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Credit Reporting Agencies And Fiji’s Ratings

Credit Reporting Agencies (CRA) evaluate the credit risk of prospective debtors and pre­dict their ability to repay the debt (principal plus interest). In other words, CRA assess credit worthiness or
05 Jan 2019 11:00
Credit Reporting Agencies And Fiji’s Ratings

Credit Reporting Agencies (CRA) evaluate the credit risk of prospective debtors and pre­dict their ability to repay the debt (principal plus interest).

In other words, CRA assess credit worthiness or the probability of debt being defaulted.

The most common type of securi­ties that are rated by CRA include government bonds, corporate bonds, local government or public enterprise bonds, stocks and other collateralised securities.

Globally, the three large CRAs cover almost 95.0 per cent of the market.

These include Moody’s Investors Ser­vice (Moody’s) and Standard & Poor’s (S&P), which together control 80.0 per­cent of the global market, while Fitch Ratings controls the remaining 15.0 per cent.

CRA play a key role in global finan­cial and capital markets by providing

supplementary credit analysis for investors when deciding which finan­cial instruments to invest in.

The credit evaluation is done using a rating scale, which provides inves­tors the degree of risk involved with a particular debtor and type of debt instrument.

Debtors with a better credit rating can access cheaper and easier credit terms; therefore, credit rating be­comes a motivation to either improve their credit rating position or main­tain their existing position if the rat­ing is already high.

Fiji Government Bonds

The Fijian Government issues a va­riety of debt instruments to finance its budget and the main ones include the Fiji Infrastructure Bonds (matu­rity is over 1 year) and Treasury Bills (maturity is less than a year).

In addition, Fiji also issues Viti Bonds which have a fixed interest se­curity and suitable for small or retail investors.

Fiji issued its first foreign currency

denominated bond in September 2006 worth US$150 million (FJ$321m)..

This was then refinanced in 2011 and 2015.

In 2017, Fiji became the first emerg­ingmarket economy and only the third in the world to issue a sovereign Green Bond.

This F$100 million Green Bond is a fixed income financial instrument to raise funds dedicated to climate miti­gation and adaptation and other envi­ronmentally friendly projects.

Fiji Government Credit Ratings

When investors, especially foreign­ers decide to invest in Fijian Govern­ment Bonds, they usually have the fol­lowing questions in mind:

Is it worthwhile to invest in Fijian Government Bonds?

What interest rate/coupon rate should I charge?

What is the likelihood that Fiji will repay its debt and not default?

Are there other countries offer­ing similar bonds where I can get a better return with lower risk?

Supplementary to their own re­search, investors refer to the robust analysis and credit rating provided by the CRA to answer the above ques­tions and help them make informed decisions on potential investment.

Moody’s and S&P provide an an­nual evaluation of the Fijian Govern­ment’s credit rating by assessing the macroeconomic conditions1 and as­sociated risks.

Fiji’s credit rating reflects domes­tic macroeconomic conditions along with changes in global financial mar­kets especially escalating global risks post the 2008 Global Financial Crisis (GFC) and the 2010 European debt crisis.

Moody’s

The latest Moody’s rating for the Fi­jian

Government Bond is “Ba3 Stable”, based on four rating factors: econom­ic strength, institutional strength, fiscal strength and susceptibility to event risk.

According to Moody’s, the stable credit profile of Fiji is supported by improvements in the country’s eco­nomic and institutional strength, aided by political stability and ongo­ing reforms.

Going forward, the agency expects Fiji’s economic growth to remain ro­bust, underpinned by the country’s expanding tourism sector and expects political stability to be maintained.

However, credit challenges for Fiji include a small, open and narrowly diversified economy that is vulner­able to climate change related shocks and low levels of economic competi­tiveness which affect diversification prospects beyond tourism and agri­culture.

Moody’s will upgrade the credit rating if economic growth is more robust and leads to improvement in business climate and swift fiscal debt consolidation; and if there is signifi­cant economic diversification that en­hances resilience to shocks.

However, the rating can also be downgraded if there is a large domes­tic or external shock such as natural disaster, re-emergence of political risks and balance of payments stress.

In terms of peer countries compari­son for Moody’s ratings, Fiji rated higher than Maldives, Papua New Guinea (PNG) and Jamaica while it scored a lower rating than Mauritius and Trinidad & Tobago.

Standard & Poor’s

S&P’s current rating for Fijian Gov­ernment debt is B+ Stable for long term and B Stable for short term debt.

Similar to Moody’s,

S&P expects the Fijian economy to continue to strengthen and help stabi­lise debt levels.

These will be supported by falling in­terest rate costs, sound external per­formance and strong medium term growth prospects. S&P will upgrade the rating if Fiji’s institutional set­tings improve, and foreign exchange restrictions are loosened further whilst maintaining a healthy level of

foreign reserves.

However, ratings can be downgrad­ed if government’s fiscal position weakens and if political and policy environment becomes unpredictable leading to a decline in foreign investor confidence and withdrawal of donor and multilateral support

When compared to some peer coun­tries S&P rating, Fiji obtained a bet­ter rating than PNG and Jamaica but lower than T&T.

Conclusion

CRA are important because they as­sist investors in assessing credit risks of their current and future invest­ments and suggest potential areas of improvement to debtors which would enhance their credit rating and ulti­mately provide them access to cheap­er credit.

However, the ratings given by the CRA are not always accurate.

For instance, all the big three rating agencies did not foresee the 2008 GFC.

Ironically, the agencies’ ratings played a critical role in the marketing of risky mortgage-backed securities, such as collateralised debt obliga­tions, which brought the US financial system to its knees.

Therefore, the ratings should not be the only source of information when making an investment decision.

These ratings must be used with the investors own analysis, reports by multilateral institutions such as IMF, central banks and government de­partments and value judgement.

For Fiji, CRA play a key role in inde­pendently verifying the economic, fis­cal and institutional strengths against those reported by the government and central bank and other multilateral agencies such as the International Monetary Fund and the World Bank.

A higher credit rating will help Fiji lower its borrowing costs and reduce her debt servicing burden.

It is therefore prudent that Govern­ment and the private sector work towards ensuring that economic growth remains robust, resilience is improved and domestic and external risks are contained.

Source: Reserve Bank of Fiji

Feedback: maraia.vula@fijisun.com.fj

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