Credit Ratings in Africa

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Credit Ratings in Africa

• Increasing Capital Flows to Africa Conference.
• Dave King

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Agenda

• 1. Role of the rating agency and benefits of
  ratings
• 2. An international perspective
• 3. International v.s. local ratings
• 4. Challenges pertaining to SCRs in Africa
• 7. Conclusion

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Role of rating agency

• To quantify relative credit qualitywhich
  facilitates more efficient allocation of capital
  and pricing of risk
• How? - Country risk
• - Industry risk
• - Company risk
• - Instrument risk
• common risk denominator
• Put differently A rating measures the
  probability of default over a defined period

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Success criteria

• Independence
• Internationally accepted methodologies
• Technical expertise and track record
• Confidentiality
• Credibility

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Benefits of ratings

• Investors-Mechanism to price for risk and monitor
  exposures
• Issuers-Increased pool of investors and reduction
  in cost of funding
• General/regulators-Facilitates development of
  more efficient capital markets and improves
  transparency
• Policy makers-Sovereign rating is tool to
  facilitate improvement

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An international perspective

• Until recently, almost exclusively a US
  phenomenon
• Statistically proven correlation between ratings
  and default probability, particularly in
  investment grade band
• Hence direct correlation between ratings and bond
  yields

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Statistical correlations
Mean for SP / Moodys over 8 year time
frame Source FT Credit Ratings International
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International vs local ratings

• International
• - Foreign currency (incorporate all sovereign
  risks including currency conversion) - Truly
  comparable
• - Domestic currency (excludes convertibility)
• Local
• - Tiered against assumed best possible AAA
• - Differentiates risks only within the country

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Questions regarding international ratings in
Africa

• Is the international domestic currency ratings
  philosophy flawed in emerging markets?
• - policy of tightly linking to foreign currency
  ratings
• - sovereign cap doesnt allow for appropriate
  differentiation
• Examples
• - Across countries

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Questions regarding international ratings in
Africa

• Relativity
• SA 8 year default probability A 0,84
• BBB 1,96
• - Comparisons within country

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Questions regarding international ratings in
Africa?

• 2. Africa is overwhelmingly non-investment grade
• Problems
• - International rating agency emerging market
  track record not comparable
• - Substantial difference between agencies in
  terms of non-investment grade default data, i.e

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Questions regarding international ratings in
Africa

• Note In the 10 investment grade categories (AAA
  to BBB-) the differential in default probability
  is around 5. However in the B category alone the
  differential is around 14.

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Questions regarding international ratings in
Africa

• 3. Is there sufficient differentiation of risk in
  Africa?
• Last 9 Ratings from SP (foreign currency)
• Botswana A
• Benin B
• Ghana B
• Senegal B
• Barkino Faso B
• Cameroon B
• Mali B
• Mozambique B
• Madagascar B

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Questions regarding international ratings in
Africa

• 4. Was the rating scale designed for first world
  markets?
• - not sufficient calibration below BBB-
• - need for African National Scale?
• - need to establish on the ground presence?

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What are the local ratings saying?

• We say - Relative likelihood of default
• - Must be comparable to
  international statistics
• - Same ratings in different
  countries?
• - Hence rating ceilings -
  between industries
• 
  - between countries

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Default data comparison

• 8 year cumulative default rates for all
  investment grade related securities
• SP (international) 1,4
• Moodys (international) 1,5
• GCR (national) 1,0
• Source FT

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Conclusion

• SCRs are only the starting point
• Development of local capital markets clearly
  requires national rating scale
• Structured finance role in attracting
  international investments?
• HIPC role in facilitating sustainable improvement
  in credit quality
• The key is for Africa to move up the credit
  quality scale