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Rating agencies' credibility doubted again
IN THE MONEY
with Juvenne Yee
Jamaica Observer Wednesday, August 12, 2009
As Jamaicans awoke in high patriotic spirits on Independence Day, the news of Standard & Poor's (S&P) downgrade seemed like a slap in the face. The blow was softened, however, after careful analysis by local and international market commentators, who overwhelmingly deemed S&P's rating action as "unjustifiable", "puzzling" and "premature".
with Juvenne Yee
As analysts and local CEOs offered variations of these opinions, one quickly began to realise that Jamaica wasn't the only entity in the spotlight -the rating agencies themselves have also been on the radar. In fact, it was the 'judgment-makers' own Achilles' heel that seems to have kicked them into the spotlight..once again.
When the financial crisis devastated the world last September, rating agencies came under intense scrutiny and were labelled a main culprit of the financial crisis. S&P, Moody's Investors Service and Fitch Ratings, the three major global rating agencies, each played their part in turning a blind eye to the toxic assets held by financial companies. The agencies were guilty of bestowing high investment grade ratings on many financial houses that collapsed, or came near to collapse, which trampled their reputations and credibility as a result. This wasn't the first time these rating agencies were publicly criticized for their shortcomings. They came under fire for failing to downgrade Enron Corp to junk before the company went bankrupt in 2001. The widely accepted consensus was that they were well-aware of the energy company's problems far in advance.
This has been the long-standing fundamental weakness of rating agencies: their failure to downgrade companies or sovereigns promptly enough, if they downgrade them any at all. However, in an attempt to redeem themselves (overcompensate) for their past failures, these same rating agencies have taken the bull by the horns, and since the end of 2008, have been downgrading companies and sovereigns left, right and centre. Though some rating downgrades have been warranted, in other cases the rating agencies are simply augmenting their problems by downgrading without justifiable reason.
For the month of July, S&P reported that 965 issuers were poised for downgrades, 220, or 30 per cent more, than a year ago, and 50 more than the trailing 12-month average.
Since Jamaica was downgraded to B- with a negative outlook in March 2009, it was probable that the sovereign rating would be downgraded even further. A CCC+ rating seems particularly harsh and unfair, however, especially since it puts the island on par with countries whose economic and political situations are far worse than Jamaica's. We are now being compared to Ecuador, Pakistan and Ukraine, the only three other countries rated by S&P with CCC category ratings.
In fact, Ecuador was not downgraded to CCC+ until after defaulting, a situation nowhere near Jamaica's default-free record. Ecuador, which has a history of non-payment, defaulted yet again on its global 2012, 2015, and 2030 bonds in December 2008, and was accordingly downgraded to CCC+ by S&P six months later on June 15, 2009.
Comparing other similarly rated countries with Jamaica shows a stark difference in what is expected in a CCC+ rated country, and highlights the inconsistencies and contradictions still persistent in rating agency methodologies. S&P's primary rationale for Jamaica's downgrade was a threat of a "distressed debt exchange", which by no means compares to the situation faced by our CCC+ peers.
Additionally, the history of Jamaica's resilience and the reality that the country has never defaulted on its debt, an option which our constitution prohibits, puts the country at an arm's length ahead of Ecuador and Pakistan, as well as other countries of higher ratings, such as Cambodia and Lebanon. In fact, speaking to the Private Sector Organization of Jamaica (PSOJ) yesterday, the Honourable Prime Minister Bruce Golding reiterated Jamaica's commitment to pay its debt obligations at all cost.
Cambodia, for example, boasts a higher credit rating than Jamaica, even though the country is considered to be quite impoverished and more underdeveloped than Jamaica in many ways. In fact, despite experiencing steady growth over the past several years, the United Nations Development Programme Human Development Index (which takes a more holistic view when it comes to ranking well-being), ranks Cambodia at 131 out of 177 countries, whereas Jamaica places is ranked 101. Similarly, war-stricken Lebanon is rated higher than Jamaica, even though it has a public debt to gross domestic product (GDP) ratio of 163.5 per cent, compared to Jamaica's debt-to-GDP of 108.94 per cent for the fiscal year ended 2008/2009, according to the Ministry of Finance.
