Trends in global sovereign ratings: How must Asia respond?
This is a speech delivered by Bangko Sentral ng Pilipinas governor Amando Tetangco Jr. on Wednesday at the "Credit Ratings: An Asian Perspective" seminar, which was held as part of the Philippines' hosting of the 45th ADB Board of Governors' Meeting.
In the almost four years since the Global Financial Crisis of 2008, the world has changed in many fascinating, yet fundamental ways. One of the most important, but least understood, is the ongoing downgrades in the AAA sovereign credit ratings of the advanced industrial world… and the ongoing upgrades of much of the developing or emerging world.
I say "important" because this trend has significant implications for the cost of capital that sovereigns are charged when raising funds in the global markets. In addition, this broad rebalancing in the global sovereign credit rating landscape also has overarching importance for the corporate and bank ratings in each individual country. Thus, those ratings are being influenced as well.
I also say “least understood” because, quite frankly, many people - governments and investors alike - don't really understand what causes an upgrade or a downgrade… It is my hope our distinguished panel can educate all of us today.
It's hard to overestimate the scope of this adjustment: at the start of 2007, S&P and Moody's had both rated the US and 13 countries in Europe as AAA credits; as of today, S&P has downgraded five of those, including the US, while Moody’s has downgraded two, not including the US. The most recent victim of the downgrade sword is Spain, which last week got the axe out of AAA territory. Though the downgrades have been driven by different economic, financial and political factors… and the timing of credit action by the two rating agencies is nowhere parallel… the truth is, virtually no AAA country is immune to intense and increasing scrutiny – just look at the US Government.
What is interesting is that, at the same time these downgrades have occurred, numerous emerging market countries have been moving in the other direction… receiving ratings upgrades. This list includes China and Korea (both now in AA land), Hong Kong (which has achieved one AAA rating), Indonesia (which has reached investment grade) and, right at home, the Republic of Philippines, which has climbed to BB+ with Fitch and BB with positive outlook at S&P. We're still waiting on Moody's to come around although, I have to say, the markets have moved faster than all three major credit rating agencies, if one were to base “rating” on the actual “pricing” that Philippine debt has been able to manage of late.
For the emerging market world, these upgrades represent more than a simple badge of honor. By reflecting improved credit worthiness, the higher ratings also bring with them the opportunity to achieve lower financing costs and increased FDI flows. These trends, in turn, provide new impetus for greater corporate sector investment, enhanced job creation and ultimately, higher growth rates and broader-based prosperity.
However, they can also create new complications, particularly in terms of monetary policy and managing volatilities in capital flows.
For certain, from my perspective as Governor of the BSP, despite these possible complications, the rebalancing trend in global sovereign credit ratings dovetails with one of the key initiatives we've been pushing in the BSP in recent years: the deepening of our local currency capital markets. We in the BSP have learned from previous crises that the healthy development of our local currency capital markets is integral to our long-term growth prospects. We also believe this trend will allow for greater financial stability as our corporations and banks have efficient options to fund in pesos, lengthen borrowing tenors and diversify away from traditional heavy reliance on loans.
This issue - the deepening and further integration of Asia's local currency capital markets - is also near and dear to the hearts of my fellow ASEAN colleagues. In recent years, ASEAN has taken many steps to drive integration of our bond markets. These include the creation of the US$700M Credit Guarantee and Investment Facility (CGIF) and the establishment of ASEAN+3 Bond Market Forum (ABMF), both under the auspices of the ABMI .
One point that remains outstanding, however, relates to credit ratings of sovereign, corporate and financial institutions. The main issue is simple but enormously important - how to create a unified credit ratings system acceptable and used by all countries and investors in the region as a way to make “apples to apples” comparison. The need for this is widely recognized. Progress on this front has been made by the Association of Credit Rating Agencies in Asia (ACCRA) when it published the “ACRAA Code of Conduct Fundamentals for Domestic Credit Rating Agencies” during its tenth anniversary in 2011.
However, more work remains to be done. But, I would not hazard to prescribe at this juncture, an optimal way to go about this. I shall not hazard to say whether we should grow regional CRAs or “force” the global CRAs to look at our region with more openness, given the region’s excellent performance in the recent crisis.
What is clear for now, however, is that any work going forward should include the rebalancing of sovereign credit ratings for the region and globally. It is likewise imperative that future work will include the careful education of investors and governments alike and greater transparency in the thought processes and methodologies that are to be used to arrive at such ratings.
It is my hope that from the panel discussions this afternoon, we can define how we could best address these issues in order to make any work on Asian credit rating truly relevant to the process of deepening and integrating our capital markets.