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Emerging economy rating agencies: How many can play the rating game?

As bond markets develop in emerging economies, local rating agencies have sprung up, often at the bidding of the regulators. But investors remain sceptical about their objectivity, and the big two - S&P and Moody's - look set to defeat the newcomers. Ronan Lyons reports on differing approaches to similar goals

Bond markets are in their infancy in Asia. In Malaysia, for example, only M$25 billion ($10.9 billion) was raised through the local debt markets between 1991 and 1994, a tiny sum compared with the Kuala Lumpur Stock Exchange's market capitalization of M$518 billion and banking-sector assets that exceed M$300 billion.

All that is about to change. With growing affluence, a big pool of pension and insurance funds throughout Asia will become available for investment in debt. Japanese investors will also begin to seek attractive fixed-income assets in the region.

But if Asian issuers are to attract funds at attractive rates, they will need reputable credit ratings. These may not be easy to achieve. Standard & Poor's and Moody's Investors Service, which dominate ratings in Europe and the US, provide little comfort to investors in Asia, or indeed in any of the emerging markets.

"The big agencies have made tentative moves but have yet to make a significant push in the emerging markets," says Bruce Johnson, co-chairman of research at ING Barings in London. Failure to understand local accounting norms and business culture could lead to mistakes and the erosion of the agencies' credibility, which has been so painstakingly nurtured in developed markets.

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