Building confidence and trust with credit rating agencies
Building confidence and trust with credit rating agencies
The adequacy of credit ratings is crucial for debt markets everywhere else in the world, including emerging economies like Vietnam. Michael Goh, an international finance expert based in Singapore, discussed with VIR’s Le Luu, the critical role as well as some possible shortcomings of credit rating agencies.
The Vietnamese business community is currently not paying sufficient attention to credit ratings, according to some insiders. What can be done to improve this situation in a way that benefits everyone?
All emerging countries and developed countries have a so-called capital market, and rating is only part of the entire capital market system. We must not look at rating only by itself, but the role it plays to develop the country’s financial system and ultimately the economy. It's very important that we see the link.
I’m here attending this investment conference and so I must say this. We cannot tell the potential investors only the potential returns without clearly disclosing the risks intrinsically in the investments itself. In general, investment is not only for quick wins but long-term success. Making money easily and quickly is dangerous and not sustainable. As a result, you must not see rating as a quick tool for people to make quick money. That is not healthy for the investors, the issuers, and the economy.
Rating is a good and necessary tool to develop the debt capital market of the financial system, which is the heart of the economy. A financial system has two key pillars of financing: banking and the capital market, and they must work well together. Rating is one of the pieces to make this efficient, by helping the people who need money and people who have money meet efficiently, transparently and at a market efficient price hopefully.
In terms of market efficiency, pricing is key. The more transparent the price, the more efficient the market. Rating creates that kind of efficiency in the bond market, and will deepen and develop Vietnam’s financial system, if used correctly. To make rating work, you also have to look at how the financial system needs to be reformed.
One important part is the legislation or the laws. The laws regarding rating, investments, risk management and transparency are all important to develop rating and the proper understanding and correct use of rating, which is crucial for Vietnam financial system.
You mentioned that good rating is a tool for good investments. How can this be achieved?
Rating does not tell you whether to buy or to sell, or how to make money by investing in bonds. Rating is another piece of information, and a critical one, for you to make your own decision, based on your risk management and risk appetite. Pricing will reflect the risk-return relationship, but pricing in the market depends on the company's business and future profit and most importantly the cashflows generated.
The rating itself does not price a bond, but we can look at its risk, which hopefully can be measured well and transparently, and the market will trade based on its risk-return profile. Rating helps us assess the risks. Credit rating does not tell you whether to invest or not - we must remember that's not the purpose of credit rating. It tells you the risk.
The market will find the right price, for which the rating helps to facilitate it to be more efficient. International rating is to achieve the international efficiency of capital flow from different countries by helping you understand and compare the risks-returns profile. Local rating takes a local bond risk profile and compares it to other local bonds as well as with risk free investment asset class such as government bonds for you as investor to decide whether the risk is worth it or not.
How can rating agencies provide a fair and independent valuation while the information is limited, or amid possible conflict of interest?
Let’s be clear. While investors rely on rating agencies, these rating firms are paid by the corporations whose debt they grade, which does create a severe potential conflict of interest. This is no different also from auditors or professionals such real estate valuers in their direct service to their clients and paid by the clients. The key is solid and transparent institutional governance internally in the service providers, be it auditors or rating agencies etc., and the integrity by all stakeholders and parties in the entire process.
I can tell you to trust me and lend your money to me or invest in my bonds, and I claim I am transparent in what I say. But how do you know that I am transparent enough and have disclosed what you need to know, and should know about me; and why do I need the money and how am I going to use the money to generate money to pay you back with a nice return? Being transparent and maintaining integrity are not only a problem in Vietnam, but also in China, in the US, and recently in India there is a huge fallout in a large conglomerate, as well as in every part of the world. In Asia, we need to step up our governance and accountability culture at all levels across the economy.
The top rating companies are in the US, but they were one part of the problems of the global financial crisis back in 2008. They rated AAA bonds and literally overnight they became junk. Everyone fell short and there are much to learn still today from this by everyone, every player and all stakeholders in the entire financial systems, and not just the rating agency.
So, transparency and integrity with solid corporate governance coupled with accountability should help to build confidence and trust. But this must be a whole collective process and is a growing process and you must involve everybody. By that, I mean the accountants, the auditors, the lawyers, and the regulators, the rating agencies, the valuers, the securities firms and even the board of directors of the companies issuing the bonds, to name a few.
What is your advice for young Vietnamese people?
Every country has various stages of development. Compared to other countries, Vietnam has tremendous potential but it needs to keep growing, evolving and going.
I saw a report that measured the relative intelligence of Vietnamese in education, which is really impressive. The PISA score to GDP per capita of Vietnam shows immense potential in Vietnamese people and community to be mobilized. There’s no doubt that young Vietnamese are intelligent, hungry, and ambitious. I think this potential needs to be harnessed and harvested, and we must make sure the system is facilitating and empowering well, not for quick wins but for sustainable success for generations to come. Not just for personal gain only, but collectively for the society as well.
If I had one wish for Vietnam, I would say the most important is strengthening the mind-skills of the Vietnamese. I am not talking about knowledge. There is too much information or even infotainment for and among the young. I'm talking about mind-skills that you can apply the information with insights and intelligence (wisdom is properly a better word) for real issues in real life and in real time.
You got to have a certain learning mindset, be transformed continually, and you apply them wisely. If we have that kind of mindset, we don't have to worry about AI, robots and data. This application transformational mindset is what I think, you and I, and all Vietnamese need the most in the digital age to come.
