RATING AGENCIES ARE MERELY ISSUING CREDIT OPINION BUT…

It was a devastating news when Fitch Rating downgraded Malaysia’s sovereign rating by a notch to BBB+ in early December. Fitch Rating was of the view that the depth and duration of the Covid-19 crisis have weakened several of Malaysia’s key credit rating namely the fiscal position. This was quite apparent judging from the size of fiscal stimulus totaling RM305 billion compared to RM67 billion when the country faced the 2009 recession.

-  Dr Mohd Afzanizam Abdul Rashid

To some degree, the decision was not entirely surprising given that the rating outlook has already been revised downward to negative in April this year. And perhaps, the S&P Global Ratings could also follow the same footsteps given the negative outlook accorded to the Malaysian government during June.

Understandably, there were flaks lambasted towards the Credit Rating Agencies (CRAs). Granted that such criticism does carry some weight especially when one revisited the US Sub Prime Crisis in 2007 and 2008.

During those periods, the toxic assets which were predominantly mortgages extended to clients whose credit standards are subprime, repackaged into Asset Backed Securities, were rated higher and the investors were oblivious on associated risk to the assets.

The crisis has led the financial system almost collapsing and the US Federal Reserve has to come in to provide the backstop through various intervention programs. The unconventional monetary policies chiefly the Quantitative Easing (QE) measures were adopted by the major central banks.

While criticizing the CRAs can be quite convenient, we would need to have a clear view on the purpose of credit ratings. Essentially, the CRAs are merely issuing their credit opinion based on the certain parameters and methodology.