The market's reaction to Jamaica's recent S&P downgrade supports the notion that the rating action was overdone, though it is possible that the downgrade was already priced into the bond and equity markets. On the equity side, the expectation was that it would instill fear with investors.
Instead, the equities market has been relatively unfazed. On the first day of trading following the downgrade, the JSE Main Index advanced 367.79 points to close at 80,165.73. Since then, there has been no fire sale of stocks, while bids and offers have remained relatively unchanged.
Interestingly, commercial and merchant banks, trust companies and brokers, which hold 46 per cent and 61 per cent of total local registered stocks and Government of Jamaica (GOJ) US dollar-denominated bond securities, respectively (as at March 2009), have not seen a sell-off of their stocks. Scotia Group Jamaica (SGJ) pulled back by $0.10 on Monday (from Friday). Bids and offers, which ranged between $17.04 and $17.20 last Wednesday (before the downgrade), came in at $17.05 to $17.50 yesterday.
Likewise, National Commercial Bank of Jamaica (NCBJ), which was trading at $13.13 on August 5, has not budged. Bids and offers, which ranged between $13.12 and $13.95 last Wednesday before the downgrade, stood at $13.17 to $13.50 yesterday.
On the bond side, the market reaction has been less severe than expected. With respect to selective Euro bonds, however, specifically the GOJ 2019, GOJ 2036 and the GOJ 2039, sellers outnumber buyers and prices have fallen 6.99 per cent, 12.25 per cent and 7.74 per cent, respectively. Prior to the downgrade, the global bonds were well bid by local institutions. However, since last Thursday there has been little or no execution on the local side as investors wait and see.
While the downgrade came as a surprise to policyholders and local and international market watchers, the fallout has been relatively muted thus far. Jamaica's fundamental economic challenges stand independent of its credit rating.
We remain cautiously optimistic that in the wake of the downgrade and with the IMF program pending, the authorities and all stakeholders will be provided adequate incentives to address these imbalances head on.
Juvenne Yee is a Research Analyst at Stocks & Securities Ltd. You can contact her at [email protected].
www.jamaicaobserver.com
IN THE MONEY
with Juvenne Yee
Jamaica Observer Wednesday, August 12, 2009
As Jamaicans awoke in high patriotic spirits on Independence Day, the news of Standard & Poor's (S&P) downgrade seemed like a slap in the face. The blow was softened, however, after careful analysis by local and international market commentators, who overwhelmingly deemed S&P's rating action as "unjustifiable", "puzzling" and "premature".
with Juvenne Yee
As analysts and local CEOs offered variations of these opinions, one quickly began to realise that Jamaica wasn't the only entity in the spotlight -the rating agencies themselves have also been on the radar. In fact, it was the 'judgment-makers' own Achilles' heel that seems to have kicked them into the spotlight..once again.
When the financial crisis devastated the world last September, rating agencies came under intense scrutiny and were labelled a main culprit of the financial crisis. S&P, Moody's Investors Service and Fitch Ratings, the three major global rating agencies, each played their part in turning a blind eye to the toxic assets held by financial companies. The agencies were guilty of bestowing high investment grade ratings on many financial houses that collapsed, or came near to collapse, which trampled their reputations and credibility as a result. This wasn't the first time these rating agencies were publicly criticized for their shortcomings. They came under fire for failing to downgrade Enron Corp to junk before the company went bankrupt in 2001. The widely accepted consensus was that they were well-aware of the energy company's problems far in advance.
This has been the long-standing fundamental weakness of rating agencies: their failure to downgrade companies or sovereigns promptly enough, if they downgrade them any at all. However, in an attempt to redeem themselves (overcompensate) for their past failures, these same rating agencies have taken the bull by the horns, and since the end of 2008, have been downgrading companies and sovereigns left, right and centre. Though some rating downgrades have been warranted, in other cases the rating agencies are simply augmenting their problems by downgrading without justifiable reason.
For the month of July, S&P reported that 965 issuers were poised for downgrades, 220, or 30 per cent more, than a year ago, and 50 more than the trailing 12-month average.
