International Credit Rating Agencies Research Articles

국제회계기준(IFRS) 도입에 따른 부동산 가격이 국가 재정건전성에 미치는 영향

Due to the COVID-19 virus outbreak, inevitable welfare spending has increased sharply, and as the national debt has increased sharply, international credit rating agencies have considered downgrading Korea's credit rating. However, the Korean government has provided support for supplementary budgets and welfare policies, and as a result, national debt is increasing and national Financial soundness is deteriorating. Accordingly, based on previous studies, this study aims to present real estate-related policy measures that can fundamentally improve the national fiscal soundness so that the national credit rating is not degraded by studying how asset revaluation gains and comprehensive real estate taxes caused by real estate price increases affect national fiscal soundness indicators based on International Accounting Standards (IFRS). As a result of the study's analysis, the introduction of international accounting standards resulted in conditional results that 'an increase in the declared value of real estate can be positive for the national fiscal soundness', and in this study, four policy improvement measures related to real estate were proposed. Through these policy implications and fiscal policies such as institutional improvement measures, the government is expected to improve the national fiscal soundness while maintaining the national credit rating.

The Impact of War and Pandemic Crises on the Sovereign Creditworthiness and Solvency. The Position, Role and Decisions of International Rating Agencies

Theoretical background: The sovereign creditworthiness and solvency in the context of the pandemic and war crises is one of the biggest challenges that the modern world and the financial market face. It has a key impact on the basic economic indicators, including the price of debt incurred by individual countries and, thus, the profitability of debt securities. The COVID-19 pandemic, which began at the turn of 2019 and 2020, and Russia’s aggression against Ukraine which started on 24 February 2022, have strongly impacted the level of debt of European states and other countries of the world. The energy crisis, which is currently growing, is also taking its toll on the main economic indicators. International credit rating agencies are institutions that have been analysing the sovereign creditworthiness and solvency and individual business entities for many decades. At times, their activities have been the subject of criticism, but their place in the global financial market seems unthreatened and the results of their work still constitute the basic indicator of creditworthiness and solvency evaluation. Purpose of the article: The purpose of this article is to present issues related to the impact of war and pandemic crises on the sovereign creditworthiness and solvency and also the position, role and decisions of international rating agencies. Due to the ongoing war in Ukraine and the COVID-19 pandemic, these are very important issues that have a real impact on the economic condition of individual countries as well as the standard of living of citizens. This article focuses on these elements of the contemporary reality. Research methods: The subject matter and purpose of the article have been illustrated against the background of current theoretical knowledge, historical research and the latest analyses of key economic indicators, such as inflation or bond yields. The study of the impact of wars on sovereign ratings was empirical. To visualise the historical scale of the wars and pandemics destruction, in the analytical part of the study, statistical data has been re-scaled to the current global population. Main findings: The research conducted in this article has indicated that crises related to a pandemic and war have a negative impact on the sovereign creditworthiness and solvency. Historical studies of armed conflicts and pandemics have shown that the former had a significantly greater impact on inflation and bond yields. For example, the level of inflation started to drop within one year after the end of the wars and almost immediately after the end of the pandemic. The same applied to bond yields. Of course, this was directly reflected in the evaluations of international rating agencies. The issues discussed in the article are of practical application, because the on-going war in Ukraine and the COVID-19 pandemic have had a very large impact on the global economy and the financial condition of individual countries. Our research also shows that the war hit the ratings of sovereign countries directly involved in the war, while other countries’ ratings (possibly threatened by aggression from Russia in the future – e.g. EU countries) remain stable.

