Agency Blames Rene For Mess
The American credit rating agency commissioned by the government to assign credit rating to
The condemnation of Mr Rene came in the following fashion in the report of the rating agency: “The macroeconomic policy mix that led to the country's high debt levels was a hallmark of the long tenure of the previous executive, under which development objectives based on a socialist ideology took precedence over economic prudence.” Standard & Poor could not have deduced by themselves that Mr Rene was the culprit unless Mr Michel had told them. President Michel is also, evidently, distancing himself from Mr Rene's past socialist ideology as well as admitting that Rene had stayed for too long in the Presidency.
For good measure, President Michel was praised for abandoning the socialist ideology through “microeconomic reform”. This is how Standard & Poor crafted the praise for Mr Michel: “This approach has only begun to change with the ascendance of the current president who, in his original capacity as finance minister, initiated microeconomic reforms in recognition of the need to arrest rising debt levels and bolster the economy after several years of moribund performance.” During his long tenure Michel talked a lot about economic reform but carried out very few of them. Most of the debt arrears have occurred while Michel was Minister of Finance. When he took over as President, he made no serious effort to reform the economy and has even been criticised by the IMF for his 1996 budget.
Standard & Poor had no time for Francis Chang Leng too as head of our Central Bank. Even though we have had an “independent Central Bank” only a year ago, Chang Leng has been leading this important financial institution for longer than anyone can remember. According to Standard & Poor Governor Chang Leng has been promoting an “exchange rate regime that imposes considerable distortions, constrains growth, and impairs external viability”.
Minister Danny Faure's glee about our first credit rating should be tampered by the small print in the Standard and Poor's report, the most important of which comes at the end: “The ratings could come under downward pressure, however, if exchange rate liberalization is substantially delayed or causes economic disruption, or if it is insufficient to address underlying distortions. Downward pressure on the ratings would also result if fiscal consolidation withers due to a weakening of resolve in the face of potential political or economic exigencies.” In other words if Minister Danny Faure and the government chicken out when confronted by the stark realities of our economy, their consequences and the mood of Mr Rene, we are doomed.
The credit rating is for international consumption only. But international investors, all of whom are savings institutions in the capitalist world, are not fools. Here, we all know that Mr Michel not only shared Mr Rene's ideology but spent most of his adult life promoting it and defending it with real guns and bullets, imprisonment without trial, as well as disappearances. We also know that Mr Rene could not have doubted Mr Michel's socialist credentials to make him his successor as Minister of Finance in 1992.
It was not surprising that Faure’s first appearance on television as the new Minister of Finance was to announce “good news”, the standard propaganda fare since President James Michel acceded to the presidency. The “good news”, according to Faure, was that our country has been given B and B+ credit ratings by Standard & Poor, after the government had contracted them to make such an assessment.
A credit rating is like an exam result. In this case it is in effect an assessment using capitalist yardsticks (ironically), of the SPPF’s conduct of economic policy after 30 years in absolute control and socialism. But a school exam result is not in itself a professional qualification. A bad result makes it even more so. What Mr Faure did not tell us, and SBC reporter could not ask because of ignorance and subservience, that under the definition of Standard and Poor’s own standards, a B rating means that the international bonds which Mr Faure plans to issue in two weeks are known as speculative or “junk bonds”.
As usual, and this seems to be Mr Faure’s forte, the government being in to total control of the state owned media made the rating to be more favourable to the SPPF’s policies than it actually is in practice. For Mr Faure, the bottle was half full rather than half empty. Quite ironically, just a few days before the rating agency published its
In contrast to our country the AFDB was given a AAA and AA+ rating for its debts. Under its definition, Standard & Poor considers an A rating as Investment Grade or low risk debt while a B rating is Junk Grade or high risk debt. To add insult to injury, in its report on AFDB, the rating agency noted that “Since 1995, AFDB has restricted its sovereign lending to its most creditworthy Regional Member Countries (RMC). There are 15 countries that are, in principle, currently eligible to borrow from the bank. However,
By peddling junk bonds on the international capital market we will not endear ourselves with the investment world. It will in fact damage the perception that we are a well managed economy. Junk bonds are only for the most speculative of investors. These investors expect much higher returns for their money than if they had deposited them in the banks or buy AFDB bonds, because of the high risk factors. While we may have political stability, the biggest debtor among us, our Government, has already defaulted on its foreign currency debts. Under Standard & Poor’s own credit rating a defaulter is only worthy of a D rating.
Contrary to Minister Faure’s impression the credit rating will not mean cheaper funds than current commercial borrowings which have been secured by foreign currency incomes deposited in special accounts with Barclays Bank. Unlike the interest (coupon) to be paid by the Government on its bonds, investors work on yields not interest when it comes to bonds. Yield takes into account the life or maturity of the bonds and the forecast movement of international interest rates over the life of the bond, unlike interest, which is a fixed income for the investor throughout the life of the bond,. Investors seek yields commensurate with the level of risks.
To achieve the required yield investors pay a discount on the face value of the bonds they consider high risk investments. The more risky (lower rating) the bond the more discount investors will seek. Hence, a US$ 1000 face value
In his statement in Creole on television Mr Faure gave the impression that the money is in the bag and that, henceforth, our life would be easier. According to Standard & Poor’s expert, however, all the reform measures the IMF, World Bank and African Development Bank have been urging the government to start undertaking must be undertaken and sooner, rather than later. Sooner will mean cheaper funds; later will mean dearer ones or none at all. Danny Faure will require all the presentational skills he honed in
It remains to be seen, however, whether going down the route of junk bonds is a good strategy for our country in the current situation. Why not start the reforms first by inviting in the IMF and benefit from a Paris Club arrangement from our institutional and bilateral creditors. Once this is done it will give us a more favourable credit rating to raise funds for economic improvements rather than a bailout, which is what Faure is contemplating. More foreign debts at this stage is like trying to save the junkie with and extra shot of heroin.
As usual our government will not publish the actual report so the Seychellois people can read it for themselves, preferring to peddle its own interpretation of it. Our readers, as usual, can read the entire report in our inside pages as well as on our website www.seychellesweekly.com.