{"id":160878,"date":"2020-04-30T14:47:40","date_gmt":"2020-04-30T12:47:40","guid":{"rendered":"http:\/\/www.myza.co.za\/why-downgrading-countries-in-a-time-of-crisis-is-an-exceptionally-bad-idea-the-conversation\/"},"modified":"2020-04-30T14:47:40","modified_gmt":"2020-04-30T12:47:40","slug":"why-downgrading-countries-in-a-time-of-crisis-is-an-exceptionally-bad-idea-the-conversation","status":"publish","type":"post","link":"https:\/\/www.myza.co.za\/press\/why-downgrading-countries-in-a-time-of-crisis-is-an-exceptionally-bad-idea-the-conversation\/","title":{"rendered":"Why downgrading countries in a time of crisis is an exceptionally bad idea | The Conversation"},"content":{"rendered":"

Why downgrading countries in a time of crisis is an exceptionally bad idea<\/a>: <\/p>\n

The street market at Mont-Bou\u00ebt in Libreville, Gabon. The country was one of 10 on the continent downgraded this year.<\/span> Getty Images<\/span><\/span><\/figcaption><\/figure>\n

A number of rating agencies have downgraded emerging market economies during the COVID-19 pandemic. Their actions have raised the question: why do so during a crisis? <\/p>\n

This is not the first time ratings agencies have adopted a procyclical approach \u2013 that is, one in which bad news is simply piled on bad news.<\/p>\n

During the 2008 global financial crisis, ratings agencies were accused of aggressively downgrading countries whose economies were already strained. Reports by the European and US Commissions found evidence that their decisions worsened the financial crisis.<\/p>\n

Nobel laureate Joseph Stiglitz has also accused rating agencies of aggressively downgrading countries during the 1997 East Asian financial crisis. The downgrades were more than what would be justified by the countries\u2019 economic fundamentals. This unduly added to the cost of borrowing and caused the supply of international capital to evaporate.<\/p>\n

In addition to the issue of timing, the effectiveness and objectivity of the rating methodology continues to be questioned by policymakers. Their methodological errors in times of crisis, together with the unresolved problem of conflict of interests, leave both issuers and investors vulnerable to losses. <\/p>\n

The procyclical nature of ratings needs to be put under check to avoid market panic. The devastating effects they add on economies that are already strained has to be challenged. The coronavirus pandemic is yet another episode to prove this.<\/p>\n

Questionable decisions<\/h2>\n

Ten African countries have been downgraded since the COVID-19 pandemic started \u2013 Angola, Botswana, Cameroon, Cape Verde, Democratic Republic of the Congo, Gabon, Nigeria, South Africa, Mauritius and Zambia.<\/p>\n

These decisions were based on expectations that their fiscal situations would deteriorate and their health systems would be severely strained by the pandemic. <\/p>\n

But, in my view, the downgrade decisions reflect monumental bad timing. I would also argue that, in most cases, they were premature and unjustified.<\/p>\n

Since international rating agencies have tremendous power to influence market expectations and investors\u2019 portfolio allocation decisions, crisis-induced downgrades undermine macroeconomic fundamentals. Once downgraded, like a self-fulfilling prophecy, even countries with strong macroeconomic fundamentals deteriorate to converge with model-predicted ratings. Investors respond by raising the cost of borrowing or by withdrawing their capital, aggravating a crisis situation.<\/p>\n