What a Country's Credit Rating Means

On March 13, 2015, the credit rating agency Standard & Poor's confirmed BiH's sovereign credit rating as "B with stable outlook," reports the BiH news agency Patria.

Based on the decisions of the Council of Ministers, BiH has signed agreements for the preparation and monitoring of BiH's sovereign credit rating with two international rating agencies, Moody's Investors Service and Standard & Poors. The signatory on behalf of BiH is the Ministry of Finance and Treasury of BiH. The Central Bank of BiH (CBBH), in its capacity as fiscal agent of the Ministry of Finance and Treasury of BiH, coordinates the preparation and monitoring of BiH's sovereign credit rating.

As a result of its analyses, on March 13, 2015, the credit rating agency Standard & Poor's confirmed BiH's sovereign credit rating as "B with stable outlook." In July 2012, the agency Moody's Investors Service confirmed BiH's sovereign credit rating as "B3" and changed the outlook from "under review - negative to stable outlook."

What is a Country's Credit Rating?

In short, a country's credit rating is an assessment of the ability and willingness of a country's government to service its debt, both on time and in full. First, it should be stated that the rating measures the ability to repay a state's debt. Second, it is important to note that the definition mentions two words: ability and willingness to pay debt. Namely, when assessing risk, economic factors are taken into account, assessing the ability to repay debt, but also political factors in the country, i.e., assessing the willingness to repay debt. These are usually related, but not identical. Third, it is evident from the definition that the debt must be repaid in full and on time.

How to Interpret a Rating?

It is known to the expert public that it is customary to use letter designations for a country's creditworthiness. The further up the alphabet, the better the rating. However, it should be said that there is not just one rating assessment for a country. Some companies actually provide two assessments. The assessment of the government's ability to repay debt denominated in its own currency is distinguished from debt denominated in foreign currency. Letter ratings in each category (foreign and domestic currency) range from AAA, considered the highest rating, to SD, which indicates that debt is not being repaid (from the English Selective Default). In other words, an AAA rating indicates the lowest probability that debt will not be repaid, meaning it signifies the best debtor. A single A rating indicates a low probability that debt will not be repaid, but such a country's sensitivity to changing circumstances is greater than that of a country with a triple-A rating. A BBB rating indicates a good debtor, a low probability of problems, but changing circumstances could jeopardize debt repayment. This rating is also considered the lowest so-called investment grade rating. This means that a country with this rating can independently appear on the international capital market as a bond issuer, meaning it can borrow from foreign banks under "normal," rather than speculative, conditions. It should be noted that there are examples of countries with lower ratings successfully issuing bonds.

Ratings from BB downwards (B, CCC, etc.) indicate so-called speculative credit ratings for a country. For example, a C rating means that problems with debt repayment are very likely. SD is the designation for non-repayment of debt.

To enable more precise country rankings, the letter designations are often supplemented with a "+" or "-" prefix. Of course, an A+ rating is higher than a regular A, just as BBB- is a slightly weaker rating than BBB.

Along with the letter rating, a judgment about expectations for how that rating will move in the future is usually included. Thus, stable outlooks (no changes expected), positive outlooks (upgrades expected), or negative outlooks (downgrades expected in the foreseeable future) are distinguished.

What are the Benefits of a Rating for a Country?

The benefits of a country's credit rating are manifold. Here are some:

Any country that wishes to borrow independently on the international capital market, i.e., issue bonds or borrow as a state from commercial banks worldwide, needs a credit rating. As in all other areas of finance, the more favorable the rating, the better the country is as a debtor. This, in turn, means that it will be able to borrow more favorably on the market, i.e., at a lower interest rate, a larger loan amount, or a longer repayment period. Therefore, a country with an AAA rating can borrow significantly more favorably than a country with a BBB rating, while a country with a B rating can practically not borrow independently on the international market, or can do so under speculative conditions, with very high interest rates. Of course, lower interest rates on borrowed funds mean lower debt repayment amounts, which is more favorable for any country. And reasonable borrowing means that a country can develop not only from its own funds but also from others', which, assuming sound investments of borrowed funds, means faster economic growth, and thus greater prosperity for the country as a whole.

By publishing its credit rating, a country increases its self-awareness. Therefore, any country aiming to attract direct foreign investment increases transparency with its obtained credit rating. All potential investors and creditors are always pleased to have as much information as possible about a country. Of course, each of them must do their "homework" and analyze a particular country, but an internationally comparable rating from a globally recognized agency certainly speeds up the decision-making process.

One of the main characteristics of modern economic trends is the growth of transparency. Today, all countries publish incomparably more data about themselves than they did twenty years ago. By publishing its rating, a country clearly states that it has nothing to hide and that all data is public. Even if the rating is unfavorable, it should be publicly announced.

The rating itself is an additional test of a country's overall economic policies. A wise person will always gladly listen to an assessment of their work. Therefore, sovereign states should not disregard the opinions of others about their overall policies, or more precisely, an expert assessment of their ability to service public debt in the future. This gives the country one of the criteria for comparison with other countries. Such a comparison is based on facts, not on prejudices that often exist.

The process of obtaining a credit rating is complex and requires a lot of knowledge that cannot be read in books. Rating agencies set high demands regarding data on a country's economy, as well as assessments and forecasts for the future. This forces the country to approach the analysis of its debt repayment capabilities with great seriousness, which is not always the case. Therefore, it is better to enter this process as early as possible.

It should be noted that in addition to country ratings, it is very common worldwide for companies to have ratings. The credit rating of each firm largely depends on the credit rating of the state. Usually, a company's rating cannot be higher than the state's, but in some exceptional cases, this is possible.

What Does a Country's Rating Depend On?

Companies that assess credit ratings consider a number of quantitative and qualitative indicators about a country. Thus, the main groups of indicators are: political risk, income and economic structure, economic growth potential, fiscal system adjustment capabilities, total consolidated state debt, various other obligations (such as non-financial state-owned enterprises), monetary stability, external liquidity, public sector debt burden, and private sector debt burden. It is important to say that there is no single methodology, i.e., uniform weights, by which a series of different indicators are converted into a single assessment; rather, this aggregation depends on the overall impression of the analysts, i.e., the individuals making the final decision.

How is the Credit Rating Process Carried Out?

To obtain a credit rating, a country's government (usually in cooperation with the central bank) enters into an agreement with one of the agencies that perform this service. The process of assigning a credit rating can take months. First, the agency requests a whole series of economic and political indicators from the country. Consistent series of quality economic variables for at least five years are often requested, and explanations for future forecasts (in the short and medium term) are required. After analyzing the data, agency representatives visit the country where they conduct in-depth discussions with all relevant authorities.

It should be noted that the full cooperation of all levels of government with the agency is very important. Only if all data is available and all participants cooperate fully can an adequate picture of the country be formed, and thus an appropriate rating.

After obtaining the first rating, company representatives usually visit the country again at least once a year. In the meantime, the country is obliged to regularly provide the agency with the requested data, and the agencies also use all other available data to regularly monitor possible changes in the country's situation.

Who are the Main Agencies that Provide Credit Ratings Worldwide?

Today, there are a number of companies that rate both countries and companies. However, the three most reputable and largest companies are certainly two American ones, Standard and Poor's (S&P) and Moody's, and the European FitchIBCA. More developed countries usually have ratings from all three companies, but for a country starting the rating process, choosing one of the most reputable is certainly sufficient.

Text prepared by the Central Bank of BiH