As explained in the article Credit Ratings by S&P, Moody’s and Fitch Ratings, a “credit rating” is a measure of the ability of an entity, whether a company or a sovereign state, to repay its debt. It shows the quality of loan instruments issued by the borrowing entity and whether these debt instruments can be repaid on time.
One may treat a credit rating similarly to an individual’s credit score. A sovereign state or a company will be assessed and assigned a credit score that shows its willingness and capacity to meet financial obligations to creditors. Of course, the higher the credit rating, the better supposedly is the quality of the loan. Conversely, the lower the credit rating, the higher is the potential risk of default.
Credit ratings upgrade and downgrade
If there are major improvements or changes in the state or the company that would enhance its capacity to pay, it may enjoy a “ratings upgrade.”
This is what most analysts expect the Philippines to receive sometime this year. The country’s robust Gross Domestic Product (GDP) growth, benign inflation, improved tax collection, higher forex reserves, and renewed investor confidence as seen in the Philippine Stock Exchange reaching all-time highs are just some of the factors said to contribute to a possible ratings upgrade for the Philippines.
If, on the other hand, there are issues or threats that impair an institution’s ability to meet financial obligations, it may face a “credit rating downgrade.” Political instability, bleak economic prospects, inefficient tax collection and declining economic growth are normally cited as reasons for a possible downgrade. The most recent credit rating downgrades we have seen include France, Greece, the United Kingdom and the United States.
There are several rating agencies whose job is to objectively evaluate each institution’s credit worthiness. The Big Three in the industry include Moody’s, Standard & Poor’s, and Fitch Ratings. Click here to learn more about the detailed explanation of the rating scores and equivalent ratings among the three agencies.
We summarize below the credit ratings assigned by rating agency Moody’s to select sovereign states.
Moody’s Investment Grade Ratings
For Moody’s, countries assigned ratings of Aaa; Aa (Aa1, Aa2, Aa3); A (A1, A2, A3); or Baa (Baa1, Baa2, Baa3) have investment-grade loans. The highest credit rating is, of course, Aaa which shows an “extremely strong” capacity of the entity to repay its loan.
As of February 2013, fifteen countries remain to have Moody’s Aaa rating. The United Kingdom last week was kicked out of this elite group after being downgraded one notch to Aa1 (see UK sovereign credit rating downgraded). In November 2012, France was also downgraded to Aa1 due to uncertainty in its future economic growth and fiscal outlook.
The United States still enjoys a triple-A rating but Moody’s has previously said the country needs to improve its fiscal position; otherwise Moody’s warned it will be downgraded in 1-2 years’ time. The rating agency currently has a negative outlook on the United States.
Singapore is the only Southeast Asian country with a triple-A rating. Other Southeast Asian countries with an investment grade status are Malaysia (A3), Thailand (Baa1), and Indonesia (Baa3). To prove that the Philippines is at par with these countries in terms of economic growth and fiscal outlook, the Philippines must strive to achieve a ratings upgrade in order to be considered “investment grade.”
A summary of the sovereign states with investment grade ratings from Moody’s is as follows.
Moody’s Speculative (Non-Investment) Grade Ratings
The other set of credit ratings refer to speculative or junk grades. Loan instruments issued by these states or companies are said to be of poor to medium-grade quality. These speculative ratings include Ba (Ba1, Ba2, Ba3); B (B1, B2, B3); Caa, Ca, and C.
The Philippines currently has a Ba1 rating, one notch below investment grade.
In contrast Greece, with its ballooning debt and fiscal deficit, has a junk rating of C. (See The “Greek debt crisis” explained).
Countries with speculative or junk credit ratings assigned by Moody’s are as follows.
Source: Moody’s Investor Services