Role of Regional Credit Agencies in Development

Mobilizing local savings for financing is extremely important for the continued economic progress of DMCs, and to this end the growth of bond markets in Asia-Pacific has been encouraged in recent years. There has been too much reliance on the banking sector till now and the establishment of sound capital markets would be a sensible diversification. But one of the major bottlenecks to the development of capital markets is the remaining asymmetry of information among market participants, particularly in Asia. That is why we think the role of trusted credit rating agencies will become critical for the growth of regional capital markets.

The Association of Credit Rating Agencies in Asia (ACRAA) was set up four years ago with the participation of a dozen or so domestic credit rating agencies (DCRA) operating regionally. Promising ideas discussed within ACRAA include harmonization of rating standards and practices and the possible establishment of an Asia-wide credit rating agency. However, there are strongly held competing views about the merits of international credit agencies versus regional or DCRAs.

You can reasonably argue that a rating for a company should be done by only one agency otherwise investors might get confused or, alternatively, different credit agencies may give the same company different ratings which are more relevant. This is likely, because domestic and international scales are often different; particularly where capital account transactions are not yet liberalized, domestic investors are only interested in the home market (for which DCRAs normally have much more accurate information about their local companies).

It seems we cannot avoid the fact that different credit agencies may use other indicators or criteria and arrive at dissimilar ratings. (When an international credit rating agency downgraded Japanese sovereign bonds the government strongly protested this as being groundless.)

But what is most important here seems to be how to ensure a sound and competitive market environment for credit rating agencies and promote the transparency of each rating agency whether it be international or domestic. So long as transparency and accountability of credit agencies are ensured by regulators, the market and themselves, investors may usefully compare and contrast different ratings from their own standpoints and rely on their own informed judgements.

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1. Bala Bhaskaran
   (posted 21 April 2008 / 11:12:39 AM)
   
   The brief paper offers insight into the dynamics of currency apreciation and its impact on the economy. Can it not give references of research papers and case studies on the same subject? That will be a lot more useful to the researcher.