Business Day Editorial: Mixed-up mood

TECHNIQUES used by international credit agencies to assess the outlook of economies are as nuanced as they are imperfect. After all, Standard and Poor’s (S&P) has erred before. It played a role in the global financial crisis of 2007/2008 by giving its highest AAA rating to risky pools of loans, made a US$2 trillion error in its downgrade of the credit rating of the US in 2011, and in 2015 had to pay US$1.5 billion to the US Justice Department to settle lawsuits alleging its ratings misled investors.

Sometimes, the errors originate outside of the ratings agency in question. For example, last year local authorities reportedly supplied erroneous figures to S&P. These figures, it would seem, could not be corroborated by any more reliable source than the country supplying them. That does not appear to be the case this year.

All of this underlines how economic forecasting is an imperfect science, one with very fine distinctions.

At the same time, ratings agencies can be relied on to offer an unvarnished view of economic realities. Many of their policy prescriptions are based on sound principles.

S&P has lowered this country’s long-term foreign and local currency credit rating from BBB+ to BBB, but held the overall outlook as steady, when compared with a negative outlook last year. This follows Moody’s holding of the Government’s credit ratings stable. On the other hand, the Caribbean Information and Credit Rating Services Ltd (CariCRIS) has reaffirmed its “high” CariAA+ rating for the Government, indicating a high level of creditworthiness of its US$500 million debt obligation. CariCRIS also maintained a stable outlook.

That things have not gotten worse is obviously cause for comfort and the Government is justified in seeing the glass half full. But the writing on the wall cannot be ignored.

The ratings agencies consistently cite the need to diversify the economy. With 80 per cent of exports related to the energy sector, its little wonder there is concern that we continue to put our eggs in one basket. The important role of the Heritage and Stabilisation Fund is also a key takeaway from these reports, but it is more of a plaster and not a truly sustainable measure. While the controls on our exchange rate are designed to protect the population from inflationary effects, protectionism must be supported by growth. And we need better economic data.

Government has the tough and sensitive job of inspiring confidence in the economy and its remarks should be understood in that light. But pointing to scheduled gains in energy is only one part of the equation. It’s time for a re-invigorated approach to the non-energy economy, which should be the main take away from these ratings.