# Understanding Credit Ratings

An episode of [The Mwango Capital Podcast](https://invisiblenetwork.ai/podcast/1583367792), 12 Mar 2025, 42 min.

Audio: https://api.substack.com/feed/podcast/158749673/4cd073fe13a50746a39663de8fb8dd82.mp3

In this episode recorded on 07.02.2025 and hosted by Ramah Nyang, we are joined by Churchill Ogutu - Economist at IC Group, and David Rogovic - VP and Senior Credit Officer at Moody’s, to discuss credit ratings and their impact on African economies. We also cover their significance, perceived bias, impact on debt restructuring, and the feasibility of an African credit rating agency. Subscribe to get notified when we make a new post. Show Notes 00:00:00 Introduction 00:01:53 Credit Rating Basics 00:06:33 Significance of Ratings in Investing 00:10:36 Perceived Bias in Credit Ratings 00:12:22 Changing the Outlook 00:15:26 Data Quality Challenges 00:27:35 Impact of Debt Restructure on Credit Rating 00:30:49 Feasibility of an African Credit Ratings Agency 00:37:46 Final Remarks Get full access to The Mwango Weekly at mwangocapital.substack.com/subscribe

## Transcript

[0:00] SPEAKER_02: Thank you.
[0:15] SPEAKER_02: Thank you.
[0:31] SPEAKER_02: than the actual risk.
[0:33] SPEAKER_02: Ghana's former finance minister,
[0:34] SPEAKER_02: Ken Ofori Atta,
[0:36] was actually even more colourful when he argued that ratings
[0:38] agencies are,
[0:39] SPEAKER_02: in his words,
[0:39] SPEAKER_02: I'm quoting him here,
[0:41] SPEAKER_02: beginning to tip our world into the first circle of Dante's inferno.
[0:45] SPEAKER_02: End of quote.
[0:46] SPEAKER_02: Now,
[0:46] SPEAKER_02: in 2023,
[0:47] a study commissioned by UNDP argued that African states could
[0:50] save nearly $75
[0:51] SPEAKER_02: billion if the ratings were,
[0:53] SPEAKER_02: in their words,
[0:54] SPEAKER_02: based on less subjective assessments.
[0:56] SPEAKER_02: And African states,
[0:58] they reckon that the only way out of this quagmire is to have a
[1:01] credit ratings
[1:01] SPEAKER_02: agency on their own.
[1:03] SPEAKER_02: But let's keep this in mind.
[1:05] African states have chosen to not fully fund the African Union themselves.
[1:09] SPEAKER_02: So if they want to set up an entirely new agency,
[1:12] SPEAKER_02: where will the capsule for this new CRA actually come from?
[1:15] SPEAKER_02: The answer matters because on the 14th of February,
[1:18] SPEAKER_02: African heads of state,
[1:19] SPEAKER_02: effectively our employees,
[1:21] SPEAKER_02: will be discussing how to set up the African Credit Ratings Agency,
[1:25] SPEAKER_02: something that they want to operationalize.
[1:27] SPEAKER_02: And it's a firm that they hope will,
[1:28] SPEAKER_02: in their words,
[1:29] SPEAKER_02: reduce the cost of credit ratings and increase access to capital markets.
[1:33] SPEAKER_02: But will it actually do that?
[1:35] SPEAKER_02: Or is this just...
[1:36] SPEAKER_02: another white elephant project.
[1:38] Over the next hour,
[1:38] we'll explore these issues and plenty more with my panelists.
[1:42] SPEAKER_02: Welcome to this edition of Mango Spaces tonight.
[1:45] SPEAKER_02: We're joined by Churchill Akutu,
[1:46] SPEAKER_02: he's an economist at IC Group,
[1:48] SPEAKER_02: and David Rogovich,
[1:50] SPEAKER_02: Senior Credit Officer and Vice President at Moody's.
[1:53] SPEAKER_02: David,
[1:54] SPEAKER_02: I want to start with you,
[1:55] SPEAKER_02: because for the audiences that we tend to have,
[1:58] SPEAKER_02: they will not always be 100% financially savvy.
[2:01] SPEAKER_02: So let's start with the basics.
[2:02] What goes into determining what a country's credit rating is
[2:06] and what combination
[2:07] SPEAKER_02: of data and qualitative analysis do you and your team work with?
[2:11] SPEAKER_00: Thanks, Rama, and thanks for having me here on this Spaces event.
[2:14] One thing we try to do is we strive for transparency when we
[2:17] try to explain our
[2:19] SPEAKER_00: rating process to anyone,
[2:20] SPEAKER_00: to governments,
[2:21] SPEAKER_00: to issuers,
[2:21] SPEAKER_00: but to anybody else that's interested in the topic.
[2:24] SPEAKER_00: I take your question and turn it into two questions.
[2:26] SPEAKER_00: One is, what is a rating?
[2:28] There's misconceptions there about what a rating measures,
[2:31] where does it measure?
[2:32] SPEAKER_00: And second is how do you sign a rating?
[2:35] SPEAKER_00: On the first question, so what is a credit rating?
[2:37] SPEAKER_00: Sovereign credit ratings are meant to be independent,
[2:40] SPEAKER_00: forward-looking opinion on the credit risk of an issuer.
[2:44] SPEAKER_00: And a sovereign rating should be able to rank order,
[2:47] SPEAKER_00: whether it's governments or corporate borrowers,
[2:49] SPEAKER_00: rank order the credit risk of issuers.
[2:52] SPEAKER_00: And therefore,
[2:53] a country that's rated lower would have a higher risk of
[2:55] default or mispayment than
[2:56] SPEAKER_00: a country that's rated higher.
[2:58] We measure credit risk and measure the ratings as the
[3:01] likelihood that a debtor,
[3:02] SPEAKER_00: such as a sovereign,
[3:03] SPEAKER_00: such as a government,
[3:04] would miss a debt payment obligation as initially set in its
[3:08] debt contract.
[3:09] SPEAKER_00: This would constitute an event of default,
[3:10] SPEAKER_00: and that's what our ratings are measuring,
[3:12] SPEAKER_00: our forward-looking opinion on the perceived credit risk.
[3:15] SPEAKER_00: Now,
[3:16] SPEAKER_00: when we assign a rating,
[3:17] we have a methodology that we use that's available publicly
[3:21] that underpins our
[3:22] SPEAKER_00: analysis and discussion of a sovereign.
[3:24] SPEAKER_00: It's applied globally.
[3:25] And what that does is that ensures that a sovereign that we're
[3:28] rating in Africa or
[3:30] SPEAKER_00: in Asia Pacific or in Latin America,
[3:32] SPEAKER_00: we're applying the same methodology to any sovereign that we look at.
[3:35] SPEAKER_00: And we use a prism of four broad factors.
[3:38] SPEAKER_00: You look at the economy's strength,
[3:39] SPEAKER_00: its diversification,
[3:41] SPEAKER_00: its growth rates,
[3:42] SPEAKER_00: how large it is,
[3:43] SPEAKER_00: its income levels.
[3:44] SPEAKER_00: We look at the institutional framework set up.
[3:47] Is it conducive to creating a stable macroeconomic environment
[3:50] that therefore then
[3:51] SPEAKER_00: enables the government to service its debt?
[3:54] SPEAKER_00: We look at the fiscal, of course.
[3:55] SPEAKER_00: We look at debt levels,
[3:57] SPEAKER_00: the debt burden,
[3:58] SPEAKER_00: interest burden,
[3:59] SPEAKER_00: how much of revenue is going to pay interest,
[4:01] SPEAKER_00: how large is interest as a share of GDP?
[4:04] And then we looked at event risks and susceptibility to these
[4:07] external shocks.
[4:08] Maybe not necessarily always something that's within the
[4:11] control of a sovereign,
[4:12] SPEAKER_00: but that could affect its credit worthiness.
[4:14] SPEAKER_00: So you take an example like the coronavirus pandemic.
[4:17] SPEAKER_00: That was an external shock that hit,
[4:19] SPEAKER_00: but some sovereigns were more affected than others because of inherent or
[4:23] SPEAKER_00: credit challenges that were existing prior to the pandemic.
[4:26] SPEAKER_00: You've got smaller shocks as well,
[4:27] SPEAKER_00: whether it's a weather-related shock,
[4:29] SPEAKER_00: heavy rains,
[4:30] SPEAKER_00: or a dry spout.
[4:31] But these shocks can all affect the creditwardness and the
[4:33] ability of a sovereign
[4:34] SPEAKER_00: to continue servicing his debt.
