International Rating Agencies

INTERNATIONAL RATING AGENCIES

(I) Perceptions of International Rating Agencies:
There are various rating agencies in the world over. However, Standard & Poor
(S&P), Moodys & Fitch are top rating agencies of the world. These rating agencies have a long experience, reputation & have spread their wings in various countries. S&P was esta lished in !"#$, Moodys in !%$$ & Fitch in !%!&. S&P has over !'$$ e(ployees and presence in over '! countries. Moodys with over '!$$ e(ployees & has presence in over !" countries, while Fitch has over !&$$ e(ployees & has presence in )* countries. The erstwhile +uff & Phelps rating agency has een ta,en over y Fitch. Though, these rating agencies rate various short ter( & long ter( instru(ents, it also underta,es the -o of rating a country or what is ,nown as Sovereign .ating. The need and i(portance for these rating agencies & country rating was felt (ore so after the /sian crisis of !%%) that saw (any of the econo(ies going down.

(II) Co ntr! Ris" # So$ereign Ris"

0ountry ris, is the exposure to a loss in cross order lending caused y events in a
particular country, which are atleast to so(e extent under the control of the govt ut definitely not under the control of a private enterprise or individual. 0ountry ris, is a roader concept than Sovereign ris, in which case the ris, is restricted to the ris, of lending to the govt of a sovereign nation. The Sovereign ris, (ay arise when the govt i(poses prohi itive exchange restriction, where y any transfer of pay(ents1outflow fro( the country is stopped. This happens when the country is inde ted & cannot service the de ts & (ay ta,e the recourse to the lenders for a re schedule(ent on co((ence(ent of a default. /fter the eruption of the de t crisis in 2atin /(erica 3Mexico 4 !%"' & 5ra6il !%"), !%%) crisis7 international an,s & institutional investors have eco(e increasingly concerned a out country ris, or sovereign ris,. Hence, proper assess(ent of the country ris, therefore has assu(ed great significance in international lending. Many co((ercial & invest(ent an,s have their own in8house syste(s of country ris, & they analy6e with varying degrees of inputs fro( pu lished infor(ation, external consultants reports & assess(ents of their own field staff. The essence of country ris, analysis is an assess(ent of factors that will affect a countrys a ility & willingness to service its external o ligations

Lect re Notes % Prof& Ra' l S'a' ((): ) *+, +-.-/ 010.2

International Rating Agencies

(III) 3eter4inants OR Para4eters sed for Rating a Co ntr!

The various factors1deter(inants1para(eters used for sovereign rating are econo(ic factors such as9 8 3!7 .esources9 :atural resources, Hu(an .esources 3'7 Macro ;cono(ic Perfor(ance9 Per 0apital <nco(e, =+P, =:P, 0apital For(ation. 3&7 ;xternal Position of the ;cono(y9 0urrent /ccount, 5>P, +e t to =+P .atio, <(ports, <MF 5orrowings, etc?

The para(eters used y the rating agencies to gauge the sovereign ris, are exhaustive
& differ etween the agencies. The road para(eters are laid down as follows9 8 Per 0apita <nco(e, =ross :ational Product, =+P =rowth, <nflation, Foreign ;xchange .eserves, Foreign ;xchange .ate (ove(ents1trend, ;xternal +e t, +e t to =+P, 5>P Position, +ent service ratio, Political Sta ility, =ovt Policies & +irections, ;cono(ic Planning, +e(ographic Factors vi6, population, age co(position, dependency urden, etc? So(e ele(ents of su -ectivity and the way these para(eters are loo,ed at influences the rating. Therefore, the ratings of the country y all the rating agencies (ay not e the sa(e. Si(ilarly, the rating is assigned on the asis of certain factors & the situation then prevailing in the country. Hence, if the situation changes the ratings (ay also change. Thus, these ratings have an underlying clause incorporating the a ove, which provides an u( rella for the rating agencies. There is no responsi ility or accounta ility of these rating agencies for the rating grades assigned.

(I5) Rating Grades # In$est4ent Grade

!. ///9 8 Highest Safety, 2owest ;xpectation of 0redit .is,, Strong capacity for ti(ely pay(ent of financial co((it(ents. This capacity is unli,ely to e adversely affected y foreseea le events. '. //9 8 @ery High 0redit Auality, 2ow expectation of 0redit .is,, very strong capacity for ti(ely pay(ent, capacity not vulnera le to foreseea le events. &. /9 8 High 0redit Auality, 2ow ;xpectation of 0redit .is,, capacity is considered strong, however capacity is vulnera le to changes in circu(stances or econo(ic position.

Lect re Notes % Prof& Ra' l S'a' ((): ) *+, +-.-/ 010.2

International Rating Agencies

Lect re Notes % Prof& Ra' l S'a' ((): ) *+, +-.-/ 010.2