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
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