[4:36] SPEAKER_00: So essentially,
[4:37] SPEAKER_00: the sovereign rating process is we take these factor scores,
[4:39] SPEAKER_00: we put them together,
[4:40] SPEAKER_00: we incorporate our qualitative assessment of these factors on top of the
[4:45] SPEAKER_00: quantitative indicators that we use.
[4:47] And the rating outcome is generated by a rating committee of
[4:51] seven to nine members,
[4:52] SPEAKER_00: could be slightly more,
[4:53] SPEAKER_00: where we discuss,
[4:53] SPEAKER_00: we compare one sovereign versus others for peer comparison purposes.
[4:57] SPEAKER_00: But ultimately,
[4:58] SPEAKER_00: in the end,
[4:59] the rating is measuring our opinion of the risk that an
[5:02] investor who purchases a bond,
[5:04] SPEAKER_00: for instance,
[5:04] SPEAKER_00: in the government,
[5:05] will not be repaid in full and on time as originally documented
[5:09] in its bond documentation.
[5:11] SPEAKER_02: David, before I get to Churchill, who foots the bill for these ratings?
[5:15] SPEAKER_02: Is it the sovereign that comes to you,
[5:16] SPEAKER_02: say for the sake of argument,
[5:17] SPEAKER_02: an African sovereign comes to you and says,
[5:19] SPEAKER_02: look,
[5:19] SPEAKER_02: we're thinking of issuing a debut bond or a euro bond into the markets.
[5:23] SPEAKER_02: Who then foots the bill for that process?
[5:26] SPEAKER_00: I would just say to start,
[5:27] we have a very strict separation of the commercial aspect of
[5:31] the business and the
[5:32] SPEAKER_00: ratings aspect.
[5:33] SPEAKER_00: So being on the analytical side,
[5:34] I'm not privy to what's involved in terms of commercial
[5:37] contract with governments.
[5:39] We rate both sovereigns on a solicited basis when they come to
[5:43] us and ask for a
[5:43] rating and on an unsolicited basis where we determine that
[5:46] there's a market interest.
[5:47] Let's say if there's a euro bond issued that we think the
[5:50] market would benefit from
[5:51] SPEAKER_00: having our view on the credit risk associated with the issue.
[5:55] SPEAKER_00: We would assign a rating on an unsolicited basis to that point.
[5:59] SPEAKER_00: Even then, you can still have engagement with governments.
[6:01] SPEAKER_00: That's separate from whether the rating is requested by an issuer or not,
[6:04] SPEAKER_00: but we would rate both issuers,
[6:06] SPEAKER_00: both sovereigns,
[6:07] whether they've been requested or not in certain cases where we
[6:10] think that there's,
[6:10] SPEAKER_00: again,
[6:11] SPEAKER_00: an interest in the market to have our view.
[6:13] SPEAKER_00: In most cases, that means that there's a euro bond.
[6:15] SPEAKER_00: In other cases, it could mean that we need a rating for
[6:18] SPEAKER_00: Other rating activity in the country,
[6:19] SPEAKER_00: if we rate the banks,
[6:20] SPEAKER_00: for instance,
[6:20] SPEAKER_00: in a country,
[6:21] SPEAKER_00: we need to have a sovereign rating as an input there.
[6:24] SPEAKER_00: But there are maybe a few other reasons why we might rate a sovereign.
[6:27] SPEAKER_00: But in terms of the commercial aspect,
[6:29] SPEAKER_00: we're very clear that we separate that from the analytical component.
[6:33] SPEAKER_02: Churchill, I want to bring you to the conversation now.
[6:34] SPEAKER_02: As I mentioned, this is Churchill Legout, who's an economist at IC Group.
[6:38] SPEAKER_02: Churchill,
[6:39] SPEAKER_02: when you're examining sovereigns,
[6:41] SPEAKER_02: right,
[6:41] on the continent and you're looking at their debts in the
[6:44] domestic market or
[6:44] whatever your bonds amount have issued in the international
[6:47] market as well,
[6:48] can you give us a sense of how important ratings are in making
[6:51] that decision or
[6:52] SPEAKER_02: that recommendation to clients to invest or not to invest?
[6:56] SPEAKER_02: Yeah.
[6:57] SPEAKER_01: Thanks, Rama.
[6:57] SPEAKER_01: So looking at it from an investor's perspective,
[7:00] SPEAKER_01: and let me start with the country's general bonds,
[7:04] because that's where it's quite easy to marry the ratings and
[7:07] also the investment objectives.
[7:10] SPEAKER_01: So broadly, we are looking at the broad categorization of the bonds.
[7:13] SPEAKER_01: General bonds are classified as investment grade,
[7:17] SPEAKER_01: and that's where a rating between above BBB minus,
[7:21] SPEAKER_01: that is under Fitch and S&P,
[7:23] SPEAKER_01: and BAA3 under MODIS.
[7:26] So anything at those ratings and above are classified as
[7:30] investment grade bond status.
[7:32] SPEAKER_01: Whereas anything below those kind of broad credentials,
[7:35] SPEAKER_01: you find that they are non-investment grade or junk bonds.
[7:39] SPEAKER_01: So that pretty much,
[7:40] are you looking at getting into an investment grade or are you
[7:43] looking at junk bonds?
[7:44] SPEAKER_01: More often than not, mostly in the African context, we find that most
[7:48] SPEAKER_01: external bonds are non-investment grade or junk bonds.
[7:51] So that means that they are below the threshold that I
[7:54] mentioned for investment grade bonds.
[7:57] The next thing,
[7:57] obviously,
[7:57] there are a number of things that now you start drilling down into.
[8:01] For instance,
[8:02] you find that most of the investors are following particular benchmarks.
[8:05] SPEAKER_01: So you find that whichever benchmark that you are tracking,
[8:08] SPEAKER_01: they have particular weighting for any sovereigns.
[8:10] SPEAKER_01: For instance, say, if you're looking at the S&P
[8:14] Africa dollar bond index,
[8:16] they have the criteria of the bonds in that particular index.
[8:21] SPEAKER_01: And there are obviously some countries will have higher weightings,
[8:24] SPEAKER_01: case in point,
[8:25] SPEAKER_01: the Egypt,
[8:25] SPEAKER_01: the Nigeria,
[8:26] SPEAKER_01: so the continent,
[8:27] SPEAKER_01: South Africa.
[8:28] As compared to others,
[8:30] which don't have many bonds as those three countries.
[8:33] So based on that,
[8:34] and also now it drills down to your investment objectives.
[8:38] SPEAKER_01: You might now have an overweight in, say, Kenya against the benchmark.
[8:42] SPEAKER_01: Say if the benchmark has Kenya with a weight of, say, 15%.
[8:47] And based on your outlook,
[8:48] you're expecting that Kenya weight outperforms.
[8:50] SPEAKER_01: So probably in your allocation, you might have Kenya at, say, 20%.
[8:55] SPEAKER_01: As compared to where the benchmark is,
[8:57] SPEAKER_01: so basically overweight Kenya,
[8:58] SPEAKER_01: and that goes across the other sovereigns that you look at.
[9:01] But it also deals down onto the outlook of the performance that
[9:05] you expect over
[9:07] your investment horizon that could determine how you are
[9:09] allocating your investment
[9:12] SPEAKER_01: into the different sovereigns instance.
[9:14] SPEAKER_01: The other thing,
[9:15] SPEAKER_01: obviously,
[9:16] SPEAKER_01: is when you have bad investment and say you invested in,
[9:20] SPEAKER_01: say,
[9:20] SPEAKER_01: Kenya when it was single B or B minus thereabouts,
[9:24] SPEAKER_01: and then a couple of months down the line or years down the line,
[9:29] SPEAKER_01: there's a downgrade.
[9:30] SPEAKER_01: And depending on whether you had some criteria,
[9:33] SPEAKER_01: that if it goes from double B minor and it gets into category C status,
[9:39] and then that automatically now means that you probably might
[9:42] want to sell it
[9:43] SPEAKER_01: because it does not meet your investment ratios.
[9:46] SPEAKER_01: So those are some of the things that investment professionals look at,
[9:49] SPEAKER_01: also when it comes to external bonds investments.
[9:53] SPEAKER_01: When it comes to local bonds,
[9:55] SPEAKER_01: for instance,
[9:56] an investor who's based in Kenya and will want opportunities
[9:59] within the local bonds,
[10:01] there's some ratings as far as domestic long-end or short-end
[10:05] ratings are.
[10:06] SPEAKER_01: But more often than not,
[10:08] people really don't pay much attention to that for a local
[10:11] investor who's looking
[10:12] SPEAKER_01: at opportunities in the local market.
