Mr. Adnan Yousif, Chairman of the Bahrain Association of Banks (BAB), emphasized the critical need for the establishment of an Arab credit rating agency that would comprehensively evaluate the investment climate in the Arab region.
This agency should consider the unique circumstances of Arab countries and operate with utmost impartiality, transparency, and reliability, free from the influence of personal biases and international interests observed in certain renowned global rating agencies. These external influences have contributed to inaccuracies in the ratings issued by these agencies, leading to successive financial crises, as exemplified by recent incidents witnessed by some American and Western banks.
During his participation in a panel discussion at the prestigious Annual Investment Forum held in Abu Dhabi, UAE, Mr. Adnan expressed his long-standing advocacy for the establishment of Arab credit rating agencies with a globally recognized stature. With unwavering conviction in the capability of proficient Arab professionals, Mr. Adnan has consistently written about this subject and corresponded extensively with relevant stakeholders. He firmly believes that establishing such an agency poses no challenges, given the presence of highly skilled Arab experts who can diligently conduct dependable evaluations and classifications, garnering international approval.
“Western rating agencies employ a comprehensive framework consisting of five fundamental factors for classifying. The first factor encompasses institutional and governance effectiveness, which involves the stability of political institutions, transparency, external security, and related aspects. The second factor focuses on the economic structure and growth prospects, including indicators such as GDP per capita, economic diversification, and overall growth. The third factor involves evaluating the country’s external situation, taking into account aspects like external liquidity and overall external position. The fourth factor assesses the financial situation, encompassing aspects such as financial flexibility, debt burden, and debt structure. Finally, the fifth factor examines the monetary situation, which includes evaluating the role of the monetary authority and the harmonious coordination of monetary policy with fiscal policy.” According to Mr. Adnan.
“However, this methodology has exhibited significant shortcomings in various instances throughout the past decades. One of the main reasons behind these failures is its deliberate reliance on Western social and economic structures as criteria for assigning high ratings. For instance, the utilization of per capita GDP as a primary indicator of a country’s economic strength overlooks crucial factors such as the level of economic development and substantial disparities in income distribution. Moreover, this indicator fails to acknowledge that a country with a favorable fiscal position and promising economic growth prospects should be deemed to possess robust borrowing and repayment capabilities, even if its GDP per capita appears relatively low.”
Furthermore, Mr. Adnan highlighted another flaw in Western classifications, which lies in their emphasis on refinancing ability as a primary factor for classification, rather than focusing on new cash flows. He argued that this methodology predominantly favors Western countries, considering that over 90% of the world’s total debt is held by developed nations, while only 8% pertains to developing countries. Moreover, he noted that developed countries exhibit external indebtedness levels reaching up to 130% of their GDP, whereas developing countries typically range between 20% to 80%.
“It is high time for stakeholders in the Arab region to collaboratively seek an internationally recognized alternative to sovereign debt ratings, one that is more realistic and equitable, taking into account the region’s robust financial conditions.”
Mr. Adnan expressed his belief that Arab countries should either enhance the role and credibility of the International Islamic Rating Agency, headquartered in Bahrain, particularly given its remarkable technical capabilities and track record in issuing credit ratings for governments and companies. Alternatively, he proposed the establishment of joint rating firms specializing in the affairs of the region’s countries, adopting classification methodologies that consider the economic, financial, and monetary conditions specific to each nation, rather than indiscriminately applying Western approaches to them.
Mr. Adnan Yousif emphasized that the success of such endeavors relies on two key conditions. Firstly, Arab governments and central banks must embrace these institutions and grant them the authority to rate and recognize credit ratings. This step is essential to lend credibility and reliability to the ratings they issue. Secondly, these governments and banks should actively support and sponsor these institutions, particularly during their initial years of establishment. It is important to acknowledge that globally recognized rating agencies like Standard & Poor’s have thrived for 150 years, operating in 26 countries with a workforce of 1,400 employees. They have issued approximately 1.2 credit ratings, amounting to a total value equivalent to $47 trillion, while their revenues exceed $2 billion.
Mr. Adnan stated that advocating for the establishment of alternative rating institutions, which incorporate classification methodologies aligned with the economic, financial, and monetary conditions of the Arab region, does not undermine the importance of ensuring these institutions possess robust capabilities and resources akin to international rating agencies. However, he also emphasized the need to achieve this gradually, allowing these institutions to strengthen and acquire the necessary capacities over time.