Developing a Scoring Credit Model Based on the Methodology of International Credit Rating Agencies

The purpose of this work is to examine the relationship of various financial and non-financial (qualitative) factors of performance of non-financial companies and their credit ratings.
 We developed the scoring model which was based on the methodologies of international and Russian rating agencies. The modelled ratings of non-financial companies for 2018–2020 were compared with actual ratings assigned by the rating agencies and discrepancies were explained. The sample includes companies from retail, protein and agriculture, steel, oil and gas sectors from Russia, USA, Luxembourg, England, Canada, India, Ukraine and Brazil.
 The paper proved that addition of business and environmental, social and governance factors improved the quality ofscoring models in comparison to those including only financial metrics. There are strong patterns in the resulting ratings of companies for some industries. Retail industry companies are associated with high sales indicators, while steel industry companies have high interest expenses coverage ratios. Oil and gas industry companies mostly show high results in reserves coefficients.
 The study developed a credit rating forecasting tool that emulates the work of analysts of rating agencies and therefore has a high predictive power. The developed model can be used by financial market practitioners to predict the credit ratings of Russian companies in the face of the refusal of international rating agencies to rate Russian issuers.

Credit positive or negative? Credit rating agencies’ framing of Brexit’s implications for the Republic of Ireland, the United Kingdom, the EU, and the Northern Ireland peace process

ABSTRACT Among Brexit’s implications was its potential to destabilise the Northern Ireland peace process, cast doubt on the future status of the Irish border, and weaken the constitutional integrity of both the UK and the EU. A less publicly visible aspect of Brexit, however, was the weight such implications carried in how international credit rating agencies evaluated the creditworthiness of the EU, the UK, and the other state most affected by the Leave vote, the Republic of Ireland (ROI). A frames analysis of the agencies’ discourse during the withdrawal period, from 2016 to 2020, suggested that their privileging of market perspectives had the effect of shaping but also of limiting their engagement with Brexit’s socio-cultural, identity and political implications for the border and the peace process. In particular, the agencies drew weak discursive links between Brexit as an instance of EU disintegration and its implications for the peace process and for the ROI’s shifting geopolitical relations as a continuing member state. This was further reflected in the agencies’ tendency to underplay socio-cultural, identity and political implications in their discourse on potential future processes of UK and EU disintegration.

The impact of institutions on regional credit ratings in Russia

Relevance. Institutions of a fiscal system play a significant role in regional credit ratings. This is reflected in the low creditworthiness of Russian regions from the international perspective. Research objective. The paper discusses the role of the institutional factors in the credit ratings assigned to Russian regions by Russian and international agencies. Data and Methods. The study analyzes the rating methodology adopted by Russian and international credit rating agencies and tests the presence of the institutional factors by conducting a formal regression analysis based on the data from the budgetary systems of Russia and the United States. Results. We demonstrate that international agencies value institutional factors, while Russian agencies use formal quantitative indicators. By applying comparative regression analysis to the economic and fiscal indicators of Russian regions and U.S. states, we found that The Big Three (Fitch Ratings, S&P Global Ratings and Moody's Investors Service) rate Russian regions lower than U.S. states, although the formal indicators between the two fiscal systems at the regional level do not differ as much. Conclusions. We conclude that the lower creditworthiness of Russian regions in the international perspective reflects the weakness of the institutions in the Russian budgetary system. Practically, the assessment of regional creditworthiness in Russia by the international agencies highlights the areas of intergovernmental fiscal relations that need improvement, most notably the insufficient tax and spending autonomy of local and regional governments.

Back to the Iron Cage? Institutional Isomorphism of the AIIB

During its first five years of operation, the Asian Infrastructure Investment Bank (AIIB) is becoming more and more similar to traditional Multilateral Development Banks (MDBs) in terms of operational goals, business area, and environmental and social standards. Why has the AIIB, the newest type of multilateral development bank (MDB) initiated by an emerging economy, undergone institutional isomorphism? Based on the socialization theory, this paper argues that the institutional environment in which the AIIB is operating has a strong influence on AIIB’s institution-building, mainly through the coercive, mimetic, and normative institutional isomorphic processes. On coercion, the pressures from European donors, international credit rating agencies, and global civil society have resulted in the AIIB’s institutional isomorphism. On mimicking, the social uncertainty of the relationship between the AIIB and the Belt and Road Initiative and the technical uncertainty of infrastructure projects have triggered the AIIB’s institutional isomorphism. On normativeness, the similar educational backgrounds and working experience of the AIIB’s staff and active interactions among the MDB family members have caused the AIIB’s institutional isomorphism. The paper concludes that the international institutional environment might hamper emerging economies’ capabilities of institutional innovation.