[10:14] SPEAKER_01: So probably I might not delve into that much more.
[10:18] SPEAKER_01: And when it comes to stocks,
[10:19] SPEAKER_01: not really when it comes to the ratings,
[10:22] SPEAKER_01: but rating criteria,
[10:24] largely because of the fact that now ratings are looking at the
[10:26] debt because of the
[10:27] SPEAKER_01: obligations that are there,
[10:28] SPEAKER_01: which is not the case,
[10:29] SPEAKER_01: typically the case with stocks.
[10:31] Those are some of the broad brush that investors screen as far
[10:35] as ratings are concerned.
[10:36] SPEAKER_02: I'm coming to you on this one,
[10:37] SPEAKER_02: David,
[10:38] SPEAKER_02: because a common argument that we keep hearing,
[10:40] SPEAKER_02: at least that I've been hearing in the last two years,
[10:42] SPEAKER_02: is that the big three credit racing agencies,
[10:45] SPEAKER_02: Moody's,
[10:45] SPEAKER_02: S&P and Fitch,
[10:47] SPEAKER_02: do not understand the local context,
[10:49] SPEAKER_02: quote unquote,
[10:50] SPEAKER_02: the countries that they're racing.
[10:52] It's an argument we heard,
[10:53] especially with Ghana after they defaulted in 2022.
[10:55] SPEAKER_02: We keep hearing it over and over again.
[10:58] SPEAKER_02: especially with the African peer review mechanism.
[11:00] And we've upsighted some of their studies and their work in
[11:03] retreat from Wango Capital.
[11:05] SPEAKER_02: What's your response to that argument?
[11:06] SPEAKER_02: Is there any merits to it?
[11:08] I appreciate the question,
[11:09] Rama,
[11:09] and I understand the concern of where the argument comes from.
[11:13] SPEAKER_00: Our approach,
[11:13] SPEAKER_00: I would say,
[11:14] SPEAKER_00: to rating sovereigns,
[11:15] SPEAKER_00: whether it's African sovereign or otherwise,
[11:17] SPEAKER_00: is really built on a comprehensive multi-source research process.
[11:21] SPEAKER_00: And it goes beyond just where you're located geographically.
[11:24] That we have a methodology that we apply against the sovereigns
[11:26] globally that has
[11:27] SPEAKER_00: enough nuance to capture local factors in a sovereign rating.
[11:31] SPEAKER_00: We do, of course, travel to countries for meetings.
[11:34] SPEAKER_00: We do spend time there.
[11:35] SPEAKER_00: We do integrate local intelligence from local sources,
[11:38] SPEAKER_00: government officials,
[11:39] SPEAKER_00: industry experts,
[11:40] SPEAKER_00: local economists.
[11:41] SPEAKER_00: are the market participants.
[11:43] SPEAKER_00: And our framework,
[11:44] SPEAKER_00: again,
[11:44] SPEAKER_00: is designed to capture the economic,
[11:46] SPEAKER_00: the political,
[11:47] SPEAKER_00: and social factors of a country.
[11:48] SPEAKER_00: But the last point,
[11:49] we have a track record of demonstrating that ratings have
[11:53] historically ranked
[11:54] sovereigns according to credit rates and sovereigns that
[11:57] default or that default
[11:58] SPEAKER_00: were more likely to have a lower rating than a higher rating.
[12:01] SPEAKER_00: So I think our ratings are serving a purpose in the market.
[12:05] SPEAKER_00: They're providing a globally comparable scale that investors can use.
[12:09] SPEAKER_00: Of course, they're only just our opinion of the credit risk.
[12:12] And investors,
[12:12] like Churchill said,
[12:13] will look at other factors as well,
[12:15] do their own analysis.
[12:16] But I think maybe the argument is a bit misplaced in that we
[12:19] have an approach that
[12:20] SPEAKER_00: goes beyond just,
[12:21] SPEAKER_00: again,
[12:21] SPEAKER_00: our geographic location.
[12:23] SPEAKER_02: I want to go back to something that the APRM actually said.
[12:26] SPEAKER_02: And this is in reference to something actually happened,
[12:28] SPEAKER_02: I think,
[12:28] SPEAKER_02: about two weeks ago,
[12:29] SPEAKER_02: because Moody's changed the outlook for Kenya,
[12:32] SPEAKER_02: at least,
[12:32] SPEAKER_02: from negative to positive,
[12:33] SPEAKER_02: reaffirmed our rating,
[12:34] SPEAKER_02: CAA won.
[12:35] SPEAKER_02: And APRM was a little ticked off about it.
[12:37] SPEAKER_02: And they said,
[12:38] SPEAKER_02: look,
[12:38] SPEAKER_02: we've not really seen many instances where a CRA accrediting agency will
[12:43] SPEAKER_02: essentially move from negative to positive.
[12:45] SPEAKER_02: and essentially skip that stable outlook.
[12:47] SPEAKER_02: Now,
[12:47] SPEAKER_02: for an outsider that might look at that and say,
[12:49] SPEAKER_02: it looks like we're quibbling about nuances here,
[12:52] SPEAKER_02: right?
[12:52] SPEAKER_02: We're essentially trying to split things at the margins.
[12:54] SPEAKER_02: But do you have a response to what APRM is saying here?
[12:57] Yeah,
[12:57] we did change the outlook from negative at CAA1 to positive at
[13:02] CAA1 still.
[13:03] SPEAKER_00: And we looked at the developments in Kenya.
[13:06] SPEAKER_00: So we had the rating of B3 negative a year ago.
[13:09] SPEAKER_00: And in May 2024, it was B3 negative.
[13:11] SPEAKER_00: So there were credit pressures.
[13:12] SPEAKER_00: It was still B3.
[13:14] SPEAKER_00: There were some factors that meant that it was still resilient.
[13:17] SPEAKER_00: When we had the protests and the cancellation of the finance bill 2024,
[13:22] SPEAKER_00: We moved the rating down to CAA1.
[13:24] SPEAKER_00: At that time,
[13:25] the rationale was that there was a risk that the ability to
[13:28] formulate policy that
[13:29] SPEAKER_00: would be conducive or be consistent with what the IMF,
[13:33] SPEAKER_00: World Bank,
[13:33] SPEAKER_00: and other multilaterals may require to continue to provide funding to the
[13:37] SPEAKER_00: government may not be there anymore.
[13:39] SPEAKER_00: That was one thing that had really,
[13:40] SPEAKER_00: I'd say,
[13:41] separated Kenya from a lot of other sovereigns that over the
[13:43] past four years,
[13:44] SPEAKER_00: up until that point,
[13:45] SPEAKER_00: we had seen the government,
[13:46] SPEAKER_00: you can argue that whether the policies were misplaced or not,
[13:48] SPEAKER_00: but they had taken steps that many other governments did not take,
[13:51] SPEAKER_00: fuel subsidy that you've seen countries struggle with all over the world.
[13:55] The government in Kenya removed that early on,
[13:57] even initially going to the IMF program.
[13:59] SPEAKER_00: If you remember in 2020,
[14:01] SPEAKER_00: when COVID hit,
[14:02] SPEAKER_00: there was a cut to the VAT,
[14:03] SPEAKER_00: to the personal income tax,
[14:04] and those were reversed nine months later by the end of the
[14:07] year as a condition
[14:08] SPEAKER_00: really for the IMF program.
[14:10] SPEAKER_00: So reversing tax cuts in a very short order,
[14:13] one year ahead of what was at that time expected to be a
[14:16] constitutional reform on
[14:17] SPEAKER_00: the BBI.
[14:18] SPEAKER_00: So a really difficult decision there.
[14:21] SPEAKER_00: Tax increases, spending cuts.
[14:22] SPEAKER_00: So
[14:22] That would have been a key factor that really supported the
[14:25] rating of Kenya.
[14:26] SPEAKER_00: But in the summer,
[14:28] the protests and the capacity to implement policies that would
[14:31] allow for continued
[14:33] SPEAKER_00: IMF funding,
[14:34] SPEAKER_00: there was uncertainty around that.
[14:35] And there's uncertainty around how large the fiscal deficit
[14:37] would be than the
[14:38] SPEAKER_00: financing sources and downside risks.
[14:40] SPEAKER_00: So even from that CAA1 rating,
[14:42] the negative outlook was signaling a one in three chance of a
[14:45] further downgrade
[14:46] SPEAKER_00: over the next 12 to 18 months.
[14:48] Now,
[14:48] the positive outlook,
[14:49] we responded to positive credit developments in the country.
[14:52] SPEAKER_00: You couldn't ignore the fact that borrowing costs had declined.