Since Jamaica was downgraded to B- with a negative outlook in March 2009, it was probable that the sovereign rating would be downgraded even further. A CCC+ rating seems particularly harsh and unfair, however, especially since it puts the island on par with countries whose economic and political situations are far worse than Jamaica's. We are now being compared to Ecuador, Pakistan and Ukraine, the only three other countries rated by S&P with CCC category ratings.
In fact, Ecuador was not downgraded to CCC+ until after defaulting, a situation nowhere near Jamaica's default-free record. Ecuador, which has a history of non-payment, defaulted yet again on its global 2012, 2015, and 2030 bonds in December 2008, and was accordingly downgraded to CCC+ by S&P six months later on June 15, 2009.
Comparing other similarly rated countries with Jamaica shows a stark difference in what is expected in a CCC+ rated country, and highlights the inconsistencies and contradictions still persistent in rating agency methodologies. S&P's primary rationale for Jamaica's downgrade was a threat of a "distressed debt exchange", which by no means compares to the situation faced by our CCC+ peers.
Additionally, the history of Jamaica's resilience and the reality that the country has never defaulted on its debt, an option which our constitution prohibits, puts the country at an arm's length ahead of Ecuador and Pakistan, as well as other countries of higher ratings, such as Cambodia and Lebanon. In fact, speaking to the Private Sector Organization of Jamaica (PSOJ) yesterday, the Honourable Prime Minister Bruce Golding reiterated Jamaica's commitment to pay its debt obligations at all cost.
Cambodia, for example, boasts a higher credit rating than Jamaica, even though the country is considered to be quite impoverished and more underdeveloped than Jamaica in many ways. In fact, despite experiencing steady growth over the past several years, the United Nations Development Programme Human Development Index (which takes a more holistic view when it comes to ranking well-being), ranks Cambodia at 131 out of 177 countries, whereas Jamaica places is ranked 101. Similarly, war-stricken Lebanon is rated higher than Jamaica, even though it has a public debt to gross domestic product (GDP) ratio of 163.5 per cent, compared to Jamaica's debt-to-GDP of 108.94 per cent for the fiscal year ended 2008/2009, according to the Ministry of Finance.
The market's reaction to Jamaica's recent S&P downgrade supports the notion that the rating action was overdone, though it is possible that the downgrade was already priced into the bond and equity markets. On the equity side, the expectation was that it would instill fear with investors.
Instead, the equities market has been relatively unfazed. On the first day of trading following the downgrade, the JSE Main Index advanced 367.79 points to close at 80,165.73. Since then, there has been no fire sale of stocks, while bids and offers have remained relatively unchanged.
Interestingly, commercial and merchant banks, trust companies and brokers, which hold 46 per cent and 61 per cent of total local registered stocks and Government of Jamaica (GOJ) US dollar-denominated bond securities, respectively (as at March 2009), have not seen a sell-off of their stocks. Scotia Group Jamaica (SGJ) pulled back by $0.10 on Monday (from Friday). Bids and offers, which ranged between $17.04 and $17.20 last Wednesday (before the downgrade), came in at $17.05 to $17.50 yesterday.
Likewise, National Commercial Bank of Jamaica (NCBJ), which was trading at $13.13 on August 5, has not budged. Bids and offers, which ranged between $13.12 and $13.95 last Wednesday before the downgrade, stood at $13.17 to $13.50 yesterday.
On the bond side, the market reaction has been less severe than expected. With respect to selective Euro bonds, however, specifically the GOJ 2019, GOJ 2036 and the GOJ 2039, sellers outnumber buyers and prices have fallen 6.99 per cent, 12.25 per cent and 7.74 per cent, respectively. Prior to the downgrade, the global bonds were well bid by local institutions. However, since last Thursday there has been little or no execution on the local side as investors wait and see.
While the downgrade came as a surprise to policyholders and local and international market watchers, the fallout has been relatively muted thus far. Jamaica's fundamental economic challenges stand independent of its credit rating.
We remain cautiously optimistic that in the wake of the downgrade and with the IMF program pending, the authorities and all stakeholders will be provided adequate incentives to address these imbalances head on.
Juvenne Yee is a Research Analyst at Stocks & Securities Ltd. You can contact her at [email protected].
www.jamaicaobserver.com