Seven reasons why we should ditch Fitch

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Anil Netto shows how rating agencies’ concerns have little to do with the concerns of ordinary Malaysians and says the media should stop pandering to these agencies.

Who cares what Fitch thinks? Why have the media been giving so much publicity to rating agencies such as Standard & Poor’s, Moody’s and Fitch Group (the so-called Big Three)?

On 20 January 2015, Fitch rating agency said it was “more likely than not to downgrade the rating of the sovereign (Malaysia)” in the coming months. On 17 March, Fitch issued another statement saying there was more than a 50 per cent chance of a downgrade by the end of June.

On 8 June, a Minister in the Prime Minister’s Department confirmed that the government had held meetings with Fitch over its negative outlook. What transpired at the meeting with Fitch?

Finally, on 30 June, Fitch announced there was no downgrade and instead maintained its A- and A ratings and even improved its outlook from negative to ‘stable’.

Here’s why ordinary Malaysians should not heed the Fitch ratings as a measure of the state of the economy and our wellbeing.

First, these ratings are for the benefit of bond issuers and investors – not for ordinary Malaysian workers.

Don’t take my word for it. This is what is written on the Fitch website: “…Fitch Ratings offers global perspectives shaped by strong local market experience and credit market expertise. The additional context, perspective and insights we provide has helped investors fund a century of growth and make important credit judgments with confidence.”

We should also follow the money trail: who pays the rating agencies? Their clients. That will tell you whose interests they serve. Rating agencies are usually paid by the issuers of the bonds and shares they rate. So chances are, they won’t rate them too negatively as the issuers can go elsewhere.

Second, the interests of investors are not exactly the same as the interests of ordinary Malaysians workers.

Investors would prefer less unionisation, a docile labour force, lower corporate tax rates, lower top band income tax rates, and a consumption tax like GST and the slashing of subsidies to make up the shortfall in government finances.

Most Malaysians, however, are against the GST and would prefer a more progressive tax regime, better protection for workers and a stronger social security support system. Fitch, however, doesn’t care about growing income inequality, poverty and the lack of social safety nets.

Third, Fitch looks at economic growth, but it doesn’t tell us who benefits most from that growth.

It has nothing to say about the low share of Malaysian workers’ wages of just 28 per cent of national output compared to the developed countries where the share exceeds 40 and even 50 per cent. Indeed, Fitch has little to say about income inequality and rural-urban poverty and the marginalisation and displacement of communities. It has nothing to say about the social and environmental costs (including the wiping out of over 90 per cent of Sarawaks primary rainforests) of such growth. It cares little that housing and food prices have soared.

Fourth, Fitch is concerned about reducing government deficits but its strategies favour Big Business.

Like the rest of us, Fitch would like federal government deficits to be reduced. But that’s where much of the similarity ends.

Fitch does not seem concerned about the gradual decline over the years in the rates of corporation tax and the upper bands of income tax – both of which have affected federal government revenue. Instead, Fitch is enthusiastic about the consumption tax (GST), which shifts the taxation burden to the public. The GST is reportedly expected to reap RM23bn in additional revenue for the government in 2015.

On the other hand, Fitch has little, if nothing, to say about the drain on public coffers as a result of rampant corruption. Malaysia is regarded as among the most corrupt nations in the world. See also the large outflows of illicit funds from Malaysia exceeding RM1 trillion over the last decade. A few years ago, Pemudah estimated that “corruption could cost Malayisia as much as RM10bn a year, or 1–2 per cent of GDP”. That could be a gross understatement as was another government minister’s admission three years ago that corruption costs Malaysia RM26bn every year. What would be the real figure be by now?

Fifth, Fitch appears to subscribe to the neoliberal economic approach, including slashing fuel subsidies.

The Fitch report affirming Malaysia’s “A-” rating was published online at 3.56pm GMT on 30 June 2015 – four minutes before Malaysia raised petrol pump prices by 10-20 sen/litre despite a drop in global oil prices in June. No doubt that would have pleased Fitch, which probably doesn’t care either if higher utility tariffs are burdening the public.

Sixth, Fitch doesn’t seem to be too perturbed about the high 88 per cent household debt to GDP ratio.

The high uptake of housing, car and personal loans and credit card debt has resulted in multibillion ringgit profits for Malaysia’s top banks, including double digit growth in consumer loans. These have burdened many Malaysian households.

Neither is Fitch overly concerned about the income inquality in the country, which is among the highest in Asia.

Seventh, Fitch says that “local agencies such as Employee Provident Fund (EPF) can provide funding to support the sovereign in the event of a sell-off by non-residents.”

Fitch should quit giving ideas to our government. Lay off the people’s retirement savings funds and do not use them to pump money into riskier investments. These savings are not there to ease the liquidity position of the government.

In conclusion, rating agencies Standard & Poor’s, Moody’s and Fitch Group have not had a glorious recent history and their role has been scrutinised in the aftermath of the global financial crisis. This was reported on the website of the Council on Foreign Relations:

CPR Senior Fellow Sebastian Mallaby argues that government regulation is unlikely to solve the conflicts inherent in credit rating agencies, particularly when it comes to sovereign debt. “The more government has power and is meddling with rating agencies, the more the rating agencies will be browbeaten into giving a generous rating to the sovereign,” Mallaby said.

The best way to counter the monopolistic power of the Big Three, he argued, is for investors to stop giving their ratings so much weight. “The reason why the subprime bubble could happen, or the reason why the European sovereign debt crisis can happen is, largely, that very blind investors bought bonds relying on ratings, and [didn’t do] their own homework about what the real credit risk was in the bonds,” said Mallaby.

Stop pandering to these rating agencies. They do not represent the interests of ordinary Malaysians.

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