[14:55] SPEAKER_00: T-bill rates had declined by over 600 basis points in six months.
[14:59] Or you couldn't not respond to the government passing multiple
[15:04] amendments to tax
[15:04] bills that are expected to generate close to 1% of GDP in
[15:08] additional revenue.
[15:09] SPEAKER_00: We had to acknowledge these positive elements,
[15:11] SPEAKER_00: and whether it's from a negative outlook to a positive outlook,
[15:14] SPEAKER_00: we've had upgrades,
[15:15] SPEAKER_00: even in the investment grade space,
[15:16] SPEAKER_00: from a stable outlook,
[15:18] SPEAKER_00: a one-notch upgrade in other regions.
[15:21] So it's not unheard of to see a move from a negative outlook to
[15:25] a positive outlook.
[15:26] SPEAKER_02: There's an interesting aspect about the quality of data available,
[15:30] the speed and the timeliness with which data is actually
[15:32] available in terms of
[15:33] SPEAKER_02: public finance and economic policy.
[15:35] And this is probably the one point of convergence that I
[15:38] probably can see between
[15:40] SPEAKER_02: the credit rate agencies on one hand and finance ministers.
[15:43] SPEAKER_02: on the other,
[15:43] SPEAKER_02: because in 2023,
[15:44] Ghana's finance minister is arguing that limited data is a
[15:48] hindrance to building up
[15:49] SPEAKER_02: an accurate picture of a country's credit worthiness.
[15:51] SPEAKER_02: But from your perspective,
[15:53] SPEAKER_02: David,
[15:53] SPEAKER_02: from where you sit at Moody's,
[15:55] SPEAKER_02: what sort of data quality problems do you often run into?
[15:57] I'm sure we'll bring in chat a little later on to provide his perspective.
[16:00] SPEAKER_02: From my end of the desk,
[16:01] SPEAKER_02: as a journalist,
[16:02] my problem is always you want to look for data that's available
[16:05] and on time.
[16:06] But more than not,
[16:07] it's either not released or it's not publicly available.
[16:10] SPEAKER_02: If you look at,
[16:11] SPEAKER_02: for example,
[16:11] SPEAKER_02: the leading economic indicators,
[16:12] the Kenya National Bureau of Statistics has the latest data set
[16:15] available for
[16:16] SPEAKER_02: November 2024.
[16:17] SPEAKER_02: Yet here we are in the middle of February.
[16:19] So can you give us a sense of what sort of data problems you
[16:21] often run into?
[16:22] SPEAKER_00: So first off,
[16:23] SPEAKER_00: to have to assign a rating,
[16:25] SPEAKER_00: to maintain a rating,
[16:26] SPEAKER_00: we have to have sufficient information.
[16:28] If there weren't enough information available,
[16:30] we didn't think we could monitor the rating.
[16:32] SPEAKER_00: We wouldn't rate a sovereign any longer.
[16:34] SPEAKER_00: We did that.
[16:34] SPEAKER_00: That's the case with Cuba,
[16:36] where we withdraw a rating because of lack of sufficient
[16:39] information that's
[16:39] SPEAKER_00: available now.
[16:40] SPEAKER_00: You're right.
[16:41] Some countries have more information that's available and more
[16:44] data available than others.
[16:46] I think Kenya is probably towards the end where there's a lot
[16:48] of data available,
[16:49] which sometimes too much data available is a lot more than
[16:52] other countries.
[16:53] SPEAKER_00: More than the data,
[16:54] SPEAKER_00: what's available,
[16:55] SPEAKER_00: I think the bigger challenge run into is the reliability,
[16:57] SPEAKER_00: not just of the actual data,
[16:58] SPEAKER_00: but of the projections,
[17:00] SPEAKER_00: right?
[17:00] So do governments have medium term budget frameworks and are
[17:03] they credible?
[17:04] SPEAKER_00: Are they reliable?
[17:05] SPEAKER_00: That is where I think you come into more challenges.
[17:08] But clearly,
[17:09] the more data that's available,
[17:11] the more transparency there is,
[17:12] the better.
[17:13] SPEAKER_00: I think that would help all sides.
[17:14] SPEAKER_00: Again,
[17:15] SPEAKER_00: to go back,
[17:15] SPEAKER_00: if we don't have sufficient information or sufficient data available,
[17:18] SPEAKER_00: we wouldn't assign or we wouldn't maintain a rating.
[17:21] SPEAKER_02: Chinchill,
[17:22] SPEAKER_02: your view on that question around the quality of data that's available,
[17:25] SPEAKER_02: because on one hand,
[17:26] sometimes it feels from our end of the desk that there's not
[17:29] enough data available
[17:30] SPEAKER_02: and what governments might provide to credit agencies to the IMF,
[17:34] they'll give them a much fuller picture of information than
[17:37] they would to their own
[17:38] SPEAKER_02: ordinary citizens.
[17:38] SPEAKER_02: So where do you stand on this?
[17:40] SPEAKER_01: Obviously,
[17:41] SPEAKER_01: it's a part-time issue because even as economists analysts,
[17:45] we pretty much use the same trade that the credit rating
[17:48] analysts like David are
[17:49] SPEAKER_01: using basically the whole business around analysis.
[17:52] SPEAKER_01: So if there's a doubt in data or there's a lack of timeliness in data,
[17:56] obviously that raises issues as to the quality of or even how
[18:01] the credit rating
[18:02] SPEAKER_01: agencies could be able to approach the data.
[18:04] SPEAKER_01: So let me just take you back to July last year and that's...
[18:08] SPEAKER_01: pretty much what was at play.
[18:10] SPEAKER_01: Remember Moody's had downgraded kind of debating,
[18:13] SPEAKER_01: even as analyst community,
[18:15] SPEAKER_01: because that was the time that we were expecting the supplementary one.
[18:19] SPEAKER_01: Then we were also expecting some revisions within the IMF fiscal targets,
[18:24] SPEAKER_01: the protracted seventh review and also the upcoming eighth review.
[18:28] SPEAKER_01: And at that point,
[18:29] obviously we didn't have any visibility as to how the IMF will
[18:32] be able to react
[18:33] SPEAKER_01: because that was one of the missing puzzle to
[18:36] pretty much have a better picture as to how the IMF obviously
[18:39] will be able to
[18:40] SPEAKER_01: analyze the situation.
[18:41] So we saw the supplementary being passed eventually around
[18:45] August thereabouts,
[18:46] SPEAKER_01: but now we didn't have visibility.
[18:48] SPEAKER_01: So we're just getting snippets from the national treasury.
[18:51] SPEAKER_01: that,
[18:51] SPEAKER_01: oh,
[18:51] SPEAKER_01: there could be an IMF program,
[18:53] SPEAKER_01: there could be an IMF review the end of August,
[18:56] SPEAKER_01: which eventually happened in October.
[18:59] But that notwithstanding,
[19:00] there were some two schools of thought within the analyst community.
[19:04] To the extent of that,
[19:05] the downgrade that came with Moody,
[19:07] putting Moody's on the spot,
[19:09] SPEAKER_01: Not because that they did the wrong thing,
[19:11] SPEAKER_01: but because as compared to the fetch and ratings,
[19:15] SPEAKER_01: which have some scheduled calendars,
[19:17] SPEAKER_01: at least for Kenya,
[19:18] there's no scheduled calendar that the analysts can now be able
[19:22] to monitor.
[19:23] SPEAKER_01: So that's the downgrade which came in July.
[19:25] SPEAKER_01: I think two people,
[19:27] SPEAKER_01: by surprise,
[19:28] SPEAKER_01: in the context of what will the IMF do if you look at the bigger picture.
[19:31] So there are schools of thought in the sense that having not
[19:35] internalized how the
[19:36] SPEAKER_01: IMF response will be,
[19:38] SPEAKER_01: And then the other school of thought was basically that,
[19:40] SPEAKER_01: okay,
[19:40] SPEAKER_01: probably Moody's did the right thing,
[19:42] acting in a proactive manner based on obviously revenues you're
[19:45] not going to meet
[19:46] SPEAKER_01: and all those things.
[19:47] So if you look at it from the context of the Africa peer review
[19:51] announcement that
[19:52] came right after the outlook that was changed from negative and
[19:56] into positive,
[19:57] SPEAKER_01: You can get where they are coming from,
[19:59] the sense that now probably Moody's will have weighed the
[20:02] situation collectively
[20:04] SPEAKER_01: before now the downgrade that happened before.
[20:06] SPEAKER_01: Obviously the other stage and ratings followed with a downgrade,
[20:10] SPEAKER_01: but on a comparative basis,
[20:11] SPEAKER_01: CAA1 Moody's is much lower.
