Will Mauritius team up with other African countries against Moody’s?

Can an annoyed Mauritius stop unsolicited ratings by global firms by requiring them to seek regulatory approvals before ranking the sovereign or banks’ debt portfolios?

It could, but it would be sending a bad signal to investors globally, analysts have warned.

They claim an “uneasiness” has crippled the local business world – one suggesting that Mauritius could join a handful of African countries planning to put a halt to “unsolicited ratings” from Moody’s and other agencies.

“Unfavourable ratings can have far-reaching investment consequences and some African countries feel they are being unjustly downgraded because these agencies fail to capture the governments’ efforts to address downside risks,” analysts say.

One such country is Kenya, whose capital markets regulator has just issued new guidelines that will require foreign rating agencies to now apply for a ‘Certificate of Recognition‘ before issuing rankings in the country.

“The Kenyan government had contracts with two rating agencies namely Fitch Ratings and S&P Global. However, these contracts ended and therefore the rating agencies are currently issuing unsolicited ratings,” the Capital Markets Authority (CMA) has claimed.

The regulator was quoted by Business Daily Africa as explaining that “lack of contract with the government or regulation provides an open door for the rating agencies to use unfavourable ratings.”

Competition among rating agencies

CMA said they have also reviewed the rules to make ratings cheaper and affordable for local companies by encouraging competition and imposing minimal charges for entry.

The rating agencies, whether domestic or foreign will henceforth pay an application fee of Sh10,000 (approx. Rs3,840), an approval fee and an annual subscription fee – both at Sh200,000 (approx. Rs76,800).

Currently, there are five Credit Rating Agencies (CRAs) operating in Kenya namely, Agusto & Company Limited (Headquartered in Nigeria), Metropol Corporation Limited, Global Credit Rating Company (headquartered in Mauritius), Care Ratings Africa (headquartered in Mauritius), and A.M Best Rating Services Limited (based in the United Kingdom).

“Global credit ratings have come under scrutiny after slashing assessments and adjusting downgrades on developed countries on the effect of the coronavirus pandemic amid criticism they fuel further economic deterioration,” Business Daily Africa said.

There has been particular criticism of the big three credit rating agencies S&P Global, Moody’s, and Fitch, and how they reacted to the COVID-19 pandemic.

A study by CountryRisk.io found that 48 countries had their ratings cut by at least one agency. Half of those also experienced more than one downgrade, although richer countries saw a far bigger rise in debt levels.

Last month, Moody’s changed Mauritius’ long-term foreign and local currency issuer ratings to Baa3 from Baa2, and changed the outlook to stable from negative.

Baa3 is the lowest investment grade rating, before ‘junk status’, which means the government’s debt obligations are subject to moderate credit risk and may possess certain speculative characteristics.

Moody’s claimed the downgrade to Baa3 was driven by its assessment that “the quality and effectiveness of institutions and policymaking have weakened, which in turn hampers Mauritius’ economic resilience and its ability to absorb future economic shocks”.

Mauritian authorities downplayed the embarrassment.

“Mauritius remains the only International Financial Centre in Africa with an Investment Grade ranking, and only one of two countries on the continent (Mauritius and Botswana) with an Investment Grade rating,” the Bank of Mauritius said.

But a firmer response to Mauritius’ downgrading came from the African Peer Review Mechanism (APRM), an organ of the African Union (AU), that supports African countries in the area of credit ratings.

In a statement APRM said it has “noted with concern the unsolicited rating action by Moody’s that resulted in the downgrade of the Government of Mauritius’ long-term foreign currency issuer rating.”

The next move

The APRM has said it is planning to establish its own credit rating agency that would provide accurate and balanced rating of African countries.

In such circumstances, some analysts fear Mauritius could follow Kenya and other countries under the African Peer Review Mechanism to impose controls over rating firms, with the risk locking out the global firms.

Even if the support of APRM to Mauritius was “much appreciated”, Government insiders say such a possibility is “not on the agenda, yet.”

“Globally, things are very sensitive and volatile. New alliances are being built, while old relationships are ending up pretty brutally. Mauritius will need to tread carefully on this one,” a senior analyst said.

With inputs from Moody’s, APRM, Business Daily Africa