Docstoc

king - PowerPoint

Document Sample
king - PowerPoint Powered By Docstoc
					          Credit Ratings in Africa



Increasing Capital Flows to Africa Conference.

                  Dave King
             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 SCR’s in Africa
7. Conclusion
              Role of rating agency

To quantify relative credit quality…which 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
            Success criteria

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

• = Credibility
           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
          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
                  Statistical correlations
                       Cumulative default rate & yield correlations
       %                                                                          BP
   7                                                                                   160


   6
                                                                                       140

   5
                                                                                       120

   4
                                                                                       100
   3

                                                                                       80
   2

                                                                                       60
   1


   0                                                                                   40
              AAA                         AA-         A-                   BBB-
                    Default probability         Average new issue spread


Mean for S&P / Moody’s over 8 year time frame
Source: FT Credit Ratings International
             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
             Questions regarding international
             ratings in Africa
1. Is the international domestic currency ratings philosophy
   flawed in emerging markets?
   - policy of tightly linking to foreign currency ratings
   - sovereign cap doesn’t allow for appropriate differentiation
Examples:
   - Across countries

   Country       Botswana              SA
             Domestic Foreign   Domestic Foreign
   S&P         A+       A-         A      BBB
           Questions regarding international
           ratings in Africa
- Relativity
  SA 8 year default probability           A   0,84%
                                          BBB 1,96%
- Comparisons within country
 Company        S&P           GCR
              Domestic   National scale
 Rand Water      A             AA
 Eskom           A-           AAA
 Transnet        A-            A+
           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:
                    Questions regarding international
                    ratings in Africa
                                        8 year default data
                   %                                                                   48.3
              50
              45                                                39.7
              40                                     32.4                    34.3   34.2
              35                                                        29
              30
              25                                             20.6
                                                  17.7
              20                 14.3      13.8
              15              8.5       9.8
              10   5.9 5.4
               5
               0

                   BBB-       BB+         BB        BB-        B+         B           B-

                                   S&P                   Moody's

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%.
                 Questions regarding international
                 ratings in Africa
3. Is there sufficient differentiation of risk in Africa?
    Last 9 Ratings from S&P (foreign currency)
    Botswana                  A
    Benin                     B+
    Ghana                     B+
    Senegal                   B+
    Barkino Faso              B
    Cameroon                  B
    Mali                      B
    Mozambique                B
    Madagascar                B
           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?
           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
             Default data comparison

8 year cumulative default rates for all investment
  grade related securities

- S&P (international)               1,4%
- Moody’s (international)           1,5%
- GCR (national)                    1,0%

Source: FT
           Conclusion

- SCR’s 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”

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:18
posted:2/5/2010
language:English
pages:17