[20:15] SPEAKER_01: one notch lower than where both Fitch and SMPs are with their B-miners.
[20:20] So I think those are some of the nuances that typically arises
[20:24] stemming from the
[20:25] SPEAKER_01: data quality and also how different credit rating agencies view things.
[20:30] SPEAKER_01: But obviously,
[20:30] SPEAKER_01: the methodologies that also guide the credit rating agencies,
[20:34] SPEAKER_01: which we fully respect,
[20:35] is just that there's normally debates usually typically arises
[20:40] with how each credit
[20:42] SPEAKER_01: rating agency's
[20:43] SPEAKER_01: approach, a particular sovereign issuer and also rating action.
[20:47] SPEAKER_01: Thanks.
[20:48] SPEAKER_02: David,
[20:48] SPEAKER_02: just to give you the right of reply on this one,
[20:50] SPEAKER_02: because it seems like this curious situation where on one hand,
[20:53] we keep saying ratings agencies are not necessarily as
[20:56] responsive as they should be
[20:57] SPEAKER_02: to domestic changes in policy and so on and so forth.
[21:00] SPEAKER_02: And yet when you do act with speed, relatively speaking,
[21:04] SPEAKER_02: There's also criticism of,
[21:05] SPEAKER_02: no,
[21:06] SPEAKER_02: you shouldn't have acted right now,
[21:07] SPEAKER_02: you should have done it this specific way.
[21:09] SPEAKER_02: Isn't it more efficient,
[21:10] SPEAKER_02: however,
[21:10] SPEAKER_02: to just operate from the perspective of,
[21:12] SPEAKER_02: you know what,
[21:13] SPEAKER_02: here's the data,
[21:13] SPEAKER_02: the situation has changed,
[21:15] SPEAKER_02: let's amend the rating accordingly?
[21:17] SPEAKER_00: And we do that, right?
[21:18] SPEAKER_00: There are two points to make.
[21:19] First is our ratings are much less volatile than market implied
[21:23] signals of credit risk.
[21:25] So if you look at sovereign ratings versus CDS spreads or bond
[21:28] implied ratings,
[21:29] SPEAKER_00: ours are much less volatile.
[21:31] SPEAKER_00: And you take the case of Kenya.
[21:33] SPEAKER_00: We were at B3 for a long time before the 2024 euro bond was matured.
[21:38] and the market applied rating a year out or six months before
[21:41] that was signaling a
[21:43] much higher risk of default than our b3 rating was speaking to
[21:46] our ratings do look
[21:47] through the cycle and they are longer term they are less
[21:49] volatile than market
[21:50] signals so there is a difference in terms of what we provide to
[21:54] the market than
[21:55] what you can glean from information from bond prices and bond
[21:58] yields now in terms
[21:59] of how fast we move it has to be driven by the fundamentals and
[22:03] the credit risks
[22:03] SPEAKER_00: there again if you go back to where we were in july
[22:06] SPEAKER_00: I think we knew what was likely to come from the budget,
[22:09] SPEAKER_00: whether there was a supplementary budget or not.
[22:11] SPEAKER_00: As early as the first end of June,
[22:13] the president had already made statements about how they're
[22:15] going to address the
[22:16] SPEAKER_00: revenue shortfall and they were going to cut spending.
[22:18] SPEAKER_00: And at first it was the full amount.
[22:19] And by early July,
[22:21] it was half the amount because they couldn't cut the full amount.
[22:23] SPEAKER_00: And that affected our own fundamental view of Kenya.
[22:26] Before the finance bill was rejected or canceled,
[22:28] the deficit was targeted was 3.3%.
[22:30] SPEAKER_00: Then it became 4.3% or 4.6%.
[22:33] And that has an effect on several metrics that go into the
[22:37] methodology according to
[22:38] SPEAKER_00: our scorecard.
[22:39] SPEAKER_00: So there was an impact we had.
[22:40] SPEAKER_00: I think we reacted or responded at the appropriate time.
[22:43] You think our ratings at any point in time should reflect the
[22:45] credit risk on that day.
[22:47] If you look at what the rating was signaling it,
[22:49] before the downgrade to CAA1,
[22:51] SPEAKER_00: It was a very low risk of default, even CAA1.
[22:53] SPEAKER_00: It doesn't mean default's imminent, but it's a higher credit risk.
[22:57] And at that time,
[22:58] and even until today,
[22:59] CAA1 is the appropriate rating level.
[23:02] SPEAKER_00: Now,
[23:02] SPEAKER_00: the outlooks,
[23:02] SPEAKER_00: again,
[23:03] signaled a one in three chance that the credit risks will move
[23:06] the rating up or
[23:07] SPEAKER_00: down over the next 12 to 18 months.
[23:08] SPEAKER_00: So a positive outlook now would indicate that if things improve,
[23:11] if we see revenue function grow in line with targets or to
[23:15] reduce the deficit,
[23:16] SPEAKER_00: that
[23:16] SPEAKER_00: will help overall credit profile that will reduce borrowing costs,
[23:20] SPEAKER_00: borrowing needs,
[23:21] SPEAKER_00: and that will feed through to improved affordability over time,
[23:24] create more space for the fiscal adjustment to achieve the same
[23:28] reduction in debt
[23:29] SPEAKER_00: and allow for more spending.
[23:31] SPEAKER_00: So it becomes more sustainable.
[23:32] SPEAKER_00: The pace of fiscal consolidation becomes more sustainable.
[23:35] SPEAKER_00: If you're getting to a situation where borrowing costs are declining,
[23:38] where revenue growth is reducing the deficit versus the
[23:42] alternative where you're
[23:42] SPEAKER_00: cutting spending to be a deficit target,
[23:44] which would just create delays for the inevitable where you
[23:47] need to actually make a
[23:48] SPEAKER_00: larger adjustment in the future or you're likely to see fiscal slippage.
[23:52] SPEAKER_02: And just before I get to my next question,
[23:53] SPEAKER_02: there's a comment here that's actually come into the DMs.
[23:56] SPEAKER_02: And one of our listeners is asking that there's some who it is
[23:59] SPEAKER_02: believe that credit rating agencies are advocating for policies that are
[24:04] SPEAKER_02: unfavorable to the public,
[24:05] SPEAKER_02: in essence,
[24:06] SPEAKER_02: lumping CRAs in the same boat,
[24:08] SPEAKER_02: for lack of a better word,
[24:09] SPEAKER_02: with agencies like IMF in advocating for more fiscal consolidation,
[24:13] funding a lot more for the public spending from domestic tax
[24:15] revenues rather than
[24:16] SPEAKER_02: debt and so on and so forth.
[24:18] SPEAKER_02: What would your response to that be?
[24:19] SPEAKER_02: Because I've got my own views on that specific line of argument.
[24:22] SPEAKER_02: But I wonder if from Moody's perspective,
[24:24] SPEAKER_02: you hear this sort of feedback and you're like,
[24:26] but we're not the guys who are recommending that you should go
[24:29] down this specific
[24:29] SPEAKER_02: fiscal consolidation path.
[24:31] SPEAKER_02: We're simply saying if these are the policies that you've taken,
[24:34] these are the outcomes and this is how the market is likely to
[24:37] perceive a country's
[24:38] SPEAKER_02: credit worthiness or not.
[24:39] SPEAKER_00: That last point is exactly right.
[24:40] SPEAKER_00: So we don't give policy advice.
[24:42] SPEAKER_00: We say this every time we meet with governments and we speak to them.
[24:45] SPEAKER_00: We're not advocating for a certain policy.
[24:47] We're not advocating for a certain even political system,
[24:50] whether it's democracy or otherwise.
[24:51] We are merely assessing what is the impact of the policy
[24:54] choices that are made on credit risk.
[24:57] SPEAKER_00: And that's our job as a rating agency.
[24:59] SPEAKER_00: That's what we do.
[24:59] I think the IMF will advocate for policies that are consistent
[25:02] with them lending
[25:03] SPEAKER_00: money to a government.
[25:04] SPEAKER_00: But for us, it's assessing...
[25:06] SPEAKER_00: What are the policies?
[25:07] SPEAKER_00: How likely are they to materialize as expected by the government?
[25:11] What does it mean it will have a knock-on effect in some other
[25:15] aspect of the credit profile?
[25:16] So you can have a very swift fiscal consolidation where you
[25:20] just cut spending.
[25:21] SPEAKER_00: Is that sustainable?
[25:22] SPEAKER_00: We would assess that.
[25:23] SPEAKER_00: We wouldn't assess whether that's the right policy.
