There are flaws with how the Big Three rate EMEs. But a BRCIS ratings agency is not the answer
India has again raised the proposal for a BRICS credit ratings agency, this time at the meeting of BRICS finance ministers and central bank governors. The three top ratings agencies, S&P, Moody’s and Fitch together make for 90% of the global market. India has, on various occasions, viewed their ratings action as biased, especially their fastidious assessment of emerging markets which are mostly non-Western economies juxtaposed against their glossing over of weaknesses of Western economies, particularly the US.
For instance, they have said in the past that they kept India’s ratings just above investment grade for years, despite its sound fundamentals, because of its high debt-GDP ratio. Experts argue that it is the composition of government debt to GDP that should matter—given India’s public debt is mostly internal, the Big Three could have relooked their ratings. At the same time, they held on to their high rating of the US during the last presidential elections citing the effect of the fiscal stimulus plan under the Donald Trump administration while they overlooked the consequent increase in the country’s debt.
A BRICS ratings agency might make sense in such a context. However, a government-promoted ratings agency will always face questions on its credibility, much as the Big Three do in the context of corporate clients that they charge to rate—indeed, their role in the 2008 financial crisis, thanks to holding on to high ratings for companies that were already toxic by then, invited heavy penalties from the US. A BRICS-funded BRICS rater runs the same risk. Moreover, the other concern of the Big Three, that relates to the severe lack of timely and comprehensive data, is one that will also plague a BRICS ratings agency. The BRICS’s, and India’s, best bet is to encourage private ratings agencies in their dealings with each other and non-Western economies, and provide updated and high-quality data.