China challenges the status quo with its own ratings agency

We have noted here before that South Africa’s real credit risk is lower than the credit rating agencies of S&P, Moody’s, and Fitch gives SA credit for.  There are strong arguments for this view, with the most important being the state of public finances.  Governments running balanced or near balanced budgets are really in the driving seat as far as the economic recovery goes.  In fact, one could argue that these are really the only countries experiencing an economic recovery.  Those running huge public deficits are merely piling on the debt that must be paid off by future generations, which will in the future become a drag on the economy when the bills must be paid. 

Dagong Global Credit Ratings, a Chinese based private ratings agency, over the weekend released credit ratings for 50 sovereign countries.  The ratings were a pleasant surprise as it focussed on the real pressing issues facing the global economy: the state of individual government’s fiscal health and their ability to repay debt not by issuing more debt, but by increasing its productive capacity to boost tax revenues. 

Dagong rated the US at “AA”, one notch below its haloed “AAA” top notch investment grade status, and below 11 other nations including Australia and New Zealand that were rated “AAA”.  South Africa was rated one notch below the US at “AA”, yet is one notch better than the “BBB” rating afforded to it by the three US agencies.  It must be said that Dagong’s ratings methodology are much more reflective of true sovereign risks when compared with the current ‘best practice’ of S&P et al.

One can’t help but wonder whether Dagong has been pioneered with a political motive in mind, particularly as Hu Jintao openly called for a revision of the current global credit rating system at the Toronto G20 meeting held just a month ago.  If this is the case, and the Chinese government and Chinese companies buy into Dagong’s ratings, South Africa could see a fresh new marginal bond and currency buyer over the coming few years as a capital reallocation takes place.  

What this means for South Africa is that as the market comes on board with this view, the ZAR will be supported as capital flows into local capital markets, which will drive down interest rates relative to investment grade peers.  In other words, the SA 10-yr govt bond yield which is currently trading around 8.50% will converge with those of the US which is currently trading near 3.05%.  This convergence could take place with both yields at or above 10% or it could happen at or near 5%.  The result of the latter scenario would mean another round of long-term credit bingeing by the SA govt, business and individuals as borrowing costs come down, and see a multitude of malinvestments which is wealth destroying.  This could also help support the anvil that is real estate prices for a couple more years if one is looking to offload property at a decent price. 

Read more as covered by the WSJ here and the official Dagong media release here.