[25:25] SPEAKER_00: We would assess what's the impact of that.
[25:27] SPEAKER_00: on the credit profile.
[25:28] SPEAKER_00: What does that mean for the debt trajectory?
[25:30] SPEAKER_00: How sustainable is that?
[25:31] SPEAKER_00: What does that mean for growth?
[25:32] What does that mean for social or political risks involved in
[25:35] the sovereign rating?
[25:36] SPEAKER_00: Maybe just to take the question one step further,
[25:38] SPEAKER_00: we get this a lot that our ratings are too low,
[25:41] SPEAKER_00: our African sovereigns are defaulting because we rate them so lowly.
[25:44] SPEAKER_00: And here,
[25:45] I think there's a few points that I think that argument really
[25:48] confuses causality
[25:49] SPEAKER_00: with correlation,
[25:50] SPEAKER_00: right?
[25:50] The criticism that if we didn't downgrade a sovereign,
[25:53] they wouldn't default.
[25:54] SPEAKER_00: The downgrade is a response to deteriorating conditions that
[25:57] SPEAKER_00: are already elevating default risk.
[25:58] SPEAKER_00: In other words, the sovereign's fundamentals are strong.
[26:01] SPEAKER_00: The rating would reflect that regardless of regional considerations,
[26:04] regardless of what multilateral or any other organization is
[26:08] advocating for.
[26:09] SPEAKER_02: Churchill,
[26:09] I saw you responding to David's argument there about conflation
[26:13] of correlation and causation.
[26:14] SPEAKER_02: William, before I go to my next question.
[26:16] SPEAKER_01: I just found it interesting how David put it.
[26:18] SPEAKER_01: But yes, he has a point.
[26:20] SPEAKER_01: It's a bit hard.
[26:21] SPEAKER_01: And I don't envy David in regards to criticism that they typically face.
[26:26] But you kind of get where they're coming from in the sense that
[26:29] they have to give
[26:29] SPEAKER_01: some signaling because I've seen them methodologies.
[26:32] SPEAKER_01: around how Moody's come to a rating.
[26:36] SPEAKER_01: And it's not just the fiscal strength, which is pretty much observable.
[26:40] Anyone just looking at the numbers pretty much can be able to
[26:43] observe that.
[26:43] SPEAKER_01: But it goes into some issues such as institutional strength,
[26:47] SPEAKER_01: governance,
[26:48] SPEAKER_01: and political risk,
[26:48] SPEAKER_01: which has some sway as to the capability eventually,
[26:53] SPEAKER_01: as to whether the sovereign Israel cannot be able to pay.
[26:55] SPEAKER_01: Demi did my friend a number of times.
[26:57] SPEAKER_01: He asked me some questions.
[26:58] SPEAKER_01: I'm like, how big do we think about it?
[27:00] SPEAKER_01: But basically just to
[27:01] SPEAKER_01: How about make an understanding of Kenyan institutions,
[27:04] SPEAKER_01: for instance,
[27:05] SPEAKER_01: which typically as analysts,
[27:07] SPEAKER_01: we are just focused on the numbers as opposed to other factors.
[27:12] SPEAKER_01: Yes,
[27:12] SPEAKER_01: as far as the criticism that they normally say,
[27:15] you can pretty much get the frustrations of credit rating
[27:19] agencies because they
[27:20] SPEAKER_01: have to give their signals.
[27:21] SPEAKER_01: But at some point, analysts or even analysts,
[27:25] the sovereigns themselves are not able to create the kind of
[27:29] signals that are sort
[27:30] SPEAKER_01: of red flags that are being flashed by their rating agencies.
[27:33] SPEAKER_01: Thanks.
[27:35] SPEAKER_01: Indeed.
[27:35] David,
[27:35] I want to come back to you on a question that came up,
[27:38] I believe this is 2023 especially.
[27:40] One of the arguments that was made in criticizing the work of
[27:43] the Big Three,
[27:44] and I've actually linked this to one of the tweets that I've
[27:46] put up in response to
[27:47] SPEAKER_02: Mango Capital's tweet on the space,
[27:49] and it's essentially the 2023 study on lauding the cost of
[27:52] warring for African
[27:53] SPEAKER_02: sovereigns by the United Nations Development Programme.
[27:55] SPEAKER_02: And one of the things they point out in that study is,
[27:57] SPEAKER_02: and I'm quoting them here,
[27:59] fear of sovereign rating downgrading led to limited interest in
[28:02] a debt relief
[28:03] initiative that was available to sovereigns around the time of
[28:08] the COVID-19 pandemic.
[28:10] SPEAKER_02: And
[28:10] SPEAKER_02: The argument they were making then is that countries were like,
[28:12] SPEAKER_02: hang on a minute,
[28:13] SPEAKER_02: if we get downgraded by S&P,
[28:16] SPEAKER_02: by Moody's,
[28:16] SPEAKER_02: either CDC,
[28:17] SPEAKER_02: yields on our bonds are automatically going to jump up.
[28:20] SPEAKER_02: The cost of debt service is going to jump up.
[28:22] SPEAKER_02: And if we essentially try and renegotiate debt,
[28:25] SPEAKER_02: or even just the appearance of trying to renegotiate some of our debt,
[28:29] SPEAKER_02: that might be seen as a default event.
[28:30] SPEAKER_02: Therefore,
[28:31] they're opting to take the pain of having to keep servicing
[28:34] debt that may still be unaffordable,
[28:37] SPEAKER_02: rather than proactively going to their creditors and saying,
[28:39] SPEAKER_02: we're in trouble here.
[28:40] SPEAKER_02: We need a bit of briefing room.
[28:42] SPEAKER_02: What's your response to this line of argument from UNDP?
[28:45] SPEAKER_00: Great question.
[28:45] Something that we were involved in these discussions throughout
[28:47] the pandemic when
[28:48] SPEAKER_00: there was the first discussion of the Common Framework and the DSSI.
[28:54] SPEAKER_00: Clearly,
[28:54] SPEAKER_00: DSSI,
[28:55] SPEAKER_00: when sovereigns,
[28:55] SPEAKER_00: when we signed up for that,
[28:56] SPEAKER_00: that didn't involve private creditors.
[28:58] It involved multilateral,
[28:59] bilateral creditors,
[29:00] but it was non-commercial creditors.
[29:02] SPEAKER_00: And our ratings speak to the
[29:04] SPEAKER_00: the risk of nonpayment to private creditors.
[29:06] SPEAKER_00: DSSI didn't trigger any rating actions.
[29:09] SPEAKER_00: When a sovereign signed up to DSSI, it didn't trigger any rating actions.
[29:12] SPEAKER_00: When a sovereign entered the common framework,
[29:15] it was much more likely that would involve some sort of haircut
[29:18] or involvement of
[29:19] SPEAKER_00: private creditors and
[29:20] SPEAKER_00: In those cases,
[29:21] SPEAKER_00: you would have seen a rating action because,
[29:22] SPEAKER_00: again,
[29:23] SPEAKER_00: our ratings speak to that very specific meaning,
[29:26] SPEAKER_00: and it's focused on a very specific thing,
[29:28] SPEAKER_00: which is if you're an investor,
[29:29] SPEAKER_00: are you likely to get repaid in full and in time?
[29:32] SPEAKER_00: So if a sovereign does ask to proactively restructure their debt,
[29:35] SPEAKER_00: that clearly will have rating implications.
[29:38] SPEAKER_00: If it's private sector creditors,
[29:40] SPEAKER_00: that's exactly what our ratings are measuring,
[29:42] SPEAKER_00: and that's what they're intended to speak to.
[29:44] SPEAKER_00: Now,
[29:45] SPEAKER_00: in terms of,
[29:45] you mentioned something about market spreads and the fear that
[29:48] markets would rise
[29:50] SPEAKER_00: and a sovereign would lose access.
[29:52] SPEAKER_00: And you've probably seen,
[29:53] SPEAKER_00: there is evidence that suggests markets,
[29:55] market spreads are incorporating other considerations other
[29:58] than credit risk.
[29:59] SPEAKER_00: And why I say that is we've looked at our ratings and
[30:03] Do we see African sovereigns defaulting more than sovereigns in
[30:06] other regions?
[30:06] SPEAKER_00: Or is there any bias?
[30:08] And so we looked for empirical evidence of this or to prove
[30:12] this or just prove this.
[30:13] And what we've done is we've looked at sovereigns across Africa
[30:16] and other regions.
[30:17] And we looked at what the cumulative default rate over a
[30:20] one-year period to a five-year period.
[30:22] What percentage of sovereigns default over a one- or five-year
[30:24] period from
[30:25] SPEAKER_00: different rating levels.
