Regulators in the United States and the European Union (EU) have passed new rules to bolster oversight of credit ratings agencies (CRAs) by enhancing disclosure and improving quality of credit ratings. These moves are expected to take effect in the Middle East shortly. "What we are seeing is that some other emerging markets are also taking steps outside the US and the EU," Stephen de Stadler, Managing Director and Head of Business Development, Middle East, Fitch Ratings, said. CRAs, which judge credit quality of firms and financial products, have been blamed in part for the global financial crisis. It is hoped that fresh regulations would prevent the same mistake from recurring.
The Securities and Exchange Commission's (SEC) regulatory framework requires better information on ratings histories and healthier competition landscape by granting agencies access to necessary underlying data for structured products. The EU regulations feature a new ratings regime for structured finance instruments and periodic disclosure and transparency obligations. Despite these improvements, regulating CRAs remains tricky in some ways. "At the end of the day, ratings agencies provide an independent opinion. And it is very difficult to regulate someone's opinion," de Stadler said.
Dubai Electricity and Water Authority (Dewa) expects its ratings to be upgraded in March due to its good technical and financial performance. Do you plan to increase Dewa's ratings?
Dewa's ratings are undertaken by the appropriate utilities and energy team. The principle in Dewa is that it is linked to the ultimate rating of Dubai.
Can we not treat it as a stand-alone entity?
Any entity can be treated as a separate entity but at the end of the day, if it is deemed to be an essential part of any sovereign, whether it is Dubai or Abu Dhabi or any other, we will also have to look at the sovereign as much as we look at the stand-alone basis. I am not saying this is necessarily the case with Dewa but in principle, we do look at an entity on a stand-alone basis and take comfort from the fact that it is part of the infrastructure of the emirate of Dubai.
Have we seen the worst in terms of downgrades?
Downgrade is a global phenomenon and the reason for that is the change in the global economy last year. Do we think there is a level of bottoming out and there is a rosier future ahead? Yes, we do. In general, we probably have seen the worst of the downgrades.
On government support and guarantees, have you revised your methodology?
We have not changed our methodology in respect of support and government-related entities. Where we believe there is no change in the government's ability and willingness to support, then we will not have to change the ratings. The only things we have changed are when the underlying sovereign has become weak from a credit perspective.
Credit agencies are partly to blame for the recession. What regulations can we expect to see this year?
There is a significant portion of US and EU regulations already in motion and many of the steps that they would like to be taken will be implemented in 2010. What we are seeing is that some other emerging markets are also taking steps outside the US and the EU. In the US, the SEC has adopted new rules on disclosure of historical ratings, disclosure of underlying issue data, and is looking at additional compliance controls. The Nationally Recognised Statistical Ratings Organisations (NRSROs) are working with the US Congress as we speak. Once the US has adopted certain policies, it is likely that these will spread to other markets as well. In Europe, the EU has approved legislation to register and regulate credit rating agencies operating in the bloc. This is largely consistent with what the SEC and Congress are doing in the US. They are looking at analyst rotation and annual review of methodologies and are trying to stop what we call structured finance ratings. All the rules relating to credit ratings agencies will be effective in 2010.
When will these regulatory changes trickle down to the region?
We don't know, but in principle, this region has always followed international norms so we can expect some of these things to be implemented.
Many rules and regulations are coming out of the global economic crisis. But philosophically speaking, the more laws there are, the more creative ways people find to get round them. Would it be better to focus more on compliance rather than on creating more laws?
At the end of the day, rating agencies provide an independent opinion. The difficulty with any law is in the manner of regulating an opinion. It is very difficult to regulate someone's opinion.
What's your outlook for the region?
The future is rosier than the past was. Have we absolutely seen the end of the global economic crisis? Obviously not. Are there expectations that some of the biggest regions in the world might experience more negativity in the medium term? Absolutely. This would affect the region just as it affects the world. However, it seems that we're getting to the bottom of negativity.
PROFILE: Stephen de Stadler Managing Director and Head of Business Development, Middle East, Fitch Ratings
Earlier, de Stadler was managing director of Fitch's operations in South Africa, with responsibility for Sub-Saharan Africa. Prior to this, he was head of credit for sovereigns and financial institutions at a large banking institution in South Africa.
An accountant by profession, he completed his Articles of Clerkship at KPMG and has served as financial director at a South African real estate entity.
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