In the global capital markets, the rating agencies stand visibly, directing traffic and cueing investors. They represent a tantamount public good, although one powered through issuer fees, subscriptions and whatever general ability the agencies have to sell their product. Their mandate is large, and the market demand is real, though.
Due diligence is a requirement, when capital is put at risk. Caveat emptor. Recent financial history says as much. And, the flawed nature of the rating agency’s effective public good means that that “good” does not uniformly serve the “public”, but really several different stakeholder groups: investors, issuers, shareholders, policy makers for that matter – all with different expectations and needs. One could argue that a more varied and deliberative due diligence approach mitigates the “vendor risk” investors back into when they depend wholly on rating agency opinion.
At MMD, we humbly suggest at least a complement to what’s on offer from the agencies and from sell side opinion. Our SIRE model (Solvency Institutional Resilience Estimate) is an estimated logit regression exercise looking at sovereign default occurrence against select World Governance Indicators (WGI) updated by the World Bank. We would argue that using the model results can be one exercise that would be part of an overall effort at assessing a country’s risk
The table below shows sovereign agency ratings compared against SIRE results along with tenor guideline model recommendations, based on the SIRE results. In some instances, opinions match. We agree that Singapore is a very strong sovereign credit. In others, we – in so many words – disagree. Moody’s and S&P have Indonesia squarely at investment grade. We offer a more conservative view and recommend risk mitigants on any exposure.