[30:26] And the analysis that we conducted,
[30:28] we published research on this,
[30:29] reveals that
[30:30] SPEAKER_00: There's an identical default rates for a BA,
[30:32] SPEAKER_00: for a single B,
[30:33] SPEAKER_00: and a CAA rate of sovereign in Africa and other regions,
[30:38] SPEAKER_00: notwithstanding a very small sample size.
[30:41] SPEAKER_00: I think the concerns of the market,
[30:42] the market spreads will widen out to more if they sign up for
[30:46] something is
[30:46] SPEAKER_00: different than what is the perceived credit risk.
[30:49] SPEAKER_02: Churchill,
[30:49] I want to get to this question around setting up an African
[30:53] credit ratings agency,
[30:54] SPEAKER_02: because there's so many ways of attacking this specific question,
[30:57] SPEAKER_02: because post-2010,
[30:59] SPEAKER_02: after the global financial crisis,
[31:00] SPEAKER_02: and then the Eurozone crisis,
[31:02] SPEAKER_02: when the EU and economies in Asia,
[31:04] they've all tried at some point to set up their own credit
[31:07] ratings agencies.
[31:08] But by around 2016,
[31:09] in terms of market share,
[31:11] not really much has changed,
[31:12] right?
[31:12] SPEAKER_02: It's still dominated,
[31:13] SPEAKER_02: for lack of a better word,
[31:14] SPEAKER_02: by the big three,
[31:15] SPEAKER_02: S&P,
[31:15] SPEAKER_02: Moody's,
[31:16] SPEAKER_02: Fitch,
[31:16] SPEAKER_02: and so on.
[31:17] But specifically within the African context,
[31:19] the AU can't even meet its entire budget,
[31:22] right?
[31:22] SPEAKER_02: Fully fund its near $700 million budget, at least for fiscal 2023.
[31:26] SPEAKER_02: By itself,
[31:27] African countries only meeting around $200 million of that
[31:30] specific budget for that
[31:32] SPEAKER_02: particular year.
[31:32] SPEAKER_02: A, would we even be able to fund the operations of this country?
[31:37] SPEAKER_02: African Credit Racers Agency,
[31:38] SPEAKER_02: because Bright Simmons argued in an essay for ODI,
[31:41] SPEAKER_02: to which we linked,
[31:42] SPEAKER_02: of course,
[31:42] SPEAKER_02: in one of those tweets,
[31:43] SPEAKER_02: he estimated we need at least half a billion dollars just to set one up.
[31:48] SPEAKER_02: Is this a solution or are we just barking up the wrong tree?
[31:51] SPEAKER_01: Yeah,
[31:52] evidently that's a Herculean task that African countries who
[31:55] are exploring the
[31:56] possibility of having a sort of African-focused credit trading
[32:01] agency will have to
[32:02] SPEAKER_01: grapple with.
[32:03] SPEAKER_01: And it also boils down to what's the business case?
[32:06] Is it just trading agency solely or there could be other anchor businesses?
[32:11] SPEAKER_01: Because one, I know some of these credit trading agencies...
[32:15] SPEAKER_01: offers solicited advice.
[32:17] SPEAKER_01: For Kenya,
[32:17] SPEAKER_01: we help reach an SMP having engagements with the government of Kenya,
[32:21] SPEAKER_01: whereas Moody's engage Kenya on unsolicited basis,
[32:25] SPEAKER_01: unless I'm mistaken.
[32:26] SPEAKER_01: But that's pretty much the case.
[32:27] SPEAKER_01: And that's across different sovereigns.
[32:30] SPEAKER_01: So even if you have the African credit rating agency for arguments case,
[32:35] SPEAKER_01: at the end of the day,
[32:37] SPEAKER_01: there should be a business case.
[32:38] SPEAKER_01: And will they just rely on rating solely?
[32:41] SPEAKER_01: Or there could be other businesses.
[32:43] SPEAKER_01: Case in point, Modules has some other...
[32:46] SPEAKER_01: non-rating related businesses other than their ratings.
[32:50] So I've engaged with some of other ratings agencies who are not
[32:55] pretty much within
[32:55] SPEAKER_01: the rating space.
[32:57] SPEAKER_01: So that also has to solidify some business case around that.
[33:00] And obviously what will be the end game or what will be the
[33:04] ultimate purpose?
[33:05] SPEAKER_01: Cause I'm considering, as you've correctly pointed out,
[33:08] SPEAKER_01: But the initial costs are quite steep,
[33:11] SPEAKER_01: $700 million thereabouts,
[33:13] SPEAKER_01: and yet they are not even able to fund the budget for African Union.
[33:17] SPEAKER_01: So it will now boil down to,
[33:19] there could be some discriminatory in the sense that there
[33:22] could be some other
[33:23] richer African countries whereby may have some outsized capital
[33:28] towards that.
[33:30] And obviously,
[33:31] from a quote-unquote selfish perspective,
[33:33] they will be deemed favorably.
[33:35] SPEAKER_01: If I'm looking at it from that angle,
[33:37] SPEAKER_01: obviously it may not be the case,
[33:38] but that could be one of the downsides that we might be facing
[33:41] in terms of the
[33:43] richer countries or how it is funded having an outsized
[33:47] influence into how the
[33:49] SPEAKER_01: ratings of those particular countries.
[33:51] SPEAKER_01: countries will be in the future.
[33:53] SPEAKER_01: So it's quite a Herculean task, as I'm saying.
[33:55] I know there are a number of smaller rating agencies even
[34:00] currently operating.
[34:01] I know one from West Africa looking at also Kenyan market and
[34:04] others before that.
[34:06] SPEAKER_01: But now this kind of an Africa credit ratings agency
[34:11] SPEAKER_01: Obviously,
[34:12] seems to be fronted at least to be an alternative to the big
[34:16] three credit rating agencies.
[34:17] But I think there are some downside risks towards setting it up
[34:21] as compared to the
[34:22] SPEAKER_01: benefits that will accrue.
[34:23] SPEAKER_01: Because ultimately, what will be the overriding benefits?
[34:27] Is it just to ensure that African sovereigns are highly rated
[34:31] or what is the end?
[34:32] SPEAKER_01: More needs to be done around that.
[34:34] SPEAKER_01: But at the moment,
[34:35] I've been seeing some happening that could now be able to
[34:37] warrant Africa-focused
[34:39] SPEAKER_01: credit rating agency.
[34:41] SPEAKER_02: Indeed.
[34:41] SPEAKER_02: I want to bring in the views of,
[34:43] and this is an asset that again has been listed in one of the
[34:46] links that I put up
[34:47] SPEAKER_02: in that tweet.
[34:47] SPEAKER_02: Mishak Mutiza is a postdoc researcher at the University of Cape Town.
[34:51] He's affiliated with the African Union as a lead expert on
[34:53] credit ratings.
[34:54] And what he essentially was arguing was the way that this would
[34:57] be set up,
[34:58] SPEAKER_02: he prefers if it's set up as a specialized agency,
[35:01] SPEAKER_02: Africa risk capacity or the African export input bank,
[35:04] SPEAKER_02: and then you could have a diverse class of shareholders.
[35:06] SPEAKER_02: African governments could own it directly, or you could have
[35:09] multilateral finance institutions and national financial
[35:12] institutions buying stakes,
[35:14] SPEAKER_02: right,
[35:14] SPEAKER_02: into this credit rating agency.
[35:16] SPEAKER_02: And then it would adopt a sort of issue-pay business model.
[35:20] And one of the things that he said was an interesting market
[35:22] opportunity is the
[35:23] fact that 22 African countries still don't have accredit
[35:27] ratings from any of the
[35:28] SPEAKER_02: big three,
[35:28] SPEAKER_02: so Fitch,
[35:29] SPEAKER_02: Moody's,
[35:29] SPEAKER_02: S&P.
[35:30] SPEAKER_02: And there's value,
[35:32] SPEAKER_02: he says,
[35:33] in offering ratings to countries that cannot afford the cost of
[35:35] maintaining a
[35:36] SPEAKER_02: rating from any of the big three.
[35:38] SPEAKER_02: What's your view of his argument there, Churchill?
[35:40] SPEAKER_01: He has a legitimate argument in the sense,
[35:43] I didn't even know that there are 22 countries that for one
[35:46] reason or another,
[35:46] SPEAKER_01: they don't have a credit rating.
[35:49] I believe the fact that the countries that have a credit rating
[35:53] are those countries
[35:54] that either have been in the market before or have a potential
[35:58] of going into the market.
