Sovereign Credit Ratings’ impact and Mauritius in the mix 

Mr. Sanjeev Sanyal, Member of the Economic Advisory Council to the Prime Minister of India, during his visit to Mauritius in October 2023, highlighted that Sovereign Credit Ratings should also be looked at from a non-western mindset, and indicated that Indian Credit Rating Agencies will soon start issuing their own Sovereign Credit Ratings. There is no doubt that the “Global South” (a term which was first coined by a political activist, Mr. Carl Oglesby) must emerge and take control of its own destiny.

Mauritius being an IFC, and with its traditional links to India, being the highest source of FDI into India until recently, and further being part of Africa, had a role to play to. Besides being entitled to be rated fairly itself, it is important that Mauritius uses its proximity and available data for both India and Africa to assist the Credit Rating Agencies to have an independent view on Sovereign Credit Ratings.

Mauritius had GCR as one of the credit ratings agencies which was established back in 1996 and took a prominent place in Africa.

Then there is another one, CARE Ratings (Africa) Pvt. Ltd. (CRAF), which established its base in Mauritius in 2016. CRAF, which is backed by CareEdge Rating, India’s second-largest rating agency, has a strong track record of rating companies across various sectors for over 30 years.

Agencies like the above and similar ones in other countries need to come together, collaborate, and set some standards for assigning Sovereign Credit Ratings.

Mr. Sanyal, during his visit, mentioned that “CareEdge will soon start publishing Sovereign Rating for various countries. The purpose of any sovereign risk assessment should be the ability to accurately assess the credit worthiness of the country, and I believe that CareEdge, with its vast experience in the ratings business, is well poised to take up this challenge.”

Mr. Sanyal often addresses the challenges and opportunities encountered by developing nations, particularly regarding economic growth, urbanisation, and governance. In his speeches, he describes the significance of credit rating agencies in shaping risk perceptions and investment prospects in emerging economies. He also highlights how these ratings influence access to capital and economic advancement in the “Global South”.

Why Credit Ratings are important, who can ask for it & the criteria?

Credit Ratings are important for both the entities being rated and prospective investors. They provide an independent assessment of a company’s or government entity’s creditworthiness in general terms, or with respect to a particular debt or financial obligations. Credit rating assesses how likely an issuer (borrower) is to pay back investors (lenders), and also affect the interest rates that the debtor pays on its borrowings.

They give investors an idea of the credit risk involved in lending to a particular debtor, can affect the interest rates that a debtor pays on its borrowings, and they help both investor and lander to manage risk exposure, prevent or mitigate financial crises, and provide comfort and transparency in the credit markets.

Companies and Corporations, Governments, Banks and Financial Institutions, Individuals, Investors, Insurance Companies, and anyone involved in borrowing, investing, lending, or assessing financial risk may need credit ratings.

Credit Rating agencies use a set of criteria to evaluate the creditworthiness of entities. Prime measures are financial performance (profitability, debt obligations and annual reports), corporate governance, compliance culture, shareholding structures, debt structure, cash flow and liquidity, future investment planning, and financial history of the entity.

… it is important that Mauritius uses its proximity and available data for both India and Africa, to assist the Credit Rating Agencies to have an independent view on Sovereign Credit Ratings.

How does it work?

The client and Rating agencies enter into an agreement – after signing, the agency requests detailed financial information about the entity. A rating team will be assigned by the agency, and they will analyze the information and interact with the client, undertake site visits, examine data, and interact with the banker / auditor. The rating committee awards rating to clients through a letter and rationales to be issued. If the client accepts, the Ratings will be published on the website. If the client does not accept, they can appeal for a review – only one time – of the Rating. Finally, periodic surveillance is carried out by the agency.

Know the Credit Rating grades

Credit Ratings are given in the form of letter grades, with AAA being the highest and C or D being the lowest. Each rating agency may use a slightly different scale, but the principle is the same. The simplicity of these symbols makes them easy for everyone to understand and makes it easier for the investors to take the investment decision based on their Risk appetite. Rating agencies also provide explanations for their symbols and the reasons behind their ratings, helping to enhance understanding.

Credit ratings, such as AAA, AA, A, BBB, BB, B, C, and D, are used for both long-term and short-term debt securities. Each rating category has its own symbols and definitions. Securities with an AAA rating are seen as very safe investments, with a high likelihood of timely repayment. Conversely, securities rated D indicate either a default or an imminent expectation of default. These ratings range from AAA to D, representing different levels of credit risk.

In conclusion

Credit Ratings can be compared to personal credit scores for corporations or governments, offering valuable insights to potential investors and lenders. It’s essential to note, as highlighted by the rating agencies, that these ratings reflect an informed assessment of potential risks rather than an absolute assurance.

Various rating services under its umbrella include, but not limited to, Recovery Ratings, Independent Credit Evaluation of Residual Debt as per Resolution Plans, Ratings for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), Infrastructure Enhancement Loans (Infra EL) Ratings, Public Finance Ratings, and the role of a Monitoring Agency for Initial Public Offerings (IPOs).

In most international capital markets, regulators have made ratings mandatory for investments in funds or bonds to safeguard an investor’s money. Independent ratings promote transparency and help in pricing or assessing risk premiums. Ratings play an important role in building a strong capital market ecosystem that meets global standards, as investors often rely on them significantly before making investment decisions. While investors conduct their own due diligence, ratings provide a detailed analysis of a company’s strengths, weaknesses, and other aspects.