T he ‘Big Three’ global credit rating agencies — Standard & Poors, Moody’s and Fitch, which together command nearly 95pc share of the world market — had come under intense criticism for their favourable (triple-A) ratings on sub-prime securities that led to the collapse of the housing market and precipitated the financial crisis and recession of 2007-08.

Through greater transparency, market efficiency and good governance, the beleaguered rating agencies were believed to have reclaimed their worthiness. “Ratings are a valuable source of information for investors and other market participants and they help in healthy capital market development,” says Sayem Ali, an economist at Standard Chartered Bank.

He adds that the importance of sovereign grading lay in the fact that the rating agencies applied uniform methodology across the board for all economies. He, however, observes that the extra care after the 2008 debacle pushed the ratings ‘slightly behind the curve’. Sometimes, global credit rating agencies’ (CRAs) ‘positive’ ratings emerged only after the market had started to rally, or the ‘negative’ ones came up not before the market had taken a steep decline, he elaborated.

Most market strategists agree that credit rating in a developing country like Pakistan is a ‘hazardous minefield’. Reliable information that is disseminated in a responsible and timely fashion is the raw material for credit rating. And this is largely lacking here

“Mainly, foreign fund managers are dependent on CRAs, for they do not have their own information gathering mechanism on the ground,” says Muzammil Aslam, MD of Emerging Market Economics. Yet, he says ratings are a useful tool, for they help reduce the knowledge gap between ‘borrowers’ (issuers) and ‘lenders’ (investors) of capital.

A local fund manager points out: “Currently, the S&P has put Pakistan’s sovereign rating on B minus, which is seven notches below investment grade, while Moody’s Caa1 sovereign rating is eight notches below investment grade”.

An asset manager of a major mutual fund recalled that in mid-July 2012, Moody’s had downgraded the country’s sovereign rating to its lowest level ever, citing a worsening current account balance, foreign exchange reserves, and looming payments to the International Monetary Fund. Moody’s had downgraded Pakistan’s foreign and local currency bond ratings from B3 to Caa1.

However, about two weeks back, Moody’s revised the outlook on the country’s foreign currency government bond rating to ‘stable’ from ‘negative’. The rating was affirmed at ‘Caa1’. Moody’s decision to revise the outlook was primarily based on ‘stabilisation in the country’s external liquidity position’.

The CRA said in its mid-July report that the situation had reversed over the past year: the current-account deficit was modest (estimated at around 1pc of GDP for the fiscal year ending June 2014), while financial inflows had increased due to a $2bn Eurobond sale earlier this year and from privatisation proceeds. Besides, multilateral and bilateral funding repayments to the IMF from the previously suspended programme were tapering off, even as disbursements from the ongoing programme continued.

Finance Minister Ishaq Dar was as pleased as the capital market, which saw an unprecedented rally the day Moody upgraded the country’s bond rating. The finance minister puffed his chest as he counted the over-subscription of the Eurobond, successful auction of 3G/4G spectrum licences, divestment of part of government holdings in state-owned enterprises, tax and energy sector reforms and improved economic indicators, all of which, he emphasised, had raised international investors’ confidence in Pakistan.

Besides the global rating agencies, two local credit rating agencies are currently operating in the country: the Pakistan Credit Rating Agency and the JCR-VIS Credit Rating Company Limited. The Securities and Exchange Commission of Pakistan (SECP) recently revised the existing Credit Rating Companies Rules 1995 for better governance of these agencies.

While replying to queries, Tahir Mahmood, the SECP chairman, told Dawn that “Investors and other stakeholders attach immense importance to CRAs’ assessments and opinions. This demands that they [the agencies] conduct their credit-rating activities in accordance with the principles of integrity, transparency, quality and good governance”.

Zafar Abdullah, Commissioner, Securities Market Division of the SECP, added that the purpose of revisiting the Credit Rating Companies Rules 1995 was to expand the horizon of the CRAs to include ratings on corporates, public sector enterprises and others in line with latest international standards and best practices. Currently, the companies issuing bonds benefit from getting them rated by the agencies. Abdullah asserts that “The ratings are currently mainly used at the time of soliciting credit”.

A former SECP chairman describes the credit rating agencies essentially as ‘purveyors’ (marketers) of integrity and professional competence, and advised them to be watchful, forward-looking, being able to issue warnings and opinions well in advance.

Yet, most market strategists agree that credit rating in a developing country like Pakistan is a ‘hazardous minefield’. Reliable information that is disseminated in a responsible and timely fashion is the raw material for credit rating. And this is largely lacking here: accountancy and auditing practices leave a lot to be desired, government policies changed frequently, and the level of corporate governance and best practices fall short of international standards.

Published in Dawn, Aug 4th, 2014