as a testament to both investors’ renewed confidence and the positive ratings bestowed upon them by the three credit rating agencies.

“Empirical pieces of evidence based on both quantitative and qualitative data clearly showed that during the year 2022, the Ghanaian economy was downgraded eleven times by global credit rating agencies – Fitch, Moody’s and S&P – as a result of dwindled foreign exchange reserves; persistent depreciation of the local currency against major trading currencies like the US$, euro and UK pound sterling; high inflation, high fiscal deficit; current account deficits, high debt servicing obligations; lack of access to capital markets; shortfall in government revenues and an increase in expenditures associated with the pandemic; over-bloated government expenditures and the weakened economy – which clearly showed that Ghana was rightly classified as a defaulting nation by credit rating agencies,” it added.

The call over perceived bias began getting louder in the wake of the pandemic. In April 2020, a month after the nation’s first confirmed case of the virus, Minister of Finance Ken Ofori-Atta in an article titled ‘What does an African Finance Minister do now?’ famously quizzed: “Are the rating agencies beginning to tip our world into the first circle of Dante’s Inferno?” – A reference to ‘Limbo’, the first in nine circles of hell as captured in the 15th-century classic.

That same month, in opening remarks as Chairman of the Development Committee of the World Bank and International Monetary Fund (IMF) at the 2020 Spring Meetings, he called for a new global financial architecture, saying: “We must design a new global financial architecture in order to rebuild global growth and institute a new global public good” – a point he reiterated during the Vulnerable Twenty (V20) meetings this year.

Most recently, President Nana Akufo-Addo – speaking during the 30th annual general meeting of the African Export-Import Bank (Afrieximbank) in Accra said “reckless downgrades” by the agencies are detrimental to the economic fortunes of African countries, as he charged stakeholders to build strong financial institutions.

That sentiment was echoed by the Regional Director-United Nations Development Programme (UNDP), Ahunna Eziakonwa. Citing a recent study by the agency, she suggested that “less subjective assessments” by the agencies cost Ghana and other African nations US$75billion annually.

However, the authors believe that investors and other stakeholders were already wary of the nation’s high debt level, terribly exposed currency, and excessive reliance on imports. Coupled with the domestic debt exchange programme and unilateral suspension of Eurobond payments, these have seen the nation lose some of its pre-existing goodwill.

Meanwhile, to remedy the situation, they said it is crucial for government to promptly address and eliminate any policy uncertainties. This action, they argue, will create a favourable environment for domestic firms – motivating them to increase their investments in the economy.

The resulting accelerated economic growth will enable government to generate higher tax revenues, potentially leading to an improvement in the debt situation. Additionally, the positive rating suggests that increased domestic investment could also attract higher levels of foreign direct investments (FDI).

“The improving economic situation and government debt environment will allow risk rating agencies to adjust the country’s risk level upward. Economic growth and investment need to be stimulated to revive government’s debt position and return its credit ratings to investment grade.

“Achieving investment-grade ratings will increase investment inflows into Ghana, thus putting government in a position where its economic conditions will improve. Key strategies need to be developed and directed toward various investments in the agricultural sector and development projects – like road networks, railway systems and incentives, both domestically and internationally – to improve the country’s sovereign credit rating,” it added.