Opinion

Why Downgrading Countries In A Time Of Crisis Is An Exceptionally Bad Idea

A number of rating agencies have downgraded emerging market economies during the COVID-19 pandemic. Their actions have raised the question: why do so during a crisis?

This is not the first time rating agencies have adopted a procyclical approach, that is, one in which bad news is simply piled on bad news.

During the 2008 global financial crisis, rating agencies were accused of aggressively downgrading countries whose economies were already strained. Reports by the European and US Commissions found evidence that their decisions worsened the financial crisis.

Questionable decisions

Ten African countries have been downgraded since the COVID-19 pandemic started: Angola, Botswana, Cameroon, Cape Verde, Democratic Republic of the Congo, Gabon, Nigeria, South Africa, Mauritius and Zambia.

These decisions were based on expectations that their fiscal situations would deteriorate and their health systems would be severely strained by the pandemic.

But, in my view, the downgrade decisions reflect monumental bad timing. I would also argue that, in most cases, they were premature and unjustified.

These downgrades deep into junk impose a wave of other problems, worse than COVID-19. They cut sovereign bond value as collateral in central bank funding operations and drive interest rates high. Sovereign bond values are grossly discounted, at the same time escalating the cost of interest repayment instalments, ultimately contributing to a rise in the cost of debt. A wave of corporate downgrades also follows because of the sovereign ceiling concept, a country’s rating generally dictates the highest rating assigned to companies within its borders.

Solution.

In response to the procyclical COVID-19 induced downgrades, African countries need to implement these four measures.

First, to curb the procyclical nature of rating actions that disrupt markets by triggering market panic, the timing of rating announcements needs to be regulated.

Second, the rules of disclosure and transparency should be enhanced during rating reviews. Rating methodologies, descriptions of models and key rating assumptions should be disclosed to enable investors to perform their own due diligence to reach their own conclusions.

Third, in collaboration with other market regulatory bodies in the financial markets, transactions that unfairly benefit from crisis-driven price falls should be restricted. This includes short-selling of securities, a market strategy that allows investors to profit from securities when their value goes down.

Lastly, African countries need to develop the capacity for rigorous engagement with rating agencies during rating reviews and appeals. They need to make sure that the agencies have all the information required to make a fair assessment of their rating profiles.

The African Union and its policy organs need to fast track the adoption of its continental policy framework of mechanisms on rating agencies’ support for countries. This will assist them to manage the practices of rating agencies.

Copyright © 2020 ZR.

You can get in touch with our news team by emailing us at: editor@zambiareports.com

19 Comments

  1. Saimbwende

    Why are these so called rating agencies European?
    They are extremely biased towards African countries.
    Why do we African countries accept to be classified as the poorest yet we have Gold,Petroleum,Diamonds,Uranium,Copper etc this astonishing considering that in Europe and elsewhere they don’t have such wealth.
    Come on guys let us refuse this stupid classificaion

    • Mabvuto Daka

      Your assessment was not done in good faith,we have poor countries than those mentioned, African leaders asrise and work together stop exporting the raw materials to outside,and build United States of Africa,one day Africa would better, follow the idea of pan African late Gaddafi,who wante

      • Malema Sankara

        Mabvuto you are on the correct path.

    • Malema Sankara

      Viva positive thinking Saimbwende!

    • Paul

      😂😂😂 indeed sir you have a point..

    • Frank Chombela

      Because even in crisis times, u still have bills to pay. It’s that simple. Who will provide u free electricity because u have lost your job?

  2. Christian

    You who is writing, before blaming others what have you done for Africa.

  3. Malema Sankara

    Rating agencies are a Way of maintaining colonialism. White monopoly capital has a hold on so-called world economy presicely because they are forcing all of us to obey western capitalist laws. We should be establishing our own rating agencies especially us the developing world. We should even use a common currency but we are too mentally enslaved to think of unchaining ourselves from the white men that colonised us

  4. Chama Julius

    The truth of the matter is that lets come as Africa with the economist and discuss where it is affecting concerning the economy

  5. Jah rules

    This is why one great son of Africa,had an idea of a United States of Africa,and he was killed because of that,and what is more shameful is that other African leaders supported the killing of one of ther own ,and now libya if not the whole of Africa is coming to realize it when its too late..mark my words these whites don’t mean well for us Africans,,,.RIP, Lt ,Col,General Gaddaffi

  6. Malizgani Nyirenda

    May God help us all

  7. Jms

    These are ideas welcomed to brainstorm on never to turn back. See mostly I repeat,mostly the strongest are the ones to attack first,in fact these countries mentioned here are stronger than any other country not mentioned because we see many entering these countries due to what they have, if another Gaddafi sprouts please lets support his mind.

  8. Jms

    Mabvuto daka correct idea.

  9. Moses Mwape

    How l hate to be underrated. Africa’s wealth should not be defined by a white man. We must do it ourselves.
    I hate to hear such African countries can’t do this before they even try. Who has prejudice? European! Why? Zambia is not a province of some European country. Zambians, let’s unite to shame those who feel we are so low in the world to fight c 19.
    Wear face masks adhere to physical distance of 1metre. Avoid crowded places, wash hands with soap frequently.
    Sensitise others on the need to abide by the rules.

  10. Waddy

    I think we should first be self reliant,let’s get rid of corruption,we need to fight and hate it,then we have land we should utilise it and have good security,improve our health facilities no minister must travel outside for treatment,maybe if they use the same facilities as the ordinary people will they take these issues seriously because we can’t just be borrowing all the time imf is the waste of them all.we will forever be indebted and the masses will always suffer.

  11. Jms

    These are some better reports and views to be hearing to, as some comments bringing to the end of mismanagement of resources etc,that has to be and on top of that we should try to identify youths, men and women who have innovations. And its first the responsibility of the present government to promote their innovations in hand at the sometime it may create some companies and employment for people, eg Samuel machishi’s program Zambia genius, think of it wisely.

  12. Jms

    If we have innovators how do the government try to protect their innovations? This has been the weakest part in Zambian governance and it leads to failure in terms of lockdown when a pandemic like this one occurs. We should start empowering our own,its very difficult even to access a loan, in such men are facing difficulties in life.it may sim the country being liked by officials but not due to the failing to develop, promote and maintain what the have and being given.

  13. Nyambe

    Accountability and financial education for all would be advisable

  14. Joe

    What do you expect from people who want you not to develop! They are busy even in times of a pandemic predicting the worst scenario for Africa.

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