[35:59] For the 22 countries that for one reason or another do not have
[36:03] a credit rating agency,
[36:05] SPEAKER_01: probably they've been my time in.
[36:06] I think they don't have that market access in the first place
[36:09] that could warrant
[36:10] even unsolicited rating agencies because for an issuer to go to
[36:15] the market,
[36:16] SPEAKER_01: there's obviously some engagement with the rating agencies,
[36:19] SPEAKER_01: at least for the investors to be able to have a pass of what's the credit
[36:22] SPEAKER_01: worthiness of these countries.
[36:23] SPEAKER_01: So if the angle for
[36:25] for setting up an Africa credit rating agency is not to be able
[36:30] to go to the market.
[36:32] I think they need to review it a different way because that
[36:36] will be capturing a
[36:37] market that potentially the business model may not even make
[36:40] sense if that is the
[36:42] SPEAKER_01: sole reason of setting it up.
[36:43] But obviously if it's not to have the other countries that
[36:47] already have a rating
[36:48] SPEAKER_01: It's also slowly being onboarded into that as an alternative.
[36:52] SPEAKER_01: Probably there's a business case over there,
[36:54] SPEAKER_01: but just targeting the peripheral countries,
[36:57] SPEAKER_01: I don't think it might have more business case,
[37:00] SPEAKER_01: but that's just my view.
[37:02] SPEAKER_02: And just for context and a different viewpoint,
[37:04] SPEAKER_02: right,
[37:04] on that whole question of will an African credit rating agency
[37:07] actually make this
[37:08] SPEAKER_02: any better?
[37:09] One of the arguments that Bright Simmons actually made here was
[37:11] that it should be
[37:12] SPEAKER_02: hugely ironic to
[37:14] SPEAKER_02: If the EU and its countries,
[37:15] SPEAKER_02: which already cover roughly 60%,
[37:17] SPEAKER_02: right,
[37:17] SPEAKER_02: of the financial burden of the EU's initiatives,
[37:19] SPEAKER_02: we're going to be asked to step in there as well,
[37:21] because the EU had concluded in its own case study that a new
[37:26] regionally focused
[37:27] credit ratings agency would not improve market information
[37:30] signals for investors.
[37:32] SPEAKER_02: And it's also not clear,
[37:33] SPEAKER_02: he says,
[37:33] SPEAKER_02: that business model innovation would actually offer a way forward.
[37:37] SPEAKER_02: So this, the whole essay is actually quite interesting.
[37:39] SPEAKER_02: It's definitely worth reading.
[37:41] It's one of the things that we've actually linked to in
[37:43] response to the Wango Capital tweet.
[37:46] SPEAKER_02: Gentlemen, we're coming into the final stage of this conversation.
[37:48] SPEAKER_02: And next week,
[37:49] African heads of states are going to be meeting in Addis Ababa
[37:52] and operationalize it.
[37:53] SPEAKER_02: The African Credit Ratings Agency,
[37:55] SPEAKER_02: I think,
[37:56] SPEAKER_02: is going to be one of the things that we'll talk about in some detail.
[37:59] But what would your final argument be to individuals who have
[38:03] spent the last hour
[38:04] here with us or who might be listening to this in the future
[38:07] around this question
[38:07] SPEAKER_02: of ratings?
[38:08] SPEAKER_02: Are they fair?
[38:09] SPEAKER_02: Are they not fair?
[38:10] SPEAKER_02: How should we approach this argument?
[38:12] Because questions around the cost of debt and the cost of debt
[38:15] service are not
[38:16] SPEAKER_02: going away in Africa.
[38:17] SPEAKER_02: David, you can start and then Churchill, you can follow up.
[38:20] SPEAKER_00: Thanks for giving this opportunity.
[38:22] SPEAKER_00: I think,
[38:22] SPEAKER_00: again,
[38:23] SPEAKER_00: if we separate what ratings are versus maybe what people view ratings as,
[38:27] SPEAKER_00: they're very focused on one thing,
[38:29] SPEAKER_00: right?
[38:29] And they're meant to give an independent objective analysis of
[38:32] the credit risk,
[38:33] SPEAKER_00: whether it's on a solicited or unsolicited basis,
[38:36] SPEAKER_00: and it is serving a need for,
[38:37] SPEAKER_00: I'd say,
[38:38] SPEAKER_00: the global market.
[38:39] where you have a consistent scale ratings help to increase
[38:43] access to funding for
[38:45] countries for sovereigns when they have that level of
[38:47] information and a rating
[38:49] assigned by a global rating agency it gives investors
[38:52] confidence whatever rating
[38:53] level that is that it does increase financing options for a
[38:56] sovereign if we think
[38:57] SPEAKER_00: about
[38:57] SPEAKER_00: Thank you.
[39:17] SPEAKER_01: Churchill, your final word?
[39:19] I think ratings is one of the criteria that could drive where
[39:23] the country's issues
[39:26] SPEAKER_01: are trading at.
[39:27] SPEAKER_01: So that's just one of the main metrics that people keep an eye on.
[39:30] Case in point,
[39:30] I've seen a number of African countries going back to the
[39:32] market last year.
[39:33] SPEAKER_01: And the way they are trading, there's lots of noise.
[39:36] SPEAKER_01: You just look at it from a ratings perspective only.
[39:39] SPEAKER_01: So Nigeria went to the market December,
[39:42] SPEAKER_01: that was two weeks after South Africa went to the market,
[39:45] SPEAKER_01: but it got there at around over 10% yield,
[39:49] SPEAKER_01: which was quite expensive.
[39:50] SPEAKER_01: Egypt went back to the market last week,
[39:53] SPEAKER_01: but it settled this week at below 10%,
[39:55] SPEAKER_01: pretty much similar rating.
[39:57] SPEAKER_01: So how do you marry two similar ratings,
[40:01] but you could expect that Egypt could have gotten it at a
[40:04] similar yield as where
[40:06] SPEAKER_01: Nigeria got.
[40:06] So there are a number of things that investors filter through
[40:10] to any potential issuance.
[40:11] SPEAKER_01: So ratings is just one of them.
[40:13] SPEAKER_01: Various nuances coming into play.
[40:16] There's plenty,
[40:16] of course,
[40:17] a lot more nuance that comes into a conversation of this sort.
[40:20] SPEAKER_02: Because countries can have similar ratings,
[40:22] SPEAKER_02: peer countries relatively,
[40:24] SPEAKER_02: economies of roughly the same size.
[40:25] But you then start looking at things like where the tax
[40:28] revenues come from,
[40:29] SPEAKER_02: how government operations funded,
[40:31] SPEAKER_02: what are their debt service to tax ratios?
[40:33] SPEAKER_02: And the picture can be completely different from one country to the next.
[40:37] And that essentially,
[40:38] I believe,
[40:38] is what happened in the Nigeria and Egypt case.
[40:41] SPEAKER_02: One last note for our listeners on this particular topic.
[40:44] SPEAKER_02: Pay attention to what's going to happen on the 14th of February.
[40:47] There will be a side event at the 38th Head of State Summit at
[40:51] the African Union in Addis Ababa.
[40:53] SPEAKER_02: It should be early in the morning East African time, so roughly 4.30pm.
[40:58] SPEAKER_02: GMT is where it's going to start.
[41:00] SPEAKER_02: Presidents will be trying to figure out to harness,
[41:02] SPEAKER_02: quote unquote,
[41:03] the political will and collective commitment to set up the
[41:05] African Credit Ratings Agency.
[41:07] They're going to be looking at the progress made in the ongoing
[41:09] technical work to
[41:10] SPEAKER_02: set up this entity.
[41:11] And they're going to try and figure out how they're going to
[41:13] make partnerships with
[41:15] SPEAKER_02: development partners,
[41:16] SPEAKER_02: international financial institutions to make this a reality.
[41:19] SPEAKER_02: Will they succeed?
[41:20] SPEAKER_02: Will they not?
[41:20] How will you change your life as a taxpayer,
[41:23] wherever you're listening from?
[41:24] SPEAKER_02: Those are questions to keep a very close eye on the 14th of February.
[41:28] SPEAKER_02: My thanks to my panellists today,
[41:30] SPEAKER_02: Churchill Guthu,
[41:30] SPEAKER_02: an economist at IC Group,
[41:32] SPEAKER_02: and David Rogovich,
[41:32] SPEAKER_02: of course,
[41:33] SPEAKER_02: a vice president and a senior credit officer at Moody's.
[41:35] And of course,
[41:36] our thanks to the Mongol Capital team for hosting us today.
[41:40] SPEAKER_02: Thank you very much for your time and attention.
[41:42] SPEAKER_02: Have a lovely Friday.

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