Sovereign and credit ratings are not new. They date as far back as 1906 when Standard Statistics was formed as a company with a mandate of rating municipal bonds, publishing corporate bonds and sovereign debts. In 1941, Standard Statistics merged with Poor’s Publishing to form what is known today as Standard and Poor’s Corporation. Other well-known rating agencies have a similar checkered history; Moody’s started ratings in 1914 and Fitch introduced their letter rating concepts in 1923. In spite of the shady role of credit ratings in 2007-2008 that led to the great recession of 2008-2009, rating agencies have remained prominent in economic landscapes across the world.
Credit rating, according to Finney (2021), offers retail and corporate investors material information that guides them in establishing whether bond issuers, related debt instruments and fixed-income securities will be able to meet their financial obligations. These ratings offer an independent assessment of companies and economies of sovereign nations that supports investors in determining the true strength of their economies, and consequently, credit-worthiness. The most influential rating agencies are Standard and Poor’s, Moody’s and Fitch. These three rating agencies cover about 85% of the ratings market. Together with other agencies, they have provided guidance to investors world-wide for over a century now.
In 2003, Fitch and Standard and Poor’s rated Ghana as B Positive and B+ Stable respectively. These remained relatively stable until 2009 when the economy started flip-flopping between negative, stable and developing till date. What’s peculiar, however, is that never has Fitch rated Ghana a B- Negative as seen in their 2022 rating. This is the lowest the nation’s economy has gone as far as Fitch ratings are concerned, resulting in animated public discussions and conversations. Indeed, all economic actors and segments – including the ordinary citizens – have to be concerned, because these ratings have ramifications.
First, negative credit ratings don’t only push the lending investor away; they have the potential of also denying a nation the foreign direct investment (FDIs) crucial for growth of that economy. Most foreign investment firms looking to enter into an economy to do business utilise the economic ratings as part of the complex matrix of considerations which lead them to eventually settle on a country of choice.
In the case of Ghana, being the second-most populous nation in the West African sub-region with over 30 million people, it offers a huge market that could attract massive FDIs (which went up to US$2.6bn in 2020 alone). However, this great advantage can be tainted with negative branding and economic outlooks based on the ratings it has gotten. To this end, the foreign exchange advantage and related economic positives FDIs bring are dwindled; and particularly for the ordinary citizenry, job opportunities that could have been availed get diminished.
As a matter of not getting adequate inflow from bonds issued, and in view of low FDIs (that could have boosted even tax proceeds), the government of Ghana will have to look within to raise funding for government business – including funding for badly needed infrastructure. This could be the starting point of open market operations (OMO), which has a crowd-out effect; where a rise in government Treasury-bills and other securities, ostensibly to attract funds, can pose a threat to commercial bank’s access to deposits.
A rise in T-bill rate – such as the 91-day rate rise from 13.66% to 17.115% between March and May this year – also triggers a round-effect that could spiral high bank lending rates, expensive loans, low repayment capacities and further complications which could dampen our past economic gains. In essence, such situations lead to very expensive borrowing rates for small to medium enterprises as these often lack negotiation powers and financial engineering to float above the tides.
There is also an increased cost to banks – which now have to advertise more, be involved in greater engagement with their clients, deposit promotions; and involved in extensive presentations to gain a stable deposit position. Additionally, they will pay more in higher interest on deposits that could impact their overall profitability and growth trajectory, particularly so since the cost-to-income ratio has been declining from its high of 50% since 2018 among banks in Ghana.
In view of this, banks need to begin to psyche themselves up early and budget adequately in 2022 and beyond for these possibilities. They might also have to improve their NFIs, which have been hovering mostly below 35% of Ghanaian banks’ total income since 2015, to reduce the impact of effects from negative economic ratings – and do one more thing: reduce stakeholder expectations of high growth and business expansion.
The writer is the Head of Sales at Stanbic Bank Ghana
