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Can BRICS credit rating agency ever take off?

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  24 Sep 2017 12:00 AM GMT

By Amit Kapoor & Chirag Yadav

The BRICS Summit was largely an uneventful affair this year. Apart from the usual declarations for greater cooperation, hardly anything noteworthy took place. Amidst all the dull news emating from Xiamen, there was also a word about India’s push for an early creation of the BRICS credit ratings agency that was proposed two years ago and formally agreed upon last year. However, India’s effort was rendered fruitless as the declaration remained silent on the initiative.

BRICS tions, apart from Chi, have frequently complained about their low ratings by the world’s top three credit rating agencies despite displaying better fundamentals than many Western economies. South Africa has been reduced to junk status while India has been awarded the lowest rating possible. Chi has not been enthusiastic about the idea since it already enjoys higher ratings than its peers. Even in the last few years when India has outperformed Chi in almost all possible aspects, the ratings have not kept pace.

This year’s Economic Survey made it a point to highlight the “poor standards” of the rating agencies. The Survey pointed out that Chi was upgraded from A+ to AA- in 2010 and India has been kept stagnt at BBB- despite contrasting economic performances by the two countries. Since the economic crisis, Chi’s credit to GDP ratio has ballooned (from 140 to over 200) while its growth has fallen. On the other hand, India’s credit to GDP ratio has remained more or less constant (at 75) while growth has exceeded that of Chi. During this period, India has also maged to moderate the government deficit from 8.3 percent in 2011-12 to 6.7 in 2016-17, boost its foreign exchange reserves to among the 10 highest in the world and rrow its current account deficit from 7.8 percent in 2012-13 to 1.4 in 2016-17.

On the face of these trends, the credit ratings hardly make sense. The fault must lie in the methodology that is being used by these agencies as it clearly fails to reflect the real-world scerio. The rating agencies repeatedly cite India’s low per capita income and high fiscal deficit as grounds for its low ratings. However, per capita income is a slow-moving variable. Even if India grows at 7 percent per annum, it’ll take more than a decade for it to graduate from a lower-middle income country to an upper-middle income country. With such a methodology, poor countries should just give up hope of seeing any improvement on their credit ratings for at least a decade or so.

So, India’s issue with the methodology followed by these agencies, which bias the ratings against poor economies, is legitimate. Incorrect ratings have an impact on the money flowing into the economy since a lot of institutiol investors depend on such alysis. Nevertheless, a new credit rating agency backed by the BRICS might not be the answer.

First is the clear conflict of interest. It will be a tough task for the investors, especially in the West, to believe that the ratings from the “independent” agency are being awarded with no governmental pressure and are politically impartial. Second, with the three major ratings agencies commanding more than 90 percent of the market, cracking it for a new entity will take a considerable amount of time and possibly never happen. More competition is always the key in such cases. Therefore, a better approach to taking on the “big three” in the market would be to decide upon a methodology that reflects the credit strengths of fincial entities much more accurately and popularising it by implementing it across the local credit rating agencies of the respective BRICS tions. The next step would be to adopt a model that elimites any conflict of interest and is more performance-based. Filly, there will a need to build a rapport among investors so that they can trust these ratings over that of the “big three”. (IANS)

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