eNCA's Simphiwe Ncongwane speaks to Rennaisance Capitals Dr Thabie Leoka about a ratings agency for Africa.
JOHANNESBURG - The BRICS group consisting of developing countries; Brazil, Russia, India, China and South Africa, has been discussing plans to set up its own rating agency and its own bank.
Member countries feel they are not afforded fair assessments by the major rating agencies such as S&P, Moody’s and Fitch.
Russia and China have also agreed to set up a joint rating agency as Moscow’s stalemate with the West over Ukraine has made it more eager to establish institutions that would reduce its dependence on the US and Europe.
Moody&39;s downgraded the credit rating of four top South African banks in August after the government was forced to bailout a troubled lender.
The ratings agency downgraded Standard Bank, Absa, FNB and Nedbank by one notch to Baa1, in a move sure to raise more questions about the health of the vital sector.
Moody&39;s decision will raise doubts about even the biggest banks, which are entrapped in the global financial system.
The agency also warned that further downgrades could be on the way, citing "weaker economic growth" and high inflation in South Africa, which could pressure highly indebted consumers.
Further downgrades are likely to lead to higher credit costs for the banks.
The financial sector accounts for as much as a quarter of South Africa&39;s economy and is by far the most developed on the continent, playing a key role in financing projects across Africa.
The stability of South Africa’s banking system is one of the main pillars on which the country is ranked internationally, so the downgrade is a blow, despite indications from the Reserve Bank that a downgrade was not warranted.
Some thought leaders are highly critical of the attitude displayed by the major rating agencies towards African countries.
This has raised the question of whether Africa should establish its own credit agency.
Alexandra Mousavizadeh of Arc Ratings believes it should. She says it’s important for the development of Africa’s capital markets and the increase in investment all asset classes.
An African ratings would mean you have an entity that is taking an in-depth look at the transaction and balance-sheet activities of entities across the region.
Jonty Levin of Alkebulan disagrees. He believes no rating agencies exist to reduce the information asymmetry between investors and borrowers, so instilling in investors the confidence that the instruments in which they invest are suitably structured and priced relative to the risk they assume.
The contrived establishment of local agencies would not provide prospective investors with the confidence that they seek and so would rapidly prove superfluous to requirements.
Notwithstanding, the high levels of investor interest in Africa cannot be over-emphasized.
Rennaisance Capital’s Dr Thabie Leoka says investors are very smart when it comes to Africa.
“They are very well informed, every time I speak to an investor I’m pleasantly surprised by the amount of knowledge they have, the homework they have done, they speak to policy makers, they understand why certain things are done.”
In an interview with eNCA, she details in the video above why Africa should not have its own rating agency.