The Rise and Fall of Dagong Global Credit Rating Agency: A Geopolitical Challenge for the Rating Industry

ABSTRACT Dagong Global Credit Rating Agency (Dagong) was originally branded as a Chinese national representative credit rating agency. Its international expansion in the US and the EU, in order to challenge the biggest international credit rating agencies, was unsuccessful and achieved little of significance. Dagong’s business suffered a complete halt because of a one-year suspension by the Chinese financial regulators. Its ratings heeded China’s geopolitical interest and China’s strategic plans of economic development rather than signalling the credit risks of debt instruments. Dagong’s ratings had a significant political bias towards countries which were China’s economic and political allies or supplied raw materials to China. Dagong officially became a state-owned credit rating agency following a reconstruction by the Chinese state in 2019. This article concludes that this new ownership may exacerbate the geopolitical characteristics of Dagong and poses a challenge to the international financial market.

Corporate Board Attributes, Shariah Board Attributes and Credit Rating: Evidence from Islamic Banks of Pakistan

Shariah Governance is an essential characteristic that differentiates Islamic financial institutions from Conventional financial institutions. The study’s purpose is to explore the effect of corporate governance attributes and Shariah board attributes on the long term and short-term credit rating of Islamic banks in Pakistan. The study develops six different models based on corporate board characteristics, Shariah board attributes and credit ratings, and collected data from annual reports of Pakistani Islamic banks for the period 2013- 2019. This study used Long term credit rating scale used by Grassa (2016) and, Ashbaugh-Skaife, Collins, and LaFond (2006), and developed a Short term credit rating scale. The study applied descriptive statistics, correlations and ordered logit regression. The results confirmed that corporate governance and Shariah governance attributes are significantly associated with the long term and short-term credit ratings of Islamic banks. The study concludes that credit rating agencies in Pakistan i.e. PACRA and JC-VIS, and other international credit rating agencies including Fitch, Moody and Standard & Poor’s must consider Shariah governance attributes as key determinants while assigning long term and short term credit ratings to Islamic banks.

A dominance-based rough set approach applied to evaluate the credit risk of sovereign bonds

Even though sovereign bonds represent low-risk alternatives that give investors a healthy income, the risk assessment process for these bonds is still considered subjective because of the lack of criteria-related information and transparency of the methodologies used by international credit rating agencies. The 2007 economic crisis reflected the lack of clarity in procedures adopted by these agencies, although the financial sector was rigorously regulated. Intending to bring more transparency to the classification process, this paper presents the use of a methodology grounded in Rough Set Theory based on dominance, the Dominance-Based Rough Sets Approach (DRSA). This study takes related studies in the literature into consideration and seeks to show how the World Bank and credit rating agencies such as Standard & Poor's and Moody's can improve on how they tackle certain issues. Using the perspective obtained with DRSA, it was possible to verify the consistency of agencies' ratings and to induce rules for pattern recognition that can explain, using a set of non-redundant attributes, how the credit risk of sovereign bonds is classified. A significant rate of accuracy was obtained in the extrapolation using real data and the number of sovereign bonds analyzed was increased. Since this analysis only uses objective attributes, it was inferred that the absence of subjective attributes, i.e. political stability, provoke divergences in the results when compared to those provided by the credit rating agencies.

International credit rating agencies in Africa: perceptions, trends and challenges

This research examines the perceptions, trends and challenges of the influence of international rating agencies on national economic affairs in African states. A descriptive analysis of independent reports published on international sovereign credit ratings and a survey on the financial bodies of the African Union as well as consultations with the three international credit rating agencies show that there is diminishing confidence in operations rating agencies in Africa. However, despite the criticisms of deficiencies in methodologies, operations and regulation of credit rating agencies, results show that they significantly remain as the best available source of credible of risk information for emerging economies to access international capital. It is therefore concluded that the information manufacturing and opinion-leading role of rating agencies remain critical to capital flow and economic development. Thus, the study recommends that African countries implement a multi-stakeholder approach to engagement rating agencies on reviewing the methodologies, indicators and the rating process as traditional methods and indicators are discounting the potential embedded in emerging economies resulting in poor credit ratings.

