As credit ratings spread across the Middle East, investment banks are trying to make friends with governments in the region by providing cheap or free advice on how to present themselves in the best possible light.
The latest recipient of a sovereign rating is Egypt, which was delighted to be rated at investment grade last month by Standard & Poor’s (S&P) of the US, following a less favourable rating from Moody’s Investors Service late last year. All six Gulf Arab states, Turkey and Jordan have been rated by one or both of the leading US agencies. Morocco is expected to follow, while the Lebanese government says it has talked to the agencies (see Lebanon).
The banks that provide the advice are often American: Merrill Lynch has advised Tunisia, Jordan, Egypt and Lebanon on ratings, while Goldman Sachs has worked with Egypt and Qatar. Japan’s Nomura has also worked with the Lebanese government. The banks are trying to build long-term relationships with states where they see prospects for future business, which is why their advisers work for low fees or for free.
The advisers try to give governments an idea, to within a couple of sub- grades, of the rating they might get from an agency. The agency’s analysts may only spend three days in the country, so the advisers’ other task is to make sure that the government uses this time to present its case for the best possible rating. The advisers assemble data, prepare meetings and coach officials who may be used to dealing in a very different way with other interested foreigners like the IMF. Outsiders often perceive the Middle East as politically more unstable than it is, and the advisers try to ensure that this is put in context.
There are limits to what a government can expect from its advisers. ‘The agencies would go nuts if you claimed to be able to influence them, though on the sovereign side, the process is a lot more user-friendly if you have an experienced adviser,’ says one US banker. ‘I don’t think it’s dishonest or manipulative because you’re not going to fool the agencies.’
However, in some cases an adviser may hope to persuade an agency to look again at its initial judgement of a state. Even if the first rating is unfavourable, the rating may be upgraded over time. In the Middle East, this has happened with Qatar’s rating by Moody’s. ‘On average, where the difference is made is over the medium term,’ says another investment banker.
Credit ratings are fast becoming an established feature of the economic landscape in the Middle East, and corporate issuers as well as governments will find it increasingly hard to avoid the scrutiny of the agencies. Moody’s issues unsolicited ratings and S&P is about to start doing the same, though the company says it will not do so in the Middle East in the near future.