Does Guyana need a sovereign credit rating?
By Patrick van Beek Stabroek News
November 12, 2006
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Last week I was asked if I would dedicate this week's column to explaining why Guyana should have a sovereign credit rating.
As I researched the topic it became clear that the primary rationale for obtaining a credit rating is in order to raise financing via the international capital markets through the issue of commercial debt to private creditors.
In the context of Guyana this immediately raises the thorny complications of structural adjustment programmes; existing multilateral lending and the HIPC initiative. The recent default on bauxite bonds is probably deserving of a mention here.
Credit rating agencies
Credit rating agencies such as Standard & Poor's (S&P) and Moody's Investors Service (Moody's) and closer to home, Caribbean Information and Credit Rating Services Limited (CariCRIS) provide information to investors largely as to the creditworthiness of borrowers. The rating agencies are keen to stress that do not regard their ratings as providing either a prediction of the timing of default or an indication of the absolute level of risk associated with a particular obligation; rather their ratings should be interpreted as forward-looking indications of the relative risk that debt issuers will not have the ability and willingness to make full and timely payments of principal and interest over the life of particular rated instruments.
Credit ratings thus reflect the relative risk of default. S&P use a scale of AAA (lowest risk of default) through AA and so on down. BBB- reflects what is commonly known as investment grade, at ratings below this investments are referred to as speculative grade (previously the term 'junk' was widely used to describe investments below investment grade, hence the origin of the term 'junk bonds.'
Since a write-off of debt under the HIPC initiative is basically an admission that current debts are not going to be paid, it can be thought of as an agreement by the lender to allow selective default. In terms of credit rating then, Guyana could be argued to already be in default and as such will only be able to access financing on concessionary terms, which is accompanied by strict limits on international private borrowing.
Where does this leave Guyana?
Guyana is a country which has vast potential for development, yet has failed to attract anywhere near the level of foreign investment which would be expected given the potential for returns by developing that potential.
Indeed a paper published by Alexander Lehmann, Senior Economist, European Bank for Reconstruction and Development entitled Sovereign Credit Ratings and Private Capital Flows to Low-income Countries, while speaking in general terms could almost exactly be describing Guyana. "Bank and portfolio flows are held back by ill-defined or poorly enforced property rights, inadequate accounting information, and inefficient judiciary systems. Poor creditor rights, such as procedures for bankruptcy, or for holding and seizing collateral, or inadequate shareholder rights, typically reflect such deficiencies in the rule of law. Local securities markets are small and illiquid, and only few large and mature corporate borrowers have accessed international capital markets, normally through foreign holding companies."
Focus on foreign direct investment
Foreign direct investment (FDI) largely bypasses these issues because the overseas company retains direct control of management. Indeed by providing expertise a large proportion of the investment represents intangible assets, acting as a strong disincentive for value to be stripped out by removal of assets from the company, since without the technology or human capital to utilise them such assets will rapidly reduce in value.
There is no doubt that foreign direct investment is the route being advocated by the current administration, perhaps taking a realistic view that private capital flows will not find an attractive home in Guyana. So on first inspection it would appear that the case for obtaining a credit rating is not a strong one, since it is rather irrelevant to the investment model being advocated.
A credit rating may be beneficial in other areas
Where the prospect exists of a foreign-owned subsidiary requiring further capital, the parent may find FDI much more appealing if the subsidiary has access to the capital markets, thereby reducing the burden on the parent. As a credit rating for the sovereign acts as a ceiling for the rating of a corporate, a lack of credit rating for the sovereign means a corporation will often be assessed against a conservative estimate of the sovereign, making its cost of borrowing higher than it need otherwise be. Thus indirectly a sovereign credit rating may make FDI more attractive.
Credit ratings are being used more and more in selection processes for potential investments. Not having one may mean Guyana may be being ignored out of hand as a potential location in which to business. Another tangible benefit of a credit rating is in improved disclosure and transparency; Lehman states that the process of obtaining and maintaining a sovereign credit rating enhances the transparency of macroeconomic policy, and as such may exert a certain discipline to manage the macroeconomic framework in a sustainable fashion.
Will Guyana ever stand on its own feet?
It is tempting to take the view that Guyana will forever be subject to structural programmes under which we are granted concessionary finance and with it the condition that Guyana cannot access international capital markets. To me this screams a cap-in-hand mentality; that Guyana is not good enough to stand on its own two feet and instead must abide by the strictures of policymakers who are not even elected by its electorate.
The only way this is going to change is if we take the view that at some point Guyana will be good enough and plan for that day. Obtaining a credit rating and maintaining or even improving it will give a sure sign to the rest of the world that Guyana is ready, and when it does become time to tap the capital markets there will be a credit history on which to base the issue.