A few months ago, we spoke about the role international credit rating agencies had in negatively affecting the economies of some countries.
This was manifested by an extreme lowering of the credit ratings of these countries, especially during the debt crisis of some local companies. This led to these agencies losing their credibility.
Some believed that we accused these companies falsely on the basis of protecting the local economy, and that ratings agencies were objective in their assessments.
However, the European Commission, which comprises the 27 members of the European Union (EU), strongly blamed Moody's, Fitch and Standard & Poor's agencies for providing incorrect credit ratings and intensifying the debt issues of some of the EU members, specifically Greece, Spain, Portugal and Ireland.
Just as previously noted, these agencies supplied Dubai and the UAE with inaccurate credit ratings.
While Dubai has already established a credit rating monitoring institution, the EU Commission has devised plans to enforce control over international credit rating agencies by establishing a credit rating supervisory authority of its own to monitor these agencies' work. This means better observations and more transparency in these agencies' operations, whose ratings seem to serve the interests of power centres and speculators in the global market.
Now, the EU began to place credit rating agencies under severe restrictions, and accused them of failing to warn investors of the collapse of many financial and banking institutions during the global financial crisis.
Suffering
On the other hand, Gulf and Arab countries are suffering from unfair ratings. The region's markets are also facing additional pressure due to the inability of local and regional credit rating agencies to provide the required ratings, which negatively affected many financial markets in the area and contributed to their deterioration at rates far higher than those witnessed in global markets.
It seems like many companies are evaluating the stocks of both local and Gulf markets with information supplied by credit rating agencies, which mainly focus on reaping quick profits by fuelling speculation at the expense of small investors and the reputation of these markets, which began to lose their momentum and status.
Just like Dubai and the European Commission have put an end to the manipulations of international credit rating agencies, it is necessary to impose similar restrictions to cease similar manipulation and speculation perpetrated by local stock valuation agencies in the local and regional stock markets.
These agencies lack professionalism in their ratings due to their frequent and massive fluctuations because they don't take into considerations the actual condition of shareholding companies, or their financial strength, performance and credit.
In this regard, the financial market departments in the region must introduce the necessary legislation to limit the subjective ratings provided by unqualified agencies. To resolve this, only certain institutions that obtain the necessary permits would have the exclusive right to conduct these operations after they have met internationally recognised rating standards. Moreover, these institutions must be a neutral party which are not involved in daily speculation operations. Only then will local and foreign investors confidently invest in the regional markets.
These regulations will help the markets recover from the predicament brought upon them by credit rating and stock valuation agencies. Credit valuation agencies may attempt to use their powerful influence to stop the issuance of such regulations.
However, the current state of the economy requires the quick implementation of such regulations to preserve the financial markets, because it is expected that these agencies will continue their risky practices until they drive the financial markets to the brink of collapse. When that happens, these agencies will vanish after gaining immense profits by fuelling massive speculation.
Dr Mohammad Al Asoomi is a UAE economic expert.
