Standard & Poor's on January 27 downgraded Sharjah's sovereign debt rating, meaning that the emirate will have to offer higher rates of interest to attract creditors. Credit-ratings agencies have been actively downgrading GCC sovereign debt ratings during the 2014-2016 oil price crash. How are such decisions made, and are they trustworthy?
The goal of a credit-rating agency is to plug an informational lacuna regarding the creditworthiness of potential debtors. In principle, they expend resources on gathering data that is otherwise unavailable to prospective creditors and on analysing that data in a manner that is beyond the immediate intellectual capabilities of prospective creditors; they then combine these outputs to deliver an assessment that clients take into consideration when they make lending decisions.
Unlike apples or pencils, credit-ratings reports are commodities that the consumer cannot assess the quality of at the time of purchase, or even upon consumption. This is because they discuss predictions about future rather than current events. Moreover, the complexity and instability of the world means that it is very difficult to retrospectively assign blame when predictions prove inaccurate.
This opens the door for supplier malpractice – credit-rating agencies can willfully cut corners to save money, or they may simply exhibit negligence because of the difficulty of holding them accountable. Alternatively, due to the presence of an ulterior motive (such as the risk of a loss of business from important clients), they might produce biased reports.
In principle, market competition can limit fraud as credit-rating agencies that produce low-quality or biased reports will lose customers, while the agencies that deliver accurate assessments will secure a larger share of the market. Two factors, however, impair the competition’s ability to weed out poor service delivery.
First, credit defaults, which are the primary event that credit-rating agencies are trying to predict, are quite rare events, especially at the sovereign level, meaning that it can take a long time to gather enough data to determine the quality of a specific agency. This data cycle is lengthened by the self-fulfilling tendencies of certain predictions – when an influential credit-rating agency predicts that a country will default with high likelihood, it will be forced to pay higher amounts to service its debt, making a default more likely, and making it harder to assess the quality of the original predictions.
Second, the process of producing credit-ratings exhibits “economies of scale”, meaning that the cost of producing a unit declines as the level of production rises. This is because operating at a larger scale makes it easier for agencies to acquire useful data and cheaper to analyse the data as many economic factors are common to multiple countries, such as the common legal environment faced by members of the EU, or the common effect of oil on the GCC economies.
Economies of scale often lead to higher levels of industry concentration as larger producers easily undercut smaller ones. In the case of credit ratings, three large providers – S&P, Fitch and Moody’s – dominate the market. Oligopolistic settings make it easier for companies to collude and manipulate the market at the expense of consumers, undermining the role of competition in delivering quality services.
Thus, for example, if a government wanted to pressure credit-rating agencies into delivering a certain rating, they only have to deal with three companies. In contrast, trying to influence all of the global media would be a logistical nightmare given how many thousands of providers exist.
Unsurprisingly, therefore, credible accusations of malpractice were directed toward credit-rating agencies after the 2008 global financial crisis, forcing them into corrective action. That is why one should always interpret credit reports with caution and acknowledge that the nominal independence of global agencies is no guarantee of accuracy.
We welcome economics questions from our readers via email (omar@omar.ec) or tweet (@omareconomics).
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SPECS
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Types of policy
Term life insurance: this is the cheapest and most-popular form of life cover. You pay a regular monthly premium for a pre-agreed period, typically anything between five and 25 years, or possibly longer. If you die within that time, the policy will pay a cash lump sum, which is typically tax-free even outside the UAE. If you die after the policy ends, you do not get anything in return. There is no cash-in value at any time. Once you stop paying premiums, cover stops.
Whole-of-life insurance: as its name suggests, this type of life cover is designed to run for the rest of your life. You pay regular monthly premiums and in return, get a guaranteed cash lump sum whenever you die. As a result, premiums are typically much higher than one term life insurance, although they do not usually increase with age. In some cases, you have to keep up premiums for as long as you live, although there may be a cut-off period, say, at age 80 but it can go as high as 95. There are penalties if you don’t last the course and you may get a lot less than you paid in.
Critical illness cover: this pays a cash lump sum if you suffer from a serious illness such as cancer, heart disease or stroke. Some policies cover as many as 50 different illnesses, although cancer triggers by far the most claims. The payout is designed to cover major financial responsibilities such as a mortgage or children’s education fees if you fall ill and are unable to work. It is cost effective to combine it with life insurance, with the policy paying out once if you either die or suffer a serious illness.
