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Shooting the messenger

Jul 27 2012 07:37
Mzwandile Jacks

NOWADAYS it is odd to find anyone concurring with the world's three rating agencies - Moody's, Fitch and Standard & Poor's (S&P) - about any economic decision they make.

But this week it emerged that these agencies shared the same fear with one of the world's biggest sources of development finance, the World Bank: that South Africa's economic outlook is not as good as many had previously thought.

The World Bank this week said economic growth forecast for South Africa would this year sag down to 2.5% from 3.1% due to a slowdown in Europe and China, South Africa's two major export destinations.

This reiterated S&P's sentiments made earlier this year. The agency relegated South Africa's economic outlook down a notch from stable to negative. In so doing, the agency joined its peers Fitch and Moody's who held the same views.

But at the time that S&P and its peers made these observations many South Africans were left livid, with Reserve Bank governor Gill Marcus promising to raise concerns with some agencies about their economic outlook of the country for this year.

Other prominent South Africans thought these warnings were "completely unacceptable" efforts by foreign, unelected capitalist bodies telling a sovereign, democratic government what it should do.

But negative comments about rating agencies did not only come from South Africa. It has become a global affair. Earlier this year criticism of rating agencies resurfaced after the outbreak of the eurozone debt crisis.

These attacks, however, started after the global financial crisis of 2007 and 2008 when the agencies were accused of failing to detect the biggest economic meltdown since the Depression of 1929.

This year, European Union leaders objected that the rating agencies were an "oligopoly" which issued self-fulfilling prophecies of doom, greatly aggravating the crisis.

There is also an undercurrent of criticism that they are based in the United States, the world's biggest economy.

I think this fact has made them one of the poorest inventions the world's financial system has ever seen, because it is impossible for three entities to rate the entire world.

We should have had at least 10 of them, spread throughout the world, in Europe, Asia and other emerging regions.

There is also a call that the world should introduce verification to check if there is abusive behaviour by the agencies.

In addition, they have been accused of not merely passing on information but expressing subjective judgements, speeding up trends that already existed. This was like pushing someone who is on the edge of a cliff. They aggravate crises.

But I think credit rating agencies play a crucial role in the financial system, providing an objective analysis of the risk posed to investors by bonds, companies and countries.

The fact that their sentiments about South Africa's economic outlook for this year were echoed by the World Bank is a breath of fresh air and shows they can get it right.

Because they have been vilified and hauled before the US Congress and the Japanese parliament, they now pull the trigger ahead of time. I feel this is good for all the world's economies.

Critics of these agencies are being haunted by what they have created. What the agencies are doing now is tantamount to upping the ante.

Agencies are just messengers and I believe we should not shoot the envoy. Those who say the agencies should think about the implications of their statements should consider what would happen if they lied or took their time to respond.

The agencies should not be blamed for everything that goes wrong in global economies. We have always been told that capitalism has the ability to sow the seeds of its own destruction.

 - Fin24




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