Assessing Asia: The Perils and Promise of Asian Credit Ratings

By Phar Kim Beng

Money is the best coward. It goes to places with the least risk. Notwithstanding such a simple formula, credit ratings have yet to achieve the status of a science. Opaque accounting systems, and fiscal spending, have all put paid to a fully credible system of assessment.

When the quantum involved is in the hundreds of billions, sometimes verging on a trillion, knowing the exact nature and form of the beast (i.e. financial risk) is the modern equivalent of self defence against weapons of mass destruction.

While the Iraq and Afghan War had cost US tax payers nearly US$1 trillion over the last decade, more than US$12 trillion were used to prevent the global financial crisis from obliterating the international system.

Granted the massive danger, this is where credit ratings are supposed to step in: Operate as the proverbial Ozone Layer to screen against the harmful rays, that is to say, the erroneous deployment of resources from the surplus countries to those in the deficit. In the current context, this implies a system that protects Asian investments in the West. Yet, the protection of Asian financial surpluses remain far and few between, especially in the West.

Despite the recent waves of downgrades across the West, one still finds that China (AA-) can be rated lower than Spain (AA). Indeed, India (BBB-) is rated lower than Ireland (BBB+) according to the ratings provided by Standard and Poor’s. The implications of this ratings disadvantage are pervasive especially since sovereign ratings will typically reduce Asian companies and countries’ competitiveness. Indeed, when the credit ratings are methodologically flawed, it goes without saying that the international financial system sui generis is totally exposed.

However, this line of argument is valid only to the degree every country continues to rely on ratings provided by the Big Three in the West; namely Fitch, Moody’s and Standard and Poor’s. But do we? The arguments against excessive fixation with the Big Three are compelling.

Within a span of one decade, all three agencies have failed or floundered in their sovereign risk assessment. First, the ratings were whiplashed by the Asian Financial Crisis, then more recently, by the Global Financial Crisis again. The ratings agencies did not foresee the meltdown and default in Argentina too. If these firms can get it wrong with the big, and massive financial events, what hope is there with the smaller ones?

Dagong in China, together with smaller credit agencies in South Korea and Hong Kong, have now appeared on the horizon to challenge the rating preponderance of the West. If knowledge is power, as Francis Bacon once affirmed, the arrival of such technical agencies in Asia marked a slow but certain shift from sheer reliance on the West. Whether this is inevitable depends on the willingness – and courage – of Asia to do remould the template of finance.

Firstly, whereas Asia has traditionally relied on the score of Big Three to borrow from the international financial institutions, especially rates first benchmarked in LIBOR (London Interbank Offered Rate), it is now given the option to assess risk differently.

Dagong, for example, assesses risk based on a country’s or company’s ability to create wealth, with due attention paid to its fiscal indebtedness. While such a formula may be more conservative and prudent, it does not diminish the value of the country or company.

Secondly, Asian credit ratings are not meant to supplant the West completely. Rather the goal is to provide a vital supplement, especially when the current regime is now in odium. Experimenting with Asian ratings is not an exercise in self-conceit. Rather, it is an endeavour to push the proverbial envelope, which in the long run, would raise the standards of due diligence across the whole industry.

To be sure, the existence of Asian credit ratings cannot transform the international allocation of capital over the short and medium term, especially the manner by which the cost of borrowing is priced. Nor can the international economy be retooled in Asia’s favour. To begin with, US consumers still consume five times more than Indian and Chinese consumers combined.

But given greater confidence in Asian credit ratings, Asian countries and financial authorities do have the means to wean themselves from the West, especially when it is misfiring at various fronts. The key is not to take advantage of the Asia’s trading partners, but to send a shot across the bow, that half of the world’s population is in Asia. Their hard earned money deserves better credit ratings, especially when the West is still fixated to assessing risk in the traditional way.

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