Income protection: this pays a replacement income if you fall ill and are unable to continue working. On the best policies, this will continue either until you recover, or reach retirement age. Unlike critical illness cover, policies will typically pay out for stress and musculoskeletal problems such as back trouble.
'Fantastic Beasts: The Secrets of Dumbledore'
Rating: 3/5
Directed by: David Yates
Starring: Mads Mikkelson, Eddie Redmayne, Ezra Miller, Jude Law
WHAT%20MACRO%20FACTORS%20ARE%20IMPACTING%20META%20TECH%20MARKETS%3F
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How to protect yourself when air quality drops
Install an air filter in your home.
Close your windows and turn on the AC.
Shower or bath after being outside.
Wear a face mask.
Stay indoors when conditions are particularly poor.
If driving, turn your engine off when stationary.
Company%20Profile
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Company%20Profile
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Eyasses squad
Charlie Preston (captain) – goal shooter/ goalkeeper (Dubai College)
Arushi Holt (vice-captain) – wing defence / centre (Jumeriah English Speaking School)
Olivia Petricola (vice-captain) – centre / wing attack (Dubai English Speaking College)
Isabel Affley – goalkeeper / goal defence (Dubai English Speaking College)
Jemma Eley – goal attack / wing attack (Dubai College)
Alana Farrell-Morton – centre / wing / defence / wing attack (Nord Anglia International School)
Molly Fuller – goal attack / wing attack (Dubai College)
Caitlin Gowdy – goal defence / wing defence (Dubai English Speaking College)
Noorulain Hussain – goal defence / wing defence (Dubai College)
Zahra Hussain-Gillani – goal defence / goalkeeper (British School Al Khubairat)
Claire Janssen – goal shooter / goal attack (Jumeriah English Speaking School)
Eliza Petricola – wing attack / centre (Dubai English Speaking College)
SPECS%3A%20Polestar%203
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TRAP
Starring: Josh Hartnett, Saleka Shyamalan, Ariel Donaghue
Director: M Night Shyamalan
Rating: 3/5
The Perfect Couple
Starring: Nicole Kidman, Liev Schreiber, Jack Reynor
Creator: Jenna Lamia
Rating: 3/5
Blackpink World Tour [Born Pink] In Cinemas
Starring: Rose, Jisoo, Jennie, Lisa
Directors: Min Geun, Oh Yoon-Dong
Rating: 3/5
COMPANY%20PROFILE
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Nepotism is the name of the game
Salman Khan’s father, Salim Khan, is one of Bollywood’s most legendary screenwriters. Through his partnership with co-writer Javed Akhtar, Salim is credited with having paved the path for the Indian film industry’s blockbuster format in the 1970s. Something his son now rules the roost of. More importantly, the Salim-Javed duo also created the persona of the “angry young man” for Bollywood megastar Amitabh Bachchan in the 1970s, reflecting the angst of the average Indian. In choosing to be the ordinary man’s “hero” as opposed to a thespian in new Bollywood, Salman Khan remains tightly linked to his father’s oeuvre. Thanks dad.
Company%20Profile
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The%20specs
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THE%20FLASH
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The specs
Engine: 2.7-litre 4-cylinder Turbomax
Power: 310hp
Torque: 583Nm
Transmission: 8-speed automatic
Price: From Dh192,500
On sale: Now
COMPANY%20PROFILE
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Company%20Profile
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HAEMOGLOBIN DISORDERS EXPLAINED
Thalassaemia is part of a family of genetic conditions affecting the blood known as haemoglobin disorders.
Haemoglobin is a substance in the red blood cells that carries oxygen and a lack of it triggers anemia, leaving patients very weak, short of breath and pale.
The most severe type of the condition is typically inherited when both parents are carriers. Those patients often require regular blood transfusions - about 450 of the UAE's 2,000 thalassaemia patients - though frequent transfusions can lead to too much iron in the body and heart and liver problems.
The condition mainly affects people of Mediterranean, South Asian, South-East Asian and Middle Eastern origin. Saudi Arabia recorded 45,892 cases of carriers between 2004 and 2014.
A World Health Organisation study estimated that globally there are at least 950,000 'new carrier couples' every year and annually there are 1.33 million at-risk pregnancies.