NICHOLAS SHUBITZ: Brics’ own credit ratings agencies could avert high debt servicing costs

As the Brics bloc seeks to develop alternatives to the Western financial system, the formation of Brics credit ratings agencies could be on the agenda at the annual summit in October. In addition to developing alternative payment mechanisms for trade in local currencies, Brics credit ratings agencies could prove critical to the bloc’s recent efforts to increase financial autonomy among emerging-market economies. 

Russian central bank governor Elvira Nabiullina has stated that the development of Brics credit ratings agencies will be a key initiative during Russia’s chairing of Brics in 2024. She said Brics ratings agencies should be “supranational” and cover all countries. Nabiullina explained that these ratings agencies will ensure mutual recognition of ratings across Brics states and will be “faster and more practical” than the current alternatives.   

This desire among Brics countries to enhance their financial autonomy should come as no surprise. The recently expanded bloc is already an economic juggernaut, controlling roughly half of global rice, wheat and oil production and boasting a GDP by purchasing power parity greater than the Group of Seven (G7). Yet despite the dominance in commodities, trade and manufacturing, the generally more indebted and slower-growing economies of the West are still able to access cheaper investment capital.

Originally conceived by a Goldman Sachs analyst to describe a group of investable leading emerging-market economies, the Brics evolved into a full-fledged political entity following the 2008 financial crisis, which was caused in part by the failure of US ratings agencies to address systemic risks in the US housing market. The speculative debt instruments based on sub-prime mortgages that precipitated the global recession were given AAA ratings, a higher rating than any Brics country is afforded today.

Although the global economy eventually recovered, developing countries continue to question why they often have lower credit ratings than advanced economies with higher debt-to-GDP ratios. While this could be due to currency weakness or political risk, emerging markets argue that credit ratings can become self-fulfilling prophesies where states with lower credit ratings become more likely to default due to higher borrowing costs rather than weak economic fundamentals. 

Africa is a good example of this. According to Moody’s Ratings, African countries have the world’s lowest default rate for infrastructure projects at 5.5%. This is lower than Latin America (12.9%), Asia (8.8%), and Western Europe (5.9%). And yet the cost of debt for African countries remains among the highest in the world, with only a handful of nations, such as Mauritius and Botswana, afforded investment-grade ratings. Naturally, currency risk is a major factor in this anomaly, which is precisely why so many countries are keen to join Brics and promote the use of their domestic currencies. 

Another example of this phenomenon is the difference in borrowing costs between Brazil and Finland. The two countries have the same debt-to-GDP ratio (74%) and similar inflation rates (3.6% for end of 2023 in Finland and 4.6% for Brazil). Brazil, the largest economy in South America, grew 3%  in 2024 despite having higher real interest rates, while the far smaller Finish economy contracted 0.5% despite the European Central Bank’s dovish stance. Both the euro and Brazilian real are back to levels against the dollar from four years ago, while the real has strengthened against the euro over the past three years.

These are supposed to be the most significant factors in determining a country’s creditworthiness. The inflation premium is critical, while currency risk can affect returns in foreign currency. Economic growth factors will also indicate whether a country can grow quickly enough to service its debts. Brazil compares favourably with Finland on all of these metrics, and yet Brazil’s government must pay 9.9% in interest on its two-year notes while Finland’s two-year bonds yield just 2.9%. This aligns with Brazil’s credit rating of BB and Finland’s AAA rating.

Quantitative easing 

One possible explanation for these disparities is that countries with reserve currencies can monetise their debts via quantitative easing (QE), which means their risk of default is lower because their central banks can “print money” and use that liquidity to buy up government bonds. But QE comes with inflationary risks and suggests that G7 central banks could continue to implement monetary policy better associated with countries like Zimbabwe and Argentina without facing any negative consequences.

Even in the US, whose dollar remains the world’s dominant reserve currency, QE is still fraught with risk. Inflation spiked to multi-decade highs in the US following pandemic-era fiscal and monetary stimulus. When the Fed raised interest rates to rein in the inflation it had played a significant role in creating, this hurt the value of long-dated US treasuries and resulted in the collapse of several large banks. Similarly, the Bank of England was forced to intervene in the gilt market as higher rates overwhelmed UK pension funds, delaying much-needed credit tightening, while the Bank of Japan chose to sell foreign reserves to defend the yen rather than risk raising interest rates at all.

Loose fiscal and monetary policy in the EU and UK has seen steep depreciations in the euro and pound, with both testing parity to the dollar, while gold and bitcoin, viewed as hedges to fiat currency, have both rallied to record highs. Similar policies in Japan have seen the yen’s real effective exchange rate fall to record lows. This suggests developed countries may struggle to continue monetising their debts without experiencing currency depreciation and higher rates of inflation.

The Japanese example is a suggestive one. Its central bank is the largest holder of Japanese government debt and corporate bonds. This has lowered debt service costs but weakened the yen. Ultra-low interest rates have also created uncompetitive “zombie” companies, which has seen Japan’s share of global trade decline. Having run a trade surplus for decades, Japan has substantial foreign currency reserves (almost $1.2-trillion) with which it can defend the yen, but other G7 states like the UK (less than $200bn) and the US (less than $40bn) lack significant reserves to defend their currencies. 

Ultimately, few developing countries have been willing or able to resort to historically unconventional monetary policy interventions such as QE and many have arguably better economic fundamentals than their current credit ratings suggest. As such, Brics wants to develop its own credit ratings agencies to complement recent efforts to dedollarise global trade and development finance. In the meanwhile, debt distressed emerging markets will continue to make the case that high debt servicing costs create rather than reflect default risk.   

• Shubitz is an independent Brics analyst.