The Role of Credit Ratings in Developing Capital Markets

1. The Role of Credit Ratings in Developing Capital Markets Dr. Ala�a Al-Yousuf Director Middle East & Africa Sovereign Ratings Group

2. What is a credit rating? It has been described as the shortest, most concise financial editorial comment in the world A credit rating is a symbol that represents S&P�s opinion of the capacity and willingness of a debtor to pay its obligations in full and on time

3. A credit rating is not� An audit A recommendation to buy, hold or sell a security A measure of price stability or volatility A substitute for proper regulation, supervision and disclosure A substitute for due diligence on good governance

4. Credit ratings are indispensable in developed capital markets S&P rates debt issuers: Sovereigns Local/regional governments, universities, hospitals, etc. Banks and insurance companies Corporations Projects S&P rates debt issues: Bonds and notes, including sukuk Bank loans Structured finance transactions (e.g. ABS, MBS, CDO)

5. Credit ratings are spreading in emerging capital markets The scarcity of credit ratings is a symptom rather than a cause of the underdeveloped capital markets In LatAm, Russia and Asia, local rating agencies and national rating scales by international rating agencies have emerged If some leading banks or corporations get rated a virtuous circle can develop and spur the development of capital market From the point of view of foreign portfolio investors, a low rating is better than no rating

6. Sovereign ratings in North Africa

7. Potential for non-sovereign ratings in North Africa At present, very few banks are rated Non of the local governments are rated or have autonomy Considerable scope for project finance ratings on syndicated bank loans subsequently refinanced by bonds (esp. oil, gas, electricity, water) Governments can take the lead by developing their debt markets (primary and secondary) and obtaining a credit rating Even in the absence of cross-border government debt issues, a local currency rating helps attract foreign capital to local issues

8. S&P/UNDP Initiative for Sovereign Ratings in Sub-Saharan Africa The initiative is in recognition of the role of credit ratings in developing domestic capital markets and attracting foreign capital The UNDP pays the initial rating fees for assigning 5-10 sovereign ratings So, far S&P has assigned ratings to Ghana: B+ 4 Sept 2003 Cameroon: B 26 Nov 2003 Benin: B+ 29 Dec 2003 Burkina Faso: B 5 Mar 2004 (100th rating) More in the pipeline These are Heavily Indebted Poor Countries (HIPCs), so what are the benefits to them of obtaining sovereign ratings?

9. Some of the benefits of sovereign ratings to the country Signal that the country is ready to benchmark itself and not shy of being scrutinised. Differentiate the country from its peers in a rough neighbourhood and overcome the perception/prejudice problem. Improve chances of attracting private capital (versus peers), and gives comfort to donors. Help develop domestic capital markets because ratings are important for regional and international investors. Set a benchmark for other potential borrowers (banks, corporates, etc.). Countries are informally ranked/risk-assessed in any case; a professional public rating is better.

10. Some of the benefits of sovereign ratings to unrated resident entities Sovereign ratings are key ingredients in the credit ratings of resident entities (the �sovereign ceiling� concept) A sovereign rating is often used as a proxy for country risk In the absence of public credit ratings on banks or corporates, international investors and creditors assign their own credit ratings to their counterparties If the sovereign is not rated, its rating has to be estimated without the benefit of dialogue with the government If the sovereign has a public rating the task is made simpler but the process remains fragmented, non-transparent and usually unfavourable to the unrated bank or corporate

11. Some of the benefits of a public credit rating for a bank or corporate A pre-requisite for access to international capital markets (and often for local markets); Benchmarking creditworthiness against peers Often improves access to or terms of counterparty credit lines Useful in business development and investor relations A strong signal of commitment to transparency

12. Concluding remarks Capital markets in the Middle East & Africa are promising Credit ratings can play a catalytic role in their further development S&P credit ratings confer global credibility to new institutions and debt instruments A rating from S&P has many benefits apart from allowing access to debt markets

13. Thank you for kind attention and please do not hesitate to contact me Dr. Ala�a Al-Yousuf Director, Middle East & Africa Sovereign Ratings Group Standard & Poor�s 20 Canada Square Canary Wharf London, E14 5LH Tel: +44 20 7176 7104 Fax: +44 20 7176 7100 Email: ala�a_al-yousuf@standardandpoors.com