Regardless of how financially sound a private-sector company is, it is very difficult for that company to achieve a corporate credit rating that is higher than that of its government - the sovereign credit.

In the case of Jamaican companies, regardless of their financial strength, their credit ratings cannot be better than 'speculative' if they utilise the global rating scale of international rating agencies Moody's, Standard and Poors and Fitch.

One might ask why that is.

The rating agencies have a policy called the 'sovereign ceiling' which essentially means that no private-sector firm in a particular country can receive a rating higher than that of the sovereign.

A primary reason given is that if a government defaults on its debt, it would impose capital controls that could also force private-sector firms to miss payments on their obligations.

credit risk

The credit risk of the Government of Jamaica, as rated by global rating agency Moody's as of August 2008, is 'B1'.

This rating falls in the speculative, below-investment grade, or junk category.

Companies or sovereigns in this category are deemed less likely to be able to pay back their creditors than a company or sovereign with an investment-grade rating.

NCB's Atrium headquarters in New Kingston. - File

Jamaica's credit rating does not rank higher because it is rated on the same global rating scale versus giant economies such as the United States, Japan, China, Germany, the United Kingdom and others.

As a result, no private-sector company in Jamaica can hope to be rated higher than the 'B1' sovereign credit rating assigned to the Government.

A recent example of this is rating agency Fitch's assignment of a credit rating of 'B' to National Commercial Bank of Jamaica (NCBJ) for its short-term, foreign and local-currency debt, and 'B+' for its long-term credit rating.

This is on par with the sovereign credit rating of Jamaica.

What is the impact on privatesector companies of the sovereign ceiling? For Jamaican companies, utilising the global credit markets with a below-investment grade rating has the added burden of causing them to face higher costs of borrowing than what would be commensurate with their financial strength.

REGIONAL, NATIONAL rating

What if Jamaica were to be rated on a Caribbean regional scale and compared not only with globally rated Barbados and Trinidad and Tobago, but with the other Caribbean economies as well?

Let's go further. What if private-sector companies in Jamaica were rated on a national scale, so that they are compared with each other in Jamaica?

This would definitely paint a different picture, something CariCRIS, the region's rating agency, has been working to achieve.

CariCRIS believes that for regions such as the Caribbean, which comprise many small national economies, global-scale ratings are inadequate as the region's economies tend to be bunched at the lower end of the global rating scale.

Examples include Trinidad and Tobago (rated Baa1), Barbados (Baa2 ), Jamaica (B1), St Vincent and the Grenadines (B1), and the Dominican Republic (B2).

For these reasons, CariCRIS sees a regional scale comparison as being more useful and relevant, particularly where, as is the case in the Caribbean, the region's economies tend to be similar in economic, political and demographic structure.

Moreover, a regional rating is able to include far more locally and regionally contextual issues than can a global-scale rating.

By focusing on the Caribbean alone, CariCRIS' ratings enhance the quality and extent of differentiation across local and regional credits. Therefore, CariCRIS ratings can provide the most relevant and comprehensive information about regional credits to all investors.

A company such as NCBJ with a long-term foreign currency global rating of 'B1' was recently rated 'CariBBB+' on a regional scale and 'jmAA-' on the Jamaica national scale, a very different perspective.

Caribbean private-sector companies now have an alternative to the global credit-rating agencies.

More important, investors now have an independent regional credit agency that utilises the same criteria to compare the credit risks of Caribbean private-sector companies on a national scale (within one's own country) as well as on a cross-border basis.

Research has found that when investors have easy-to-use measurements of relative credit risk, this generally increases the efficiency of the market, lowering the costs for both borrowers and lenders.

Independent credit ratings also open the capital markets to categories of borrowers who might otherwise be shut out altogether.

In many areas of the global marketplace, the Caribbean has little leverage.

Fayval Williams is aconsultant with CariCRIS.

fayvalw@gmail.com