Credit rating

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1. In short, a credit rating of a country is assessment of capacity and readiness of the government of a country to serve its debt in time and in full. With its sovereign rating the state measures the ability to repay the state debt. It is important to recognize that the rating depends on potential, but also on readiness to repay the debt. When assessing the risks, the economic factors are considered, and the potential to repay the debt is assessed, but also the political factors in the country, i.e., the readiness to repay the debt. Those factors are usually connected, but they are not identical. In few words, a debt should be repaid in time and in full.

It is usual modus to assign letter’ marks to credit worthiness of a country. There is no only one rating assessment for a country. The rating of the government to repay its debt denominated in local currency differs sometimes from the same debt denominated in foreign currency. Letter marks in each of the categories (foreign and local currency) range from AAA, the highest rating mark, to SD, meaning that the debt is served selectively (Selective Default). In other words, AAA mark represents the least potential for non-payment of the debt, i.e. , it indicates the best performing debtor. Mark with only one letter A indicates small possibility that the debt will not be repaid, but the vulnerability of such country to changes of the circumstances is higher than the vulnerability of the country with AAA. The BBB mark indicates creditworthy debtor, and small possibility for problem occurrences, but change of circumstances could jeopardise the repayment of the debt. This assessment is considered to be the lowest, so called, investment rating. This means that a country with this assessment can appear individually in the international capital market as a debtor, i.e., that “under normal”, and “not speculative” conditions, it can borrow from foreign banks. Assessments from BB and lower (B, CCC and similar) indicate so called speculative credit sovereign ratings. For example, C mark indicates that the issues with repayment of the debt are quite probable.   In order to have more precise ranking of states, the positive sign “+” and the negative one “-” are often added to the letter marks.  Off course mark A+ is higher rating than simple A, as well as BBB- is slightly lower rating than BBB.

With the letter mark, usually comes the projections on the trends of this assessment in future. More specifically, there are stable outlook (no changes expected), positive outlook (the rating expected to be upgraded) or negative outlook (the changes to lower rating are expected in near future). More at: https://www.cbbh.ba/press/novina/?year=2003

2. Benefits form the sovereign credit rating are multiple. Some of them are:

Any country wishing to indebt independently in the international capital market, i.e. to issue the stocks or to indebt as state with the commercial banks in the world, must have sovereign credit rating. As in other parts of finance, as the rating is more favourable, so the state is more creditworthy debtor. This means, in fact, that it can borrow at more favourable terms in the market, i.e., at lower interest rate, higher amount of loan or longer period of repayment. Therefore, country with the AAA rating can indebt more favourably than the country with BBB rating, while the country with B mark can borrow at the international market, most often under speculative terms, with very high interest rates. Off course, lower interest rates on borrowed funds mean lower amounts of debt repayment, which is more favourable for each country. Reasonable indebting means that a country can develop not only from own sources, but from other’s too, which, under the precondition of sound investment of borrowed funds, means also the faster economic growth, and by that the greater wealth of the country.

With the publishing of its sovereign rating, a state increases the public information on itself. Therefore, each country trying to attract direct foreign investments with assigned credit rating increases its transparency. All potential investors and creditors are always interested in having as much as possible information on a country. Internationally comparable credit rating by global rating agency definitely accelerates the decision making process of creditors, having confidence on someone who, on their behalf, has processed the available information on potential debtor in systematic way.

One of the main features of modern economic trends is the increase of transparency. Nowadays, all countries publish on themselves incomparably more data than it was the case twenty years ago. While publishing its rating, the country says loud and clear that there is nothing to hide and that all data are public. Even if rating is unfavourable, it should be published. Such like behaviour is always awarded by investors.  In other words, there is no doubt about reasons for having a credit rating, but there comes the problem when a country does not have it, because the questions pops up what is tried to be hidden from the public.

The rating itself is additional test of total economic policies of a country. A wise man always gladly listens to the evaluation of his work. Therefore, modern states should not neglect opinions of others on their overall policies, or more precisely, expert assessment on their capacities to serve the public debt in future. With it, the country obtains one of the criteria to compare with other countries. Such comparisons are grounded on facts, not on prejudices often being present.

The process of assigning the credit rating is complex and it requires a lot of knowledge that cannot be read in books. When country enters in the process of credit rating assignment, the stakeholders acquire the knowledge on that. Credit rating agencies set high demands related to the data on the country’s economy, in relation to the assessment and outlook of the future. This is forcing a country to approach the analyses of its debt repayment capacities more seriously, which is not always the case. Thus, it is better to enter this process as earlier as possible. More at: https://www.cbbh.ba/press/novina/?year=2003

3. Agencies in charge of credit rating assignment consider set of qualitative and quantitative indicators on a country. Thus, main group of indicators, are: political risk, income and economic structure, economic growth prospects, adjustment capacities of the fiscal system , consolidated debt of the state, different other liabilities (such as non-financial public companies), monetary stability, external liquidity, burden of the public sector debt and burden of the private sector debt.  It is important to mention that there is no only one methodology, i.e. single weights by which set of different indicators transform into one appraisal, but this compilation depends on overall impression of the analysts, i.e. persons delivering the final decision. More at: https://www.cbbh.ba/press/novina/?year=2003

4. Standard and Poor's and Moody's, two international credit rating agencies, monitor and prepare the sovereign credit rating of Bosnia and Herzegovina.

Global rating agencies have assessed the political instability, and risk related to it, to be the most important reasons of low sovereign credit rating of Bosnia and Herzegovina. It is necessary to direct the resources into country’s economic development, European integration process and implementation of the structural reforms, in order to have the country's rating much more upgraded and close to the investment range. Given the international rating of the country, stability of the currency, of monetary policy and financial system represents the important pillar of Bosnia and Herzegovina stability, and the Central Bank of Bosnia and Herzegovina, will continue to contribute actively to the upgrading of the sovereign credit rating, within its mandate. More at: https://cbbh.ba/Content/relations/892?newscategoryId=69