With the creation of an African credit rating agency (AfCRA) set to be debated on 14 February 2025 at the African Union (AU) summit, governments across the continent are hoping it will help eliminate the so-called African premium in sovereign borrowing.
The African premium (that is, the higher borrowing rates paid by African countries) is a reflection of the negative view of African sovereign risk said to be held by the big three rating agencies – Fitch, Standard & Poors and Moody’s. With AfCRA, the AU aims to help Treasury departments across the continent get a better hearing – and reduced borrowing rates – from lenders.
‘A dedicated agency could provide a more balanced perspective’
According to Carlos Lopes, a professor at the Nelson Mandela School of Public Governance in Cape Town, the big three agencies have in the past applied ratings models that ‘failed to capture the nuance of African economies’. He adds: ‘A dedicated agency could provide a more balanced perspective, which would help build trust and credibility for African issues in global markets. It could also diversify the global financial architecture, creating space for alternative voices and fostering a more inclusive system.’
A new system
The brainchild of the African Union, an African rating agency was floated as an idea as far back as 2002. In 2019 the proposal was resurrected, and a feasibility study concluded that it would work. AfCRA was originally slated to be set up in December 2023 but difficulties in finding professional advisers has delayed its launch until some time in 2025.
AfCRA will represent a key development in the financing of African nations convinced the current system works against them. Disquiet with the big ratings agencies is not hard to find.
‘Credit rating idiosyncrasies’ cost US$74.5bn in ‘excess interest’ and lost funding
A report from the UN Economic Commission for Africa concludes the ratings agencies ‘continue to make significant errors in their ratings’, yet ‘continue to influence’ finance decisions. Another report, from the UN Development Programme, puts the full cost of ‘credit rating idiosyncrasies’ at US$74.5bn in ‘excess interest’ and lost funding.
And Akinwumi Adesina, outgoing president of the African Development Bank, says: ‘The cost of raising capital in Africa is three or four times what it is in other regions. Why? Because of the so-called Africa premium… The issue is perception, the perception is not reality.’
Okey Umeano FCCA, deputy director for financial markets at the Central Bank of Nigeria, says the big three rating agencies simply have too few people working across the continent to build the right expertise. He points out: ‘If you send somebody twice a year from London, or the US, and that person spends just two or three days here, they will not be in a good position to know what’s going on.’
Winning a welcome
According to Misheck Mituze, lead expert on rating agencies at the African Union, there has been a ‘positive’ reaction to AfCRA among some institutional lenders and even the big three. That may be because the credibility problem that local agencies once faced appeared to fade last year when Moody’s acquired Global Credit Rating Company, which has operations across the continent.
Credibility will be a big issue for the new agency. To convince lenders, it will need to prove it can be relied on. While data quality has in the past been a problem for African sovereigns, Mituze says it is one that has now largely been resolved. Umeano agrees that information has ‘become better’ over the past decade but adds: ‘It would be wrong for anybody to look at the continent as one. There are over 50 countries in Africa and each one has to be judged according to where it is.’
Another part of the credibility solution will be governance. The organisation must be independent of government influence, exist in the private sector and be funded by subscriptions. Mituze says: ‘If it’s able to gain some market share, then you’ll know the agency is being successful. This institution must be established outside the African Union for credibility and independence.’ It must ‘fight for its own space’ without showing bias.
‘An African agency may be stuck in a catch-22’
Negligence problem
While there is widespread support for an African credit ratings agency, not everyone is entirely convinced. Daniel Cash, a legal researcher at Aston University in the UK whose research focus is the credit rating industry, warns of a potential ‘negligence’ problem. Principals may be reluctant to lend based on ratings from an agency they see as a ‘public’ body that is ‘clearly’ conflicted because it provides ratings on the same institutions that have brought it into existence. If lenders lose money, they could be accused of negligence and have to pay compensation.
There may also be problems for borrowers. Cash explains: ‘The problem an African agency has is that it’s going to be stuck in a catch-22. If it goes lower on ratings than the big three, the African countries aren’t going to be happy with it. If it goes higher than the big three, investors will say it is biased towards African countries. And if they say the same as the big three, what’s the point?’
Umeano acknowledges the argument but believes the ‘superior data’ and ‘superior analysis’ produced by experts who live and work locally and understand the prevailing economic landscape will stack up for AfCRA. Besides, there is already confidence in local rating agencies, so why not one serving African sovereigns?
‘We need a reformed global financial system that prioritises equity and fairness’
Empowerment
Whether its ratings bring down borrowing costs or not, the new agency could still play an important role. Cash says it could act as a ‘domestic supercharger’, boosting local expertise and capacity and helping governments learn how to manage the process of being rated.
‘It also empowers Africans,’ he adds, ‘because they’re doing something in the international financial architecture that they design. That’s important.’
Lopes argues that the debt problems faced by African treasury departments cannot be solved by an indigenous credit ratings agency alone. Real progress will also require better debt management at national level, strong cooperation among regional players and a ‘reformed global financial system that prioritises equity and fairness’.
As for the ratings issue, he says a new agency may be appealing, but there are other methods, such as reforming the methodologies of existing agencies. ‘This approach would yield quicker and broader benefits without the financial and political risks associated with creating a new institution.’
