For the record, before we all lose our minds following the recent downgrading of Zambia’s credit rating by the last of the big 3 ratings agencies, let’s take a walk down memory lane to remind ourselves who these guys are and how, from a ratings perspective, we go here.
According to an entry on wikipedia.org, the ‘Big Three’ credit rating agencies are Standard & Poor’s (S&P), Moody’s, and Fitch Group. S&P and Moody’s are based in the US, while Fitch is dual-headquartered in New York City and London, and is controlled by Hearst. As of 2013 they hold a collective global market share of “roughly 95 percent” with Moody’s and Standard & Poor’s having approximately 40% each, and Fitch around 15%. However, the big three have been facing growing competition from The financial services firm Morningstar, Inc. and its ratings subsidiary Morningstar Credit Ratings has grown its market share, with some publications speculating the firm could transform the ‘Big Three’ into the ‘Big Four’ rating agencies.
Moodys was first to downgrade Zambia’s long-term issue rating in July 2018 to Caa1 (not prime with substantial risks) from B3 but maintained a stable outlook. After that in August of the same year, S&P downgraded Zambia’s sovereign credit rating from B (highly speculative B grade) to B- citing fast debt accumulation and fiscal deficits. Finally October, Fitch also joined the fray by downgrading the country’s long-term currency issuer default rating (IDR) to B- (highly speculative B grade) from B with a negative outlook. Therefore, the initial Moodys downgrade of July 2018 was the lowest rating from the big three combined.
For astute economic analysts, two of the big three’s ratings agencies are now in parity when it comes to Zambia’s outlook (S&P and Fitch) while Moody’s inaugural downgrade is the lowest. The timing of the Fitch rating on the back of the recently announced budget by Hon. Margaret Mwanakatwe must not be taken as an action point for the recent downgrade by Fitch. This downgrade has its genesis from the same reasons that Moody’s gave for the initial downgrade. Therefore, key inputs into the big three’s next assessment will be post the budget presentation and what fiscal action points are acted on and the much anticipated outcome from the IMF meetings.
Sentiment attributed to Bloomberg quoting Fitch’s recent statement of “Upward revisions to fiscal deficits and government debt have weakened the credibility of the government’s fiscal targets” assumed to be part of the reason of the downgrade albeit only to country rate at par with the other two ratings agency makes one wonder how timely the Fitch rating framework is.
Once dubbed the “essential cogs in the wheel of financial destruction“, the big three ratings were key enablers of the financial meltdown of 2008 following their favourable pre-crisis ratings of insolvent financial institutions such as Lehman Brothers in addition to the mortgage-related securities that were responsible for the collapse of the U.S. housing market.
If natives and would be investors have to make a choice on which ratings agency they would, at best would be the more optimistic S&P and Fitch rating which by definition means that Zambia is MORE VULNERABLE than the countries rated ‘BB’, but the Zambia currently has the capacity to meet its financial commitments (this echoes what Hon. Mwanakatwe has been consistently saying much to deaf ears of nay Sayers). Furthermore, adverse business, financial, or economic conditions will likely impair the Zambia’s capacity or willingness to meet its financial commitments. This is the clear and present danger that is presented when fiscal and macro-economic factors impact businesses.
At worst, Moody’s provides pessimistic natives and investors a position by definition means that Zambia is CURRENTLY VULNERABLE, and is dependent upon favourable business, financial, and economic conditions to meet its financial commitments. In the end, we at Financial Insight see parity in the three ratings agencies. Furthermore, an aggregated view of all three ratings would imply that yes Zambia is vulnerable however, it is currently able to meet its debt obligations albeit dependent on a favourable economic climate.