Original Research

A motivation for banks in emerging economies to adapt agency ratings when assessing corporate credit

Tanja Verster, Riaan de Jongh, Simon Greenberg, Erika Fourie, Dries de Wet
South African Journal of Economic and Management Sciences | Vol 22, No 1 | a2818 | DOI: https://doi.org/10.4102/sajems.v22i1.2818 | © 2019 Tanja Verster, Riaan de Jongh, Simon Greenberg, Erika Fourie, Dries de Wet | This work is licensed under CC Attribution 4.0
Submitted: 20 September 2018 | Published: 25 March 2019

About the author(s)

Tanja Verster, Centre for Business Mathematics and Informatics, North West University, Potchefstroom, South Africa
Riaan de Jongh, Centre for Business Mathematics and Informatics, North West University, Potchefstroom, South Africa
Simon Greenberg, Independent Validation Unit, Group Risk, ABSA, Johannesburg, South Africa
Erika Fourie, Centre for Business Mathematics and Informatics, North West University, Potchefstroom, South Africa
Dries de Wet, Centre for Business Mathematics and Informatics, North West University, Potchefstroom, South Africa


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Abstract

Background: This article considers whether South African banks should utilise the credit ratings provided by US-based credit rating agencies when assessing the creditworthiness of corporate borrowers.

Aim: A review is conducted of the relevant literature and specifically the methodologies used by the credit rating agencies for ranking corporates in emerging markets.

Setting: The three largest international credit rating agencies are Fitch Ratings, Moody’s Investor Services, and Standard and Poor’s. These agencies’ credit ratings cover the global spectrum of corporate, sovereign, financial and other public entities and the securities and obligations they issue. The analytical frameworks used to produce these ratings are referred to as credit rating methodologies.

Method: A review of Moody’s ratings for South African corporate entities was undertaken to examine claims of a sovereign ceiling influencing the external ratings obtained by these institutions in emerging markets.

Results: Only 14 of the 200 global South African ratings pierced the sovereign ceiling.

Conclusion: The study concludes that the use of unmodified external ratings by banks to assess a corporate borrower should be discouraged. High-level suggestions are provided on how the methodologies and data used by the external agencies may rather be used to arrive at more suitable internal ratings.


Keywords

Sovereign ratings; credit ratings; country ceiling; emerging markets; modification of external ratings.

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