Moody's on their credit system, Sovereign Credit Ratings and Bank Credit Ratings

Economic Development

18 November 2014
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

Moody’s credit rating was an opinion on the relative likelihood of an issuer to pay its debt and the ratings assessed expected loss which was the combination of probability of default and the severity of loss in case of default. Moody’s recognised three types of default events: bankruptcy, missed interest or principal payment and a distressed exchange. Moody’s started to rate South Africa in1994, introduced the Moody’s South Africa National Rating Scale in 2001 and was registered by South Africa's Financial Services Board (FSB). The summary of credit assessment considerations included Qualitative Analysis, Quantitative Analysis, Market Position, and Competitive Trends in Sector, Regulatory Environment, Sector Analysis and Sovereign Macro-Economic Analysis.

South Africa had a stable sovereign rating (Baa2) as compared to other BRICS countries, with only China achieving a higher rating. Moody’s Sovereign Credit Analysis Framework considered economic strength, institutional strength, fiscal strength and susceptibility to event risk. This framework related directly to economic resilience, government financial strength and the government bond rating range. Some of the key factors that contributed to South Africa’s stable rating outlook were the sheer size of the economic base, wealth levels, natural resources endowment and the commitment on the part of the government to address key economic challenges. South Africa’s rating, although considered a stable rating among other developing countries, lagged when considering all countries (developed and developing) within the Baa rating scale. Key drivers for this rating were constrained growth sector and the growing public sector debt. The medium term growth outlook was materially constrained by energy shortages, high interest rate levels and poor investment climate. South Africa compared unfavourably relative to other Baa-rated countries and the increasing debt burden due to poor growth and deficit financing needs were at 50%, materially higher than peers.

Moody’s bank rating essentially focused on the bank’s standalone strength and when the bank ran into financial difficulty, it assessed both the government’s willingness and capacity to support. Large South African banks in terms of their standalone strength, compared quite favourably with banks from BRICS counterparts, on par with the country’s sovereign rating (Baa2) and slightly higher than the average global rating. Although South African banks rated higher than China in terms of standalone strength, China rated higher overall because the Chinese government had a greater capacity to assist banks should they encounter difficulties.

The Committee's discussion focused on how objective or subjective the credit rating was, whether the National Rating Scale took into account its history and social imperatives and what the country could do to improve its rating. Members asked for comment on the civil suit the United States brought against the rating agency, Standard & Poor’s, and what the implication of that lawsuit had for Moody’s and the rating industry as a whole. The Committee asked for an assessment on the clarity of the country’s economic policy, as well as for clarification on the weight assigned to the Sovereign Credit Analysis framework. Due to limited time, the unanswered question would be responded to in writing.
 

Meeting report

The Chairperson welcomed everyone to the meeting.  She gave a brief overview of the mandate of the Portfolio Committee on Economic Development and said the main priority for the Committee was economic development according to the targets set by the National Development Plan (NDP) and the New Growth Path (NDP). She apologised on behalf of Parliament for the drastically shortened allocated time for the meeting and she explained it was beyond the control of the Committee.  

Briefing on Moody’s Credit Rating System, Sovereign Credit Ratings and Bank Credit Ratings
Moody’s Managing Director: Banking and Sovereign, Mr Yves Lemay said Moody’s had been one of the world’s leading independent global providers of credit rating opinions and insight on credit risk measurement and management for over 100 years. The organisation provided credit ratings and analysis on 136 000 corporate, government and structured finance securities, 10000 corporate and financial institution relationships and over 100 sovereign nations. A Moody’s credit rating was an opinion on the relative likelihood of an issuer to pay its debt and the ratings assessed expected loss which was the combination of probability of default and the severity of loss in case of default. Moody’s recognised three types of default events which were bankruptcy, missed interest or principal payment and distressed exchange. The rating system provided a point of reference easily understood by market professionals, it provided market commentary that helped the flow of relevant information and it improved understanding of credit risk, which promoted market integrity and efficiency.

Moody’s rating system provided a rank ordering of relative creditworthiness with six broad categories and 21 refined categories of long and short term ratings. The organisation rated corporate bonds, syndicated bank loans, sovereign nations, municipal obligations, infrastructure projects, structured transactions, bank deposits and mutual funds. To meet market needs, credit rating systems have evolved over time with broad coverage across markets and industries that enabled comparability. Moody’s started to rate South Africa in1994, introduced the Moody’s South Africa National Rating Scale in 2001 and was registered by South African Financial Services Board (FSB).

