Naoko Nemoto, financial economist at ADBI, talks about the current status and the causes of rating disparities between local and global credit rating agencies operating in Asia.
The Determinants of Rating Splits between Local and Global Rating Agencies
Description: Naoko Nemoto, financial economist at ADBI, talks about the current status and the causes of rating disparities between local and global credit rating agencies operating in Asia.
Credit ratings are important because investors rely on them to make decisions. But ratings make sense only if they’re consistent across rating agencies, if there are no rating splits.
I’ve found, however, that rating splits do exist in large Asian economies. The discrepancies between global and local agency ratings of companies in Asia may be driven by local-market factors such as the relationship between the company and its main bank or group company and the government’s implicit support.
Three global rating agencies dominate the market: Moody's, Standard and Poor's, and Fitch Ratings. More than 100 local rating agencies operate mainly in home markets.
In Asia, local rating agencies assign ratings that are about two or three notches higher than those issued by global rating agencies.
Each rating agency uses its own methodology, so it’s only natural that there will be some differences in ratings. Local and global rating splits had gradually narrowed. But since the 2007 global financial crisis, they have been widening again.
The large gaps between credit ratings may complicate investors' ability to interpret information and engage in cross-border transaction. It’s important to find out what underlies the rating splits so we can ensure that credit ratings are meaningful.
ADB is promoting the development of the bonds market in Asia and I believe our research will contribute to this initiative.