Moody ratings

A mixed bag of ratings faces pushback and calls for a new credit rating methodology

Source: Reuters

In 2023, Moody’s Rating released its credit rating for the Nigerian economy, downgrading it from B3 to Caa1. Recently, they raised the rating back to B3 and revised the outlook to “stable.” A score of Caa1 represents “substantial risk,” while B3 denotes “highly speculative.”

The agency cited the CBN’s adoption of NFEM, which ensures transparency for forex participants, growing FX reserves, and reduced inflationary pressures as key drivers of this upgrade. Another credit rating company, Fitch, issued a report on the credit rating of the African Export-Import Bank (Afreximbank) and announced a downgrade from BBB to BBB-. They questioned the ability of some of the bank's debtors (Ghana, Zambia, South Sudan) to repay their loans and stated that the bank would need to restructure the payment terms for these countries.

Just two weeks earlier, on May 16, Moody’s made history by cutting the U.S. sovereign rating from Aaa to Aa1, marking the first downgrade since 1919, and shifted the outlook to “stable.” Moody’s flagged America’s soaring $36 trillion debt, persistent budget deficits, and rising interest-payment burdens as the principal reasons for its decision. Notably, this was the first instance in history that all three major credit-rating agencies—Moody’s, S&P, and Fitch—had rated the U.S. below the top tier.

So what?

Similar to the accounting firms, including Deloitte, EY, PwC, and KPMG, the credit rating industry has its own version of the big three: Fitch, Moody’s, and S&P. They provide a grading system used by investors (primarily bond investors) and debt issuers. These grades indicate the level of risk associated with investing in that economy. They have existed for a considerable time and hold significant weight among stakeholders who rely on this information.

A higher rating translates directly into access to more foreign investment with lower borrowing costs. Therefore, countries with improved ratings can release funds earmarked for interest-rate financing and redirect them into other sectors of the economy. Conversely, a country with a C grade would struggle to access loans and would face higher borrowing rates due to the increased risk associated with such economies.

Over the years, however, there has been some discussion about the one-size-fits-all methodology applied by these credit rating agencies. They have built a reputation for maintaining an objective and globally trusted methodology, yet there remain nuances in grading all economies and financial institutions uniformly despite the existing differences among them. For instance, regarding Afreximbank’s downgrade, Fitch classified the loans issued to countries like Ghana as Non-Performing Loans, which is inconsistent with the parameters Afreximbank employs to categorise loans to countries in which it holds shares (those shares can serve as collateral).

Additionally, there appears to be a Western bias in the perspectives of these companies, where the lens through which they scrutinise Western economies and companies contrasts with how they assess the African region. With this in mind, organisations like the African Union aim to establish a regional credit agency that mitigates any bias and can provide holistic and objective evaluations of African economies.