Why Foreign Banks Fail in Emerging Economies: Risk Management Perspective from Pakistan

The tenacity of this paper is to understand the concept of ‘relative efficiency’ as an alternative measure to assess bank performance, and to investigate the progressive performance of foreign and domestic banks in Pakistan. A very steady growth is observed in assets of foreign banks in Pakistan although Pakistani banking sector has very limited contribution of foreign banks but its historic contribution is much accountable towards economic growth. The significance of this study is that we have conducted the study in Pakistan which was not explored earlier. A research design is the structure for investigation and way of finding out the answer of research question (Huizinga, 1999). We have conducted this research under the umbrella of Quantitative paradigm. Our preferred methodology is CAMELS. This system was developed by ACCION (Americans for Community Co-operation in Other Nations) in 1980’s to help regulator banks of North America (hUallachain, 1994). CAMELS methodology adopted by North America Bank regulators to know the financial and managerial reliability of commercial lending institutions. For sample selection of the banks, we used criteria sampling method that is a type of non-probability sampling. We took sample data of 16 banks working in Pakistan from the period of 2014-2016. Groups are structured according to their ownership status. After assessment of CAMELS rating system in the context of Pakistan banking industry, it is observed that CAMELS is an internal rating system and its results are not available to the general public but to the regulators and the directors of the banks, so we implement its ratios to avail the result of the sample banks. Results of international credit rating agencies such as S&P, Moody’s and Fitch should also be compare for similarities with CAMELS or any of the supervisory rating systems implemented in different countries. It would be productive research to study adoptability of CAMELS rating system in the context of Islamic banking system..

SOME ASPECTS OF INFLUENCE OF INFORMATION ACTIVITIES ON THE BEHAVIOR OF ENTERPRISES: PERFORMATIVE PERSPECTIVE

This article examines the behavior of enterprises in response to the actions of specialized institutions of information activity. Particularly, we focus on the example of the interaction between metallurgical companies and international credit rating agencies in response to decisions on assignment, review and change of their ratings. Commonly, researches on the outlined issue are carried out based on an analysis of changes in the characteristics of financial instruments in response to the announcement of ratings. However, this approach does not take into account the direct reaction of issuers. Even though specialized information actors influence not only the performance of financial instruments but also the reputation of companies through publications related to the analysis, assumptions and forecasts of the operating and financial activities of enterprises, the latter can express approval, criticism or ignore such forms of economically sensitive information disclosure. Through the performative perspective, in particular, the speech act theory and performances, an explanation of the reasons for the corresponding reaction of companies is provided.

국내 기업의 재생에너지 조달을 위한 녹색전력 구매계약제도 설계에 관한 제언

As global interests in climate change are growing, international credit rating agencies and investors allow for individual enterprises’ action plans for that issue as a key indicator for their corporate competitiveness. As such, multinational companies promote their efforts into the energy transition by unveiling their objectives and attainment of voluntary renewable energy 100% (RE 100). The establishment of their goals for RE 100 is likely to obligate their business partners to encourage wider use of renewables while the corporate sourcing conditions for renewables and institutional strategies in Korea are still nascent. Accordingly, the arrangement of both effective measures to facilitate corporate renewable energy procurement and reasonable standards to validate the renewable electricity consumption is now required to keep domestic industries immensely competitive, simply not to fulfill the national target of green gas emissions. Though multiple procurement pathways vary across countries based on how they are implemented and detailed market rules and regulations, utility green tariffs, which have emerged recently in U.S. markets, are highly regarded as economical and stable options to meet renewable energy demand from corporations. Typically, in utility green tariffs, the utility procures renewable energy on behalf of the electricity customers, and they pay a special utility green tariff rate for the renewable energy service. Compared with other potential opportunities, utility green tariffs have an overwhelming advantage of reduced financial burdens on renewable energy purchases by realizing the renewable energy offerings with overall cost savings through enabling renewable generators to seek assurances that their investments in renewables should be returned on a long-term basis. Finally, this paper purports to come up with a viable and vibrant green tariff mechanism in Korean electric power transaction frameworks and, at the same time, the overarching insights into various requirements considered to trigger this scheme in an amicable manner.

