Gov’t cautioned against reliance on credit rating agencies

Dr. John Gatsi 1AN economist, Dr. John Gatsi, has cautioned the govern-ment against relying solely on international credit agencies’ assessment of sovereign bonds for the purposes of investing Ghana’s oil revenue, saying the ratings of the agencies could no longer be fully trusted.

According to him, recent inaccuracies found in the grading of sovereign debt ratings to show the credit worthiness of countries, give cause for worry, especially as funds from the Ghana petroleum funds would have to be invested in sovereign securities.

Dr. Gatsi, who is also a senior lecturer at the School of Business at the University of Cape Coast, who gave the caution in his presentation at a capacity building workshop for financial journalists on oil and gas governance, in Kumasi said it was a critical for government to go beyond the assessment of the rating agencies in analysing the viability of qualifying instruments for investment.

Section 27 of the Petroleum Revenue Management Act 2011 (Act 815) stipulates that the resources of the Ghana petroleum funds which is made up of the Stabilisation Fund and Heritage Fund shall be invested in qualifying instruments in other countries apart from Ghana, and the  range of qualifying instruments is limited to bonds issued by sovereign states, the International Monetary Fund, the World Bank and cash deposits and bonds issued by the central banks, Bank for International Settlements and the European Central Bank, provided that the instruments are denominated in foreign currencies and that both the instruments and the issuers have an investment grade rating.

The three-day workshop, orga-nised by the Institute for Financial and Economic Journalists (IFEJ) in collaboration with the German Technical Cooperation (GIZ) and the Swiss Secretariat for Economic Affairs (SECO), aimed at enhancing the capacity of journalists in reporting on the management of the oil and gas sector.

But Dr. Gatsi’s fear comes in the wake of increasing questioning of the credibility of the recent ratings done by the rating agencies.

Currently, the “Big Three” global credit rating agencies,U.S.-based Standard and Poor’s (S&P), Moody’s, and Fitch Ratings have come under intense scrutiny in the wake of the global financial crisis.

Meant to provide investors with reliable information on the riskiness of various kinds of debt, these agencies have instead been accused of exacerbating the financial crisis and defrauding investors by offering overly favorable evaluations of insolvent financial institutions and approving extremely risky mortgage-related securities.

In Europe, the Big Three created further controversy over their sovereign debt ratings. While they graded the public debt of crisis-hit countries like Greece, Portugal, and Ireland as “junk” status, the agencies also downgraded the creditworthiness of France, Austria, and other major eurozone economies.

It led to EU officials arguing that such inaccurate ratings accelerated the eurozone’s sovereign debt crisis, leading to calls for the creation of an independent European ratings agency.

Both the United States and Europe have taken steps to regulate the three main agencies and ensure more transparency and competitiveness.

The agencies have faced intense legal scrutiny of their business practices, with S&P paying a record 1.37 billion dollars in a 2015 settlement with US State and federal prosecutors, while Moody’s is being investigated by the U.S. Justice Department.

Also financial experts in the UK issued a threat to downgrade the credit agencies by 30 per cent because their analysis does not reveal in-depth understanding of some companies and national economies.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and the European Securities and Markets Authority (ESMA), created in 2011, have both sought to hold agencies accountable and protect investors.

Credit rating agencies are meant to provide global investors with an informed analysis of the risk associated with debt securities which includes government bonds, corporate bonds, certificates of deposit, municipal bonds, preferred stock, and collateralised securities.

“We can’t have private companies, whose primary goal is maximising profit, behaving like sovereign judges passing down opinions that are binding for disinterested third parties,” argued Thomas Straubhaar, a critic of the agencies and the Director of the Hamburg Institute of International Economics, on Deutsche Welle amidst the rating controversy.

Dr. Gatsi indicated that because the purpose of the investment of the petroleum funds was critical for the development of the nation, the selection of instruments for investment should be carefully done, without solely depending on the grading of the credit rating agencies.

“We need to critically examine the work of these credit rating agencies because they are no more angels,” he said.

He further advised religious adherence to the formulation of investment policy and strategy by the finance minister and the investment advisory committee to guide the bank of Ghana.

Mr. Abdallah Ali-Nakyea, a tax expert and lawyer, however, feared the resource curse was setting in too early for Ghana as the national budget had become over-reliant on the oil revenue.

From Edmund Mingle ,Kumasi

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