What the Fitch?
The word “Fitch” has now crept into our vocabulary, and everybody is talking about the “negative outlook” opinion by Fitch. A friend of mine wanted to ask what Fitch is, but he asked “What the Fitch?” I liked that, and so I decided to write about it.
Globalisation has its advantages and disadvantages; one disadvantage (there are legions of them) is that countries and people become so interconnected and interdependent that one cannot do anything without affecting the other, or being affected by another. Proverbially, if one person sneezes, the others catch the cold, or stuff like that.
On many occasions, governments cannot balance their books due to one or several reasons, and they thus end up spending more than what they are receiving primarily through taxes. Governments, like private people, usually borrow from the private sector to finance the shortfall, on a short or long-term basis. The problem is that the person that lends the money wants to have the peace of mind that their money will be repaid (with interest, of course!).
Thus, over a period of time, some private individuals identified this information gap and hence created companies that will provide the assurance needed by the investors and lenders that their money was in safe hands. They would thus evaluate the “credit-worthiness” of each entity that wanted to borrow money, and this is how credit rating agencies like Fitch, Moody, and Standard & Poor (S&P) got into business. They are internationally recognized as the “Top Three” in credit ratings.
Fitch Ratings was started by John Knowles Fitch in 1914, and has its headquarters in New York (USA), and London (UK). It employs over 2000 people all over the world. According to information on its website, “Fitch Ratings provide an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims, or counterparty obligations. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested. Ratings are opinions based on all information known to Fitch, including publicly available information and/or non-public documents and information provided to the agency by an issuer and other parties.”
Furthermore, “Fitch Ratings’ credit ratings provide an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims, or counterparty obligations. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested. Ratings are opinions based on all information known to Fitch, including publicly available information and/or non-public documents and information provided to the agency by an issuer and other parties.”
A private company provides an opinion about governments, and this opinion may or may not be accurate, but it is still taken as the gospel truth. Whatever Fitch or Moody or S&P says is taken literally as a bill of health or a death certificate. And this is where the problem lies, because we all start to sing from the same hymnbook. Consequently, we become sensitive to everything these guys say or write about us, even if we know deep down that it is not true.
But I guess the problem is self-inflicted: if we can learn to live within our means by spending what we can afford, then in theory we should not need to borrow significant amounts of money, and thus there will be no need for Fitch and Co. Unfortunately, we have already commenced our descent into the borrowing pit, having a government debt very close to 40 percent of GDP. This is not so bad compared to Japan that has a debt larger than 200 percent of its GDP. Yet Japan has a rating of A+ compared to Namibia’s BBB-. Granted, Japan has a much larger economy (GDP is about 300 times larger than that of Namibia, and its GDP per capita is 7 times larger than ours).
For us to be on the same page, allow me to give some brief explanations of the Fitch ratings as follows: AAA (reliable and stable), AA (quality with a bit higher risk), A (economic situation could affect finance), BBB (middle class, an acceptable risk), BB (more prone to economic changes), CCC (vulnerable, dependent on current economic situation), D (has defaulted before, high risk to default again). So Namibia is still sitting pretty, even though the outlook has been downgraded from “Stable” to “Negative”. If that is any comfort, Japan also has a “Negative” outlook!
Fitch had problems with Namibia regarding the following issues: budget deficit of 8.3 percent of GDP is higher than the BBB median of 2.7 percent; current account deficit is 14.1 percent of GDP compared to the BBB median of 1.3 percent, and the New Equitable Economic Empowerment Framework (NEEEF) received an unfavourable mention because it has caused “unease in the business community and could slow down foreign investment in manufacturing and services.” However, on the positive side, the government debt of 39 percent of GDP is lower than the BBB median of 41 percent, and the projected economic growth rate of 4.4 percent is higher than the BBB median of 2.5 percent.
Fitch concluded that Namibia’s fiscal deficit, current account deficit and deteriorating economic growth are cause for concern, and thus gave the negative outlook. The finance minister made the undertaking that they will address these concerns to avoid a downgrade. I wish him all the luck in the world.
I was surprised about Fitch’s comment on NEEEF, and this confirms my suspicions that these rating agencies have neoliberal agendas to dictate to many developing countries under the guise of “prudent macro-economic policies”. The choice is ours: we can play the development game according to their rules, or we can chart our own unique trajectory that makes us independent of these neoliberal policies.
If we continue to regard these ratings as the gospel truth, we shall end up exclaiming like my friend did: What the Fitch!