question

To rate or not to rate that is the question

JUST over a year ago, the Cook Islands became the first Pacific Island nation to be awarded a sovereign credit rating by one of the big international rating’s agency.

Rarotonga invited rating’s agency Standard and Poor’s to look over its books and paid for a visit by international rating’s experts. It was rewarded with the dubious distinction of receiv ing what was then the lowest credit rating ever awarded to an

independent nation.

Despite the Cook Islands experience, other Pacific Island nations are now rushing down the same path, with Papua New Guinea’s rating recently released and Fiji’s due out as this edi tion of PIM goes to print.

Why, one might .ask, would Pacific Island nations put them selves through this sort of ignominy.

It all comes down to a desperate need for foreign investment or loans and the desire to put one’s country on the radar screens of those with the available dollars.

When Cook Islands received its rating, in January last year, it was given a B- for long-term rating and a C for the short-term. (A ‘C’ rating suggests the country is staring down the barrel of default and a ‘B’ is as low as it is possible before falling into a

‘C’ rating).

The move to get rated was part of a package of measures to deal with Cook Islands worst ever debt crisis and was intended to track its recovery.

In many ways, therefore, the low rating was not unexpected.

Having restructured its debt with creditors in Italy, New Zealand and Nauru, Rarotonga is now hoping it will get an upgrade when the result of its rating review is complete in the next few months.

Probably, the only downside of being rated by one of the international rating’s agencies, is if their team of experts assign an unfairly low rating. In a worst case scenario, that can lead to a flight of capital, a drop in the value of currency and increased

difficulties, for governments and business alike, in obtaining for

eign loans.

It was to obtain overseas finance - in the form of a bond issue - that prompted Papua New Guinea to ask both Moody’s and Standard and Poor’s to give it a rating.

Releasing the results (a ‘B-plus’ foreign currency rating from Standard and Poor’s and a ‘Bl’ from Moody’s), PNG prime min ister Bill Skate said “these excellent ratings now put Papua New Guinea on the map for international investors and increase access to capital markets for the country.”

Increase access to capital markets they will, mainly because without it investors would simply not be prepared to take such a risk on what, to them, is pretty much an unknown country.

Whether the results are “excellent” is another matter. PNG’s treasurer, lairo Lasaro, believes the rating underestimated his country’s real economic standing.

Rick Shepherd, a member of the Standard and Poor’s rating team, says a ‘B-plus’ means Papua New Guinea is “very much in speculative grade which means any adverse economic or finan cial pressures or developments could seriously jeopardise their chances of repaying their foreign currency debt”.

But he adds “it’s a long way from Indonesia who are on the verge of default (Indonesia’s latest rating saw it just slip out of the ‘B’ category into ‘CCC-plus’).

For prime minister Skate, the ratings are crucial.

At this stage, even with the privatisation and public service cuts already announced in the 1999 budget, he does not have the money to keep the wheels of government turning until the end of the year. Foreign currency levels have plummeted, negotiations with a European banking syndicate have failed and those with the World Bank are struggling. his plan is to cover the shortfall with a US$25O million bond issue on markets in Europe, the US and Asia.

The rating’s agency assessments will be an important part of the sales pitch.

These assessments give a detailed and clear accdunt of all the forces operating within the economy and, by offering them to clients world-wide, they do indeed put small countries on the map.

Just how much that is needed became clear when I rang Moody’s New York office to find out when the rating on Fiji would be available. “Fiji! ...er ...is that a company?” replied the operator.

For Fiji, however, the prospects for a higher rating are much better. Although it is much smaller than PNG, its level of devel opment, its relatively low debt and good record will all count in its favour. That can already be seen by the rating it receives from the Australian Export Finance and Insurance Corporation (EFIC), which rates every Pacific Island country including small ones, such as Niue.

EFIC places Fiji in its third highest category (out of six).

So, is it worth getting a credit rating with one of the interna tional agencies. In most cases the answer is probably, yes.

The standard of the rating and the independence of the assessment counts for a lot with investors.

The rigorous review process is an added incentive to have national accounting procedures up to scratch and the public rela tions value of being offered, on these agencies’ smorgasbords of investment opportunities, is worth having. ■

Jemima Garrett

Sydney