Credit ratings: Emerging in the emerging markets

Credit Research Poll 2006

Well, for starters, it certainly helps to have a high profile. With this in mind, four regional rating agencies operating in emerging markets – JCR-VIS Credit Rating Company, Pacific Credit Rating Company, European Rating Agency and Global Credit Rating Company – have come together to create a localized group that spans the emerging markets from Africa, eastern Europe, Latin America and Asia. The International Ratings Group (IRG) – as the tie-up is called – hopes to establish itself as a household name for ratings on the periphery of the capital markets. In fact, it aims to become market leader, expecting growth of existing members to grow their business and additional agencies to join. As befits a global brand, a single methodology and unified rating scales are being established, with the group hoping to benefit from pooling their expertise.

But how is the group going to compete with the big players such as S&P and Moody’s? According to Richard Wilson, managing director of IRG, it won’t in fact engage in direct competition. “The big credit rating agencies have moved out of the emerging markets to an extent,” he says. “They tend to focus on the developed markets, where the return on investment is better for them. So we stand a chance, as we are not exactly competing head to head.”

Dave King, chairman of South Africa-based IRG member Global Credit Rating, agrees. As the major rating agencies would need to establish a presence in emerging markets, their costs would be comparatively high. In conjunction with lower fees, this would make business there unattractive. “In my opinion, the big US rating agencies cannot be profitable in the emerging markets,” asserts King. This view does not go unchallenged. A Moody’s spokesman points out that his agency is active in many emerging markets countries, with growth potential stemming from companies’ wish to make use of the debt capital markets in preference to bank finance.

Still, the IRG is facing a substantial challenge for recognition. Raphael Kassin, head of emerging market fixed income at ABN Amro Asset Management, points out that events such as the default of the Russian government in 1998, which the rating agencies failed to predict, are playing on investors’ minds. Furthermore, investment banks have beefed up their research departments, and are now able to produce high-quality risk assessments of their own, which diminish their need for ratings from agencies. On top of that, there is concern about the frequent and substantial divergences between agency ratings. So while the established agencies claim to welcome competition, arguing that this will push them to deliver a better service, the emergence of the IRG could be seen to be adding numbers but not quality. “Certainly, a new credit rating agency in the emerging markets can add value.” says Kassin “ but it must prove that it has predictive power.”