The decision by the Brics nations to establish their own credit ratings agency is foolhardy and based on ideological nonsense. President Jacob Zuma this week announced that the Brics nations of Brazil, Russia, India, China and South Africa wished to set up such an agency in order to “further strengthen the global governance architecture”.
This decision is based on the idea that the world’s leading credit rating agencies – Moody’s, Standard & Poor, Global Ratings and Fitch Ratings – are biased in favour of developed nations and favour “white capital”.
The problem with this kind of narrow thinking is that an established rating system establishes a global standard and to stray from this standard is akin to reducing the university pass rate because too few students are passing their exams. Setting a different standard doesn’t change the fundamental economic woes facing a country – it just makes politicians look better.
The move is like creating a new standard for the metre as a unit of length that strays from the globally accepted SI definition of 1 metre = the distance light travels in a vacuum in 1/299,792,458 seconds, or to parody a hashtag: #sciencemustfall.
A country’s economic rating is based on a number of factors that include:
- Public debt
- Currency reserves
- Fiscal policy
- Economic strength
These measures are readily available, and therefore to establish a Brics-favouring rating agency would be at odds with the established measurement standards available.
Investors, however, follow the market and asset managers display confidence in a country through Credit Default Swaps (CDS) spreads. The CDS market shows the spread on the foreign debt a country has and has already started moving towards a downward rating for South Africa.
The market and the ratings agencies don’t always agree but they are at least directional – and a much more realistic view than a Brics-favouring agency would have.
Trevor Manual, South Africa’s highly regarded former finance minister, has argued that even if a Brics agency were created investors would still follow the established ratings of Moody’s, S&P et al.
Although CDS spreads are far from stable, the market does shatter the myth that ratings agencies dictate sentiment. As a result, a Brics ratings agency would have no clout since the market would make up its own mind in any case.
There is therefore no rationale for establishing a Brics rating agency which would be as legitimate as a state-owned broadcaster.