Mr Lemay gave an overview of the primary issuance process and the monitoring. The summary of credit assessment considerations included Qualitative Analysis, Quantitative Analysis, Market Position, and Competitive Trends in Sector, Regulatory Environment, Sector Analysis and Sovereign Macro-Economic Analysis.

Moody’s Sovereign Portfolio started rating national governments in the 1920s and currently rated close to 130 national governments worldwide, 20 countries in Africa and was assigned first time rating on the debt issued by the South African government in 1994. South Africa had stable sovereign rating (Baa2) as compared to other BRICS countries, with only China achieving a higher rating. Moody’s Sovereign Credit Analysis Framework considered economic strength, institutional strength, fiscal strength and susceptibility to event risk. This framework related directly to economic resilience, government financial strength and the government bond rating range. Some of the key factors that contributed to South Africa’s stable rating outlook were the sheer size of the economic base, wealth levels, natural resources endowment and the commitment on the part of the government to address key economic challenges. Key drivers for the rating were the constrained growth sector and the growing public sector debt. The medium term growth outlook was materially constrained by energy shortages, high interest rate levels and poor investment climate. South Africa compared unfavourably relative to other Baa-rated countries and the increasing debt burden due to poor growth and deficit financing needs were at 50%, materially higher than peers.

Moody’s Associate Managing Director, Mr Sean Marion, said Moody’s bank rating essentially focused on the bank’s standalone strength and when the bank ran into financial difficulty, it assessed both the government’s willingness and capacity to support. Large South African banks in terms of their standalone strength, compared quite favourable with banks from the BRICS counterparts, on par with the country’s sovereign rating (Baa2) and slightly higher than the average global rating. Although South African banks rated higher than China in terms of standalone strength, China rated higher overall because the Chinese government had a greater capacity to assist banks should they encounter difficulties.

Discussion
Mr K Marais (DA) asked for clarification on the subjective and objective opinions and he asked to what extent local government impacted on the country’s sovereign rating. He asked if there was one global standard everyone was rated against or was the rating done within a ‘developing’ or ‘developed’ context. Lastly, he asked for an opinion on what South Africa could do to improve its rating.

Mr Lemay said it was a combination of quantitative hard facts and judgments based on qualitative analysis, particularly as it pertained to the future of government policies in terms of the risk to the fiscal outlook a country might or might not be facing.

Mr S Tlenane (ANC) said the rebuilding of the South African economy started in 1994, it changed to an inclusive economy and it also took into consideration neighbouring countries and the African Continent. He asked whether Moody’s considered these conditions when the National Rating Scale was developed in 2001. In 2013 the United States government filed a civil suit against the rating agency Standard & Poor’s for $5 billion and he asked what implications this case had for the rating industry and for Moody’s, even before conclusion of the case. He asked what could be done for more optimal utilisation of the tools and the work of Moody’s to attain economic justice and prosperity for all nations.

Mr P Atkinson (DA) said there was a general economic negative outlook in the world currently and he asked how this outlook affected how the rating was done. He asked what Moody’s assessment of South African’s economic policy was, because the clarity of the policy was an important condition for possible investors.

Mr L Pikinini (ANC) referred to the ability of a government to rescue failing businesses and he asked if Moody’s considered the social imperatives in a country like South Africa where the government was focused on taking care of the socio-economic needs of its people.

Mr M Mabika (NFP) asked if South Africa and its banks were rated to be stable among its developing counterparts, why the banks would be downgraded.

Ms C Matsimbi (ANC) asked if Moody’s had an opinion as to what happened leading up to the global financial crisis. According to the European Union (EU), rating agencies were biased and she asked Moody’s to comment on that. She asked whether Moody’s had any programmes to assist those at risk or whether the Agency’s focus was only on the rating aspect.

Mr A Cele (ANC) asked what the ratings of the United Kingdom, the United States and Japan were.

The Chairperson asked what interested Moody’s to register in South Africa. In the case of the Unites States versus Standard & Poor’s, she asked what other recourse other than litigation there would be for a country in case of incorrect opinions and ratings. The weight assigned to each section of the framework that contributed to the eventual rating was not clear and she asked it to be clarified. She asked who comprised of the rating committees, how the selection took place, if the selection was consistent and if countries could be represented on the committees. Moody’s ‘long-term’ was 12 to 18 months, but South Africa’s diagnostic and response plans stretched over a 30 year period and considering all the variables unique to the country, she asked for Moody’s to estimate how fair their rating was.

The Chairperson apologised and stopped the meeting due to time constraints. The Committee would forward further questions to Moody’s and would expect written responses on all unanswered questions.

The meeting was adjourned.
 

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