Standard & Poor's is one of the world's top rating agencies
International credit-rating agencies are products of economic globalization, especially the liberalization and integration of financial and investment activities. As borrowers or bond issuers may be geographically remote, lenders were unable to learn their creditworthiness or possibilities of borrowers' default. However, lenders needed to know how likely it would be for the borrowers to pay back the debts so that they were able to contain risks of their investments. Against this backdrop, international influential rating agencies emerged to assign credit rating for debt issuers.
Since 1860, when Henry Poor started the rating agency of Standard & Poor's, the business of rating major companies and countries was gradually dominated by the big three agencies - Standard & Poor's, Moody's and Fitch - that still remain the industry standard-bearers and take up 95 percent of global rating business.
In 1975, the Securities and Exchange Commission, the U.S. financial watchdog, acknowledged these three as Nationally Recognized Statistical Rating Organizations. As an economic superpower that had material influence on international financial markets, the United States, in effect, reinforced the monopoly of these agencies by granting such an endorsement.
This history shows that current dominating rating agencies unavoidably have Western attributes. They represent the unchallengeable impact Western nations exert on the global economy. Such a condition results in a biased approach when the agencies assign ratings to bond issuers from emerging nations like BRICS members. Over the past decades, emerging economies impressed the world with rapid economic progress.
With their GDP shares declining from a global perspective, Western countries' endorsement has become less persuasive to emerging nations. While these rating agencies spare no efforts to maintain their monopoly, emerging BRICS nations look for favorable rating assessments to better scale up economic growth. Conflicts between them have, therefore, become unavoidable.
This can be seen from recent moves of downgrading credit ratings of BRICS member nations. Fitch lowered Brazil's sovereignty credit rating to BB+ from BBB- in December 2015, and further downgraded it in May 2016. Since 2016, only Fitch among the big three has assigned an investment-grade rating to Russia. In April, Standard & Poor's and Fitch successively labeled South Africa's state debt as junk following the nation's domestic political reshuffle. Even China's stable outlook was changed to negative by Moody's and Standard & Poor's during the past year. India's ranking was even worse, resulting in its domestic media's widespread criticism on the rating agencies bias against India in assigning a rating. In fact, all the five members of BRICS have questioned the way in which the three agencies operate with double standards and entrenched political bias.
Although BRICS may be irritated by the downgrades that may potentially cause market upheaval, they should look at the rating agencies with a cool head rather than respond with overwhelming criticism.
Admittedly, as well-established organizations, the agencies have developed a complete and effective assessment model and approach. Their professionalism deserves full recognition. It is also debatable that the agencies deliberately lower the sovereignty credit ratings of emerging nations as developed nations have also had their ratings lowered. Besides, the plummeting oil price, domestic instability, international sanctions and shrinking foreign investment all contribute to poor economic performances of Brazil and Russia, thus leading to the downgrade. China, South Africa and India face financial risks of a different nature. A reduction in credit rating more importantly reflects international investors' widespread concerns. Also, the rating calculation is a dynamic process with ups and downs.
Of course, there are problems with the agencies' rating approaches. For example, as they may not have full access to first-hand information on countries they are rating, the agencies may come up with totally different rating results for the same country. During the European debt crisis, the financial condition of some European countries was evidently worse than BRICS nations. However, they still obtained positive ratings. Suspiciously, such results were reached with double standards. Democracy or free election is also one of the key factors in deciding the sovereignty credit rating. This is an evident ideological bias.
No intention to overturn
Believing current rating agencies are assigning them unfair credit ratings, BRICS members have been in discussions to support the establishment of their own rating service. During the 2016 BRICS Summit in Goa, India, the BRICS economies reached a consensus in this regard. They further discussed the possibility of such an independent agency this June when the Second BRICS Finance Ministers and Central Bank Governors Meeting was held in Shanghai.
To further push forward BRICS cooperation and play a greater role in the global financial market, BRICS members should establish a trustworthy rating agency independent from the dominating big three. To this end, they should stick to some basic principles and have a clear objective.
First, the ultimate goal is not to overturn current counterparts, but to offer a better and fairer credit rating service alternative.
Second, the new rating agency co-founded by BRICS can learn from the mature practices of the big three and develop innovations to surpass them. Over the past decades, the growth rate of BRICS countries outpaced that of developed nations. Their global GDP share is also on the rise. But it still takes time for them to catch up with developed economies that are expected to dominate the international financial markets in the long term. The developed nations still spearhead finance and investment theories, innovation as well as manpower resources. It is not realistic or smart to try to bypass the big three that have accumulated experience of more than 100 years. Learning, reforming, then innovating is a more feasible and practical path.
Last but not least, the new rating agency should seek a higher and broader vision and focus more on communication and cooperation with various international and regional organizations and non-BRICS nations. After all, a new rating agency is not just to do business with BRICS nations, but to break the current monopoly and offer a trustworthy credit rating service alternative for developing nations as a whole, as well as developed ones.
(The author is a research fellow with the Beijing Academy of Social Sciences)