Professor Robert Brooks from Monash University’s Department of Econometrics and Business Statistics believes the ratings are important benchmarks but admits making predictions in an environment of policy uncertainty would be challenging.
While the traditional role of these rating agencies is to assess the credit worthiness of sovereign and corporate entities, how difficult is this task in a Trump-tariff world?
“An unpredictable tariff environment impacts forecasts of the macroeconomic and international variables. Historically, economic policy uncertainty has been a negative influence on credit ratings, however this impact does not yet seem apparent around the current US tariff policy settings,” Brooks said.
He said thinking about how to model the policy responses is an important consideration.
“To date, most other countries are looking to do deals and negotiate a position around the tariffs, this has created greater stability than initially expected where there was an initial concern of tit for tat retaliation on trade barriers,” Brooks told Investor Daily.
He said research has shown that changes to credit ratings impact financial markets, though these impacts tend to be more significant for ratings downgrades.
“Ratings are important and they do matter. That said, the literature shows that in general that upgrades don’t matter as much to markets … downgrades do matter and impact financial markets but reflect a changed economic environment and new risks so this creates an asymmetry to not be overly positive, noting the challenges of a contagion setting where you do sometimes get concentrated downgrades,” he said.
Brooks said sovereign credit ratings have value and the benchmarks assist in providing an assessment of the country risk associated with investments.
“Their worth is in their reputation for doing that risk assessment well,” he said.
A high sovereign credit rating serves as a mark of confidence, indicating a secure and potentially rewarding investment climate. In contrast, low ratings can discourage investment and drive up a country’s borrowing costs. Credit rating agencies assess a wide range of factors – from economic indicators to political stability – to determine these ratings.
“The key factors underlying sovereign ratings are typically macroeconomic variables (gross domestic product growth, inflation), international factors (trade balance, foreign debt), institutions and policy settings.”
AMP economist Shane Oliver said he’s sceptical of the accuracy of credit rating agencies.
“You could argue the credit ratings agencies didn’t provide a lot of warning regarding the GFC and the issues around the high yield funds and was it subprime and so on all those years ago,” he said.
However, Oliver said there are always factors creating uncertainty for economies that credit rating agencies have to consider – and the tariffs are just the latest.
“A few years ago you might have said it was something else. The war in Ukraine or whatever’s going on in the Middle East ... there’s always something, or climate change.”
“Ultimately, history continues to rhyme. It doesn’t repeat, as Mark Twain once said, doesn’t repeat precisely, but it does rhyme,” Oliver said.
He believes the real difficulty the agencies face is the demand for public debt by institutions.