A comparative study of economic growth as a key determinant of sovereign credit ratings in Africa

PurposeThis study is a comparative analysis of the magnitude of economic growth as a key determinant of long-term foreign currency sovereign credit ratings in 30 countries in Africa, Europe, Asia and Latin America from 2010 to 2018.Design/methodology/approachThe analysis applies the fixed effects (FE) and random effects (RE) panel least squares (PLS) models.FindingsThe authors find that the magnitude economic coefficients are marginally small for African countries compared to other developing countries in Asia, Europe and Latin America. Results of the probit and logit binary estimation models show positive coefficients for economic growth sub-factors for non-African countries (developing and developed) compared to negative coefficients for African countries.Practical implicationsThese findings mean that, an increase in economic growth in Africa does not significantly increase the likelihood that sovereign credit ratings will be upgraded. This implies that there is lack of uniformity in the application of the economic growth determinant despite the claims of a consistent framework by rating agencies. Thus, macroeconomic factors are relatively less important in determining country's risk profile in Africa than in other developing and developed countries.Originality/valueFirst, studies that investigate the accuracy of sovereign credit rating indicators and risk factors in Africa are rare. This study is a key literature at the time when the majority of African countries are exploring the window of sovereign bonds as an alternative funding model to the traditional concessionary borrowings from multilateral institutions. On the other hand, the persistent poor rating is driving the cost of sovereign bonds to unreasonably high levels, invariably threatening their hopes of diversifying funding options. Second, there is criticism that the rating assessments of the credit rating agencies are biased in favour of developed countries and there is a gap in literature on studies that explore the whether the credit rating agencies are biased against African countries. This paper thus explores the rationale behind the African Union Decision Assembly/AU/Dec.631 (XXVIII) adopted by the 28th Ordinary Session of the African Union held in Addis Ababa, Ethiopia in January 2017 (African Union, 2017), directing its specialized governance agency, the African Peer Review Mechanism (APRM), to provide support to its Member States in the field of international credit rating agencies. The Assembly of African Heads of State and Government highlight that African countries are facing the challenges of credit downgrades despite an average positive economic growth. Lastly, the paper makes contribution to the argument that the majority of African countries are unfairly rated by international credit rating agencies, raising a discussion of the possibility of establishing a Pan-African credit rating institution.

International Credit Rating Agencies in Africa: Perceptions, Trends and Challenges

This research examines the perceptions, trends and challenges of the influence of international rating agencies on national economic affairs in African states. A descriptive analysis of independent reports published on international sovereign credit ratings and a survey on the financial bodies of the African Union as well as consultations with the three international credit rating agencies show that there is diminishing confidence in operations rating agencies in Africa. However, despite the criticisms of deficiencies in methodologies, operations and regulation of credit rating agencies, results show that they significantly remain as the best available source of credible of risk information for emerging economies to access international capital. It is therefore concluded that the information manufacturing and opinion-leading role of rating agencies remain critical to capital flow and economic development. Thus, the study recommends that African countries implement a multi-stakeholder approach to engagement rating agencies on reviewing the methodologies, indicators and the rating process as traditional methods and indicators are discounting the potential embedded in emerging economies resulting in poor credit ratings.

