Hot topic of the town, rating downgrades and relevance of credit rating to ordinary citizens

By Dasith Fernando

Most Sri Lankans talk about the global rating agencies as they have downgraded us multiple times during the past three years.

Although most politicians criticize the rating agencies, they criticise without going into the substance of the reports issued by the rating agencies.

Since credit rating is a trending topic, this article will give the reader a basic understanding.

What is a credit rating?

Credit rating is an independent opinion on an entity's debt repayment ability and demonstrates on a scale for simplicity.

A rating agency evaluates the debt repayment ability of the company using its rating methodology; this gives a framework to assess a company based on a quantitative and qualitative perspective.

The highest rating on the scale starts with AAA, and the lowest is D.

Rating agencies?

There are international and local rating agencies; classified based on their mandate. International rating agencies can rate sovereign states and corporates. Moody’s, Standard & Poors, and Fitch are leading global credit rating agencies. The local rating agencies have a restricted mandate, and they can rate any entity domiciled in the country. In Sri Lanka, Fitch Ratings Lanka, ICRA Lanka, and Lanka rating operate as the rating agencies licensed by the Central Bank of Sri Lanka.

Importance of credit rating to Sri Lanka?

Sovereign rating directly determines the borrowing cost and the access to funding of a country. Since October 2018, following the political crisis, Sri Lanka has been downgraded multiple times by the international rating agencies from B level to C level. 

Presently, the Moody’s rating stands at Caa2 (Stable), Fitch at CC, and Standard and Poors at CCC+ (Negative). Based on the ratings issued by the three rating agencies, all the agencies have opined that there is substantial credit risk and a high possibility of a default.

Importance of ratings issued by the local rating agencies?

Corporate investors are the primary users of credit ratings. They use the opinion of the rating agencies when making investment decisions on debentures, commercial papers, and fixed deposits.

Bankers use the ratings when they make lending decisions on the rated entity.

Importance of the rating to an ordinary citizen?

Credit rating is crucial to ordinary citizens when they make deposits in Banks and Financial institutes. It is crucial because it gives an independent opinion on the repayment of the deposit; in financial terms, this refers to the risk of the investment. But most Sri Lankans ignore this when placing their deposits in financial institutions. 

By referring to the credit rating, Sri Lankan citizens can make well-informed decisions and avoid losing their hard-earned money.

Advice to the general public?

Always refer to the credit rating of a financial institute before placing a deposit. Remember that entities rated BBB and above are considered investment grade, and below is considered non-investment grade. Investing in an investment or non-investment grade entity will depend on your risk appetite. 

(The writer can be reached via email at [email protected])