If the government were to request the big agencies for a sovereign rating, the Nepal government need not do any home work. The grading work can be accomplished within six months based on the standard format and system at a cost of around $4 million for two ratings
Foreign direct investment (FDI) and foreign loans are the necessary means for achieving higher growth and development in both developed countries and developing / low-income countries.
However, for attracting both FDI and foreign loans, a sovereign credit rating is generally necessary. The number of countries having undergone such a rating has crossed more than 150. There are, however, 50 countries with no rating, including four countries – Nepal, Bhutan, Myanmar and Afghanistan– in South Asia.
In the second half of the 20th century, three big companies, namely, Moody's (Mood's Corporation), Standard and Poor (S&P) and Fitch, started a credit rating system. It began with company rating as an independent evaluation of a company, providing information about its credit worthiness. It also provided information on whether to invest in that company along with the associated risks.
From the rating of companies, it led to the development of sovereign credit rating of countries, which is an independent evaluation of their credit worthiness.
On the request of the government, a rating company will evaluate the country's sovereign rating grade, following detailed analysis of the overall situation, including political, economic and environment, of the country.
In this regard, the rating company will provide information to the investors about the rating status of the sovereign debt and investment as well as political and economic risk factors.
The sovereign rating also provides the status of the country's capacity to pay the principal and interest of its sovereign debt and overall quantitative and qualitative situation of the investment environment.
Additionally, they also do rating of the debt, share and other instruments.
This overall information is helpful for investment in a particular country. Additionally, this rating system will help develop the international financial market by facilitating sell debt instruments and providing opportunity for FDI.
While rating, countries are given A, B, C and D grades. A and B grades indicate riskless investment whereas C signals speculative investment with less risk, but D means risky investment.
A triple A makes the best grade, and there are 11 countries, such as Australia, Canada, Denmark, Finland and Germany, that belong in this category.
Countries like the USA and UK have a combination of A and B grades.
In the 1990s, many developing nations set up separate subsidiary companies of the three big rating agencies.
Following the economic liberalisation policy in the 1990s, many reforms, including the first Foreign Investment and Technology Act (FITA) 1992, and other legal reforms were made, but due to the political instability, a sovereign credit rating company could not be established in Nepal.
However, the Securities Board of Nepal (SEBON) executed the Credit Rating Regulations in 2011to do a credit rating of public companies and financial instruments, which resulted in the establishment of the first rating company – ICRA Nepal Limited as a subsidiary company of ICRA India.
After this, another credit rating company – CARE Nepal –was also established.
In other South Asian countries, India has six rating companies, 13 in Bangladesh, three in Sri Lanka and two in Pakistan.
Another FITA 2018 was enacted, allowing Nepali companies to sell their debt and other securities in the foreign securities market.
The2018/19 government budget announced there would be a sovereign rating of Nepal, but it has been delayed. Nevertheless, the Ministry of Finance (MOF) formed a sovereign credit rating committee under the convenorship of the Revenue Secretary with five members, including myself as then SEBON chairman,inJanuary2019.
However, the then MoF was actually afraid of the country rating for fear of having a low grade.
Thus, the MoF tried to get financial and technical assistance from DFID of the UK government for a better rating for the country.
Due to this, the committee could not work effectively.
Later on, due to the pandemic, the government suspended the credit rating work.
If the government were to request the big agencies for a sovereign rating, the Nepal government need not do any home work.
The grading work can be accomplished within six months based on the standard format and system at a cost ofaround$4million for two ratings.
But it is a shame that the government tried to seek foreign aid for such a paltry sum.
For standard sovereign rating, agencies will collect information on different aspects of political, socio, economic and other relevant areas from international organisations like the IMF, World Bank, ADB, Bank for International Settlement, WTO, OECD, United Nations, WHO, Transparency International, Human Rights Watch and the like. This also includes information on doing business, consistence and continuity of economic and other policies, financial crimes and status of risk, along with political stability, rule of law, corruption and good governance.
If the grade is low, the government has the right not to disclose it but has the chance to correct the weak areas.
Nevertheless, there are challenges regarding sovereign rating. Although Enron of USA had a good rating, it collapsed, and some crises like the financial crisis of 2008 and European debt crisis occurred despite the countries' favourable sovereign and debt ratings. In spite of these challenges and weaknesses, the importance of such ratings has been increasing, especially in developing countries, in accelerating development and growth through increased FDI and mobilising foreign resources.
Under FITA, the government is encouraging BFIs (banks and financial institutions) to borrow from the international market, and internationalise the Nepali securities market to bring in resources, attract FDI and expand reinsurance service in the world market.
In this context, a sovereign rating of Nepal is a must, for which the government should immediately start without having further delay.
A version of this article appears in the print on September 29 2021, of The Himalayan Times.