The sovereign credit ratings of the leading credit rating agencies are most visible through their outputs: an upgrade, a downgrade or a change in “outlook”. The evaluative work that produces those outcomes receives far less attention. Yet it is precisely that work that explains why credit rating agencies occupy such an influential position in international finance.
The recent case of Gabon provides an unusually clear opportunity to observe this process in action.
Gabon had recently:
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- revised its budget
- widened its deficit – meaning that it expected government spending to exceed revenues by an even larger margin
- planned a Eurobond (borrowing from international investors in a foreign currency).
It was also in negotiations with the International Monetary Fund to launch a new programme that would combine financial support with commitments on fiscal and transparency reforms. In addition, an audit that was examining a decade of public borrowing was still ongoing.
Fitch had previously warned that Gabon’s widening fiscal deficit would complicate negotiations over a new IMF programme. Moody’s had cautioned that the country’s ongoing public debt audit could uncover additional undisclosed liabilities. Investors drew similar conclusions, with Gabon’s government bond prices falling after the revised budget was announced. Different institutions had independently reached related judgements about the country’s fiscal outlook.
Gabon is a small central African economy of around 2.5 million people and a member of the Central African Economic and Monetary Community. Oil, manganese and timber account for almost all of its exports, leaving government revenues highly exposed to commodity prices and external financing conditions.
Moody’s affirmed Gabon’s rating at Caa2 in June and moved the outlook to negative. Fitch had already affirmed Gabon at CCC- a month earlier. A CCC- rating sits near the bottom of Fitch’s long-term sovereign scale and indicates that default risk is considered very high, although default is not regarded as inevitable.
The published rating is only the most visible output. Credit rating agencies also assemble political, institutional and financial evidence into judgements that governments, investors and international organisations can use. Their assessments sit alongside those of the IMF and auditors and investors. Each examines different aspect of the same sovereign.
The Gabon case therefore reveals a broader process. Sovereign creditworthiness is interpreted and reassessed through several overlapping evaluations. Credit rating agencies evaluate institutions, financing strategies and possible future developments alongside current fiscal conditions.
Understanding these functions provides a clearer picture of what a sovereign rating represents and why it carries influence. None of these evaluative processes is unusual on its own. What makes Gabon’s case unusual is seeing so many of them converge at once.
Gabon’s revised budget, IMF negotiations, sovereign rating reviews, public debt audit and market reaction unfolded almost simultaneously. This allowed reporting by the Reuters news agency to capture how sovereign creditworthiness is constructed through overlapping assessments rather than a single institutional judgement.
More than a number-crunching exercise
The first thing to understand is that agencies do more than read the numbers. They perform several other evaluative functions that receive far less attention than the headline rating.
Moody’s noted that Gabon’s spending plans would make it harder for the government to bring spending back into line with its revenues, and also warned that if Gabon asked investors to accept less favourable repayment terms in order to ease pressure on its finances, Gabon’s debt could be classified as distressed and therefore count as a default. This is a routine part of sovereign credit analysis. Credit rating agencies assess not only a government’s current finances, but also the policy choices and future developments that are likely to shape its ability to repay.
Moody’s rates Gabon’s governance issuer profile at G-5, the weakest category on its governance scale, citing weak control of corruption and a record of extra-budgetary spending. Fitch assigns Gabon a score of 5 for rule of law and institutional quality, drawn from the World Bank’s Worldwide Governance Indicators.
Neither agency measures institutional quality directly. Instead, as research suggests, this is common practice across the industry; agencies incorporate governance assessments produced by organisations such as the World Bank into their broader judgement of creditworthiness.
Credit rating agencies also evaluate how governments choose to finance themselves. A government seeking new borrowing has several options. It can negotiate support from multilateral lenders such as the IMF, issue bonds directly to private investors, or rely more heavily on domestic borrowing. Those choices send signals about a government’s priorities, confidence and financial position.
Gabon’s decision to authorise a Eurobond while its IMF talks remain unresolved is not neutral information sitting alongside the deficit figures. Kevin Daly, an investment director specialising in emerging market debt at Aberdeen Investments, interpreted the decision as evidence that agreement with the IMF was becoming less likely in the short term. In turn this suggested any new programme would probably be delayed until 2027.
Credit rating agencies also evaluate possible future developments. Gabon’s audit of borrowing between 2016 and 2024 has not yet reported, but Moody’s has already stated that it could uncover previously unreported liabilities.
Nicholas Sauer, a portfolio manager specialising in emerging market debt at Robeco, reached a similar conclusion from the investor side, warning that if the audit uncovered more previously undisclosed debt than expected, Gabon’s debt burden could prove significantly worse than investors currently believed. Credit rating agencies are not unique in looking ahead. Investors do the same. The significance lies in the convergence of their evaluations, because similar conclusions reached independently reinforce one another.
Why this carries weight
Political economist Timothy Sinclair’s influential study of the American credit rating agencies that pioneered modern sovereign rating practice helps explain why these evaluative roles carry such weight.
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Credit rating agencies, he argued, are not simply technical providers of opinion. They help construct the conditions under which governments make policy choices, which gives their judgements a political character. A rating does not just describe Gabon’s position; it becomes part of the environment Gabon’s government has to navigate next.
None of this happens in isolation. Gabon publishes a budget. Fitch responds. Moody’s responds. The audit proceeds in the background. The IMF continues its own assessment of programme viability. Investors price bonds against all these signals at once, and the market moves accordingly: Gabon’s 2031 and 2029 bonds both fell after the revised budget was published.
Each institution enters this process with a different mandate. The IMF evaluates programme viability. Credit rating agencies evaluate credit risk. Auditors evaluate the completeness of the state’s accounts. Investors evaluate expected returns. No institution is formally responsible for producing sovereign creditworthiness itself. That judgement emerges through the interaction of separate evaluations.
Each assessment is therefore partial. Sovereign creditworthiness emerges from the accumulation of those partial evaluations rather than from any single institution’s judgement.
What appears to be a single judgement about creditworthiness is, in practice, the accumulation of several distinct judgements produced by different institutions.
Daniel Cash, Senior Fellow, Centre for Policy Research (UNU-CPR), United Nations University; Aston University