Borrowing Country-Oriented or Donor CountryOriented? Comparing the BRICS New Development Bank and the Asian Infrastructure Investment Bank

Why have the New Development Bank (NDB),established by the BRICS grouping of Brazil, Russia, India, China and South Africa, and the Asian Infrastructure Investment Bank (AIIB), both created by emerging economies, taken different operational institutions? The NDB has adopted a borrowing country-oriented operational modality, while the AIIB’s operational modality is still donor country-oriented. This article examines the structural factors leading to the creation of these new banks and different institutional proposals during the establishment negotiation processes to explain the operational differences. In the establishment of NDB, the competition between India and China for leadership made the principle of equality a basic feature of the bank. All the founding members are the borrowing countries. The NDB is a borrowing country-oriented new multilateral development bank (MDB) with equal shareholding and the use of country systems as two prominent institutional innovations. In the case of AIIB, after being joined by non-regional European powers, China pushed it toward an internationalized and high standards approach, in the face of political pressure toward multilateralism, especially from the European founding members, and market pressure from the international credit rating agencies in America. As a result the AIIB was similar to existing MDBs in terms of operational modality. This research shows the different institutional approaches to participation in global economic governance for emerging economies.

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

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.

Assessment of the Macroeconomic Risk Analysis of International Credit Rating Agencies against the Principles of Soundness and Credibility

International credit rating agencies regularly (twice a year) assess the risk level of sovereign debt, and thus that of a given country. In order to identify risks, each credit rating agency has developed its own methodology to assess economic and public finance processes and identify the emerging risks. The evaluations carried out influence at the international level the financing possibilities of a given country and its conditions. The improving result of evaluations by international credit rating agencies has become one of the requirements for the success of economic policy. However, this can only be a realistic condition and a measure of success if the evaluation made is methodologically sound and the evaluations resulting from their consistent implementation are scientifically credible. This article describes in detail the evaluation methodology applied by the three major international credit rating agencies to evaluate the individual countries and sovereign debt. After presenting the general aspects, the article draws attention to the fact that the principles of objectivity, authenticity and methodological determination are enforced in practice in the evaluations of international credit rating agencies to a limited extent.

Are Transfer-Dependent Governments More Creditworthy? Reassessing the Fiscal Federal Foundations of Subnational Default Risk

AbstractMany fiscal federal scholars argue, often implicitly, that transfer dependence generally bolsters subnational creditworthiness by signalling a higher likelihood of national bailouts for distressed governments. This article argues that dependence fails to bestow general benefits on local borrowers because it suggests an inability to generate additional revenues in the event of fiscal distress, and because this inability does not, contrary to the expectations of many, necessarily translate into higher bailout expectations. Ultimately it is the nature, not the level, of transfers that affects local creditworthiness, whether through bailout or non-bailout channels. Stable and predictable payments, including robust equalization systems, support local creditworthiness, while volatile and unpredictable transfers do not. The article supports these arguments with a review of documents issued by the major international credit rating agencies and cross-national statistical analyses of bailout probabilities and standalone credit ratings issued by Moody’s Investors Service. It also discusses the implications of the findings for work on the fiscal discipline of subnational governments.

Who carried more credibility?: An analysis of the market responses to news from the Japanese government, the Japanese central bank and international credit rating agencies

The Japanese economy has been in recession since its real estate crisis back in the 1990s. Since the burst of the bubble, the Japanese central bank has implemented unconventional monetary policy in an attempt to stimulate the economy. However, the effect appears to be rather limited. It has, however, provided an opportunity to investigate the extent to which markets are influenced by news made by the Japanese government, the Japanese central bank (BoJ) and international credit rating agencies. The aim of this research, therefore, is to examine the market reactions to good and bad news announced by these institutions and to compare who carried more credibility. The findings show that the market had asymmetric responses to good versus bad news. In addition, news from national governments, the national central bank, as well as major international credit rating agencies, had distinct impacts on the market. Moreover, results confirm the role of the introduction of Abenomics as a watershed development in the Japanese economy. Good news made by the major international credit rating agencies had the greatest credibility before the introduction of Abenomics, while good news made by the BoJ had the greatest credibility afterward.