Microeconomic Indicator in FOREX:
What is Credit Rating?
Credit rating is basically the rank, generally used by lenders to check the credibility of the borrowers to provide loans, credit cards, etc. The stronger the credit rating is, the easier it gets for the borrowers to borrow money from banks and other financial institutions. It will be easier for the banks, as well, to lend loans to the borrower if their credit rating is high. If an individual’s credit rating is poor, the bank can reject their loan solely based on the credit rating rather than going through all the hassle of the background check.
The exact same thing applies to the countries as well. A lot of countries rely on the foreign investors and foreign governments to get loans, and these entities will primarily check the nation’s credit rating to know the ability of the country to pay back the loans they lent. These credit ratings are given to individual countries by the credit rating agencies. Standard & Poor’s, Moody’s & Fitch are some of the most credible credit rating agencies. These agencies are paid by lending bodies or the governments that are seeking a credit rating for them. Credit rating varies from agency to agency. Top agency ratings range from AAA to D, where AAA is the prime with at most trustworthiness and D being the defaulter list.
What does Credit Rating measure?
Credit rating measures the likelihood of the borrower in repayment of the loan, according to the loan agreement and avoids defaulting. A country with a good credit rating can easily access loans from foreign countries. A strong rating can also attract other forms of financing to the country like foreign direct investments. For instance, a foreign company willing to open its operations in a particular country will look at that country’s credit rating to confirm its stability before taking the final decisions of investing. Losing your credit rating or being downgraded will have a serious effect on the country’s ability to borrow loans from foreign governments and banks.
Reliable sources of information on ‘Credit Rating’ for Major currencies:
There is a lot of information with respect to the credit rating of different countries in the sources provided below. You can familiarise yourself with the credit rating of the respective country along with the historical data related to that. You can also compare the credit rating of one country to the other using this web portal. The graphical representation of the historical data will give you a clear understanding of how this data changed over time. You also get to change the graphical representations according to your preference. A ton of more information related to the latest news in that regard is provided to give you a better understanding.
GBP (Sterling) – https://tradingeconomics.com/united-kingdom/rating
What do traders care about the Credit Rating and its impact on the currency?
As the credit rating indicates the likelihood of the country paying back its debts, it has a strong impact on the exchange rates of that country’s currency. If the country has a high credit score, it means that the country is a safe place to lend the money to. An excellent credit rating boosts the demand for that country’s currency as more foreign governments and banks would be willing to lend loans to these countries. Also, there would be more foreign direct investments flowing into a country whose credit rating is excellent, and this is a favourable condition for the currency to increase its value. So traders willing to hold the currencies long term would prefer those countries with higher credit rating.
Frequency of the release
The credit rating is generally reviewed and iterated on a quarterly basis. However, the complete analysis with the updated country’s rating is published on an annual basis. According to one of the most credible credit rating agency Moody’s, the initial review and rating process can take close to four weeks or higher based on the size & the scale of the country. Once the review and rating process is completed, the results are published via press release.
The Bottom Line
Foreign governments use credit ratings to assess the worthiness of the loans they lend. It is one of the country’s risk indicators and plays a significant role in international capital markets. Credit rating is useful not just for foreign banks and governments but also for individual creditors, private investors, foreign industries and global companies to assess the risk on their investments and the loans they provide. This rating will also be extremely beneficial for the country’s residents who are willing to do business and are in need of loans and investments. It is also connected with a wide range of different factors which include both economic and non-economic in nature. Traders should consider a country’s credit rating if they are planning to hold that country’s currencies for the long term to secure their investments.