When South Africa took on the presidency of the G20 in December 2024 there was hope that it would use its influence to address the high borrowing rates faced by developing countries and in so doing redress Africa’s inequitable position (see also An end to the ‘Africa premium’). Prominent among its aims was the establishment of a Cost of Capital Commission, but as the country’s presidency nears its end, it is disappointing to note the lack of progress.
African nations borrow at prices that are significantly higher than those faced by their peers – prices that cannot be justified by their credit ratings.
A study at Michigan State University showed that between 2006 and 2022, African nations paid about 1% more than peers, a premium that cost Africa an additional US$5bn in interest payments at the Eurobond markets over the period, and much more in funding that was never accessed due to the high borrowing rates. This premium, which some argue is more like 2%-3%, has raised such concern that it featured at the May 2025 African Union Debt Sustainability Conference in Togo’s capital Lomé, which highlighted the billion-dollar annual cost in terms of lost development financing.
African nations generally have low credit ratings
Implicit bias
The Africa premium stems from a number of causes, which include relatively lower credit ratings, creditors’ perceptions of African sovereign risks, the inequitable global financial architecture and legacy governance issues. African nations generally have low credit ratings but there does seem to be an implicit bias in the ratings. A 2023 report by the United Nations Development Programme showed that this may be due in part to unavailability of reliable data, leading to relatively greater subjectivity in ratings assessments, especially as rating agencies generally do not have much of a presence in Africa and may not therefore be able to feel the true pulse of the continent.
Inaccurate narratives feed into creditors’ perceptions of African sovereign risk
Another reason may be perceptions driven by many years of inaccurate narratives, which may have an impact on both the objectivity of ratings analysts and lenders’ perceptions of African sovereign risk. Like ratings analysts, many international lenders may have spent little or no time on the continent. In addition, their judgment may be clouded by inaccurate or ill-informed media reports in their own countries.
The design of the global financial architecture does not help the situation. Africa can boast no top global financial centre on its soil and no important part of the architecture – such as a system like Swift or an institution like the Bank for International Settlements. Also, with only a small proportion of global capital present on the continent, the cost of travel of capital also contributes to the friction.
The position is not helped by historic governance issues. Past eras of erratic leadership and political instability, which saw debt defaults and expropriation of foreign-owned investments, remain in memories, propping up the perception that Africa is riskier than it really is.
Many creditors and investors recognise the existence of the premium and take advantage of it. This is why most African Eurobond issuances are oversubscribed, often by two times or more, which some in Africa see as a sign of success. But this is not necessarily the case. Yes, investors are interested in buying African debt, but why? Could it be that they recognise that the bonds are overpriced? This being the case, over-subscriptions in multiples should perhaps not be celebrated, but questioned as a sign that the country may be overpaying for the borrowing.
Grow capital
So how can African nations reverse the situation? Of course, part of the solution lies in a concerted effort to lower risk perceptions. However, efforts should also be directed at growing capital on the continent, by increasing the number and size of pension funds and savings schemes. Initiatives like the African Exchanges Linkage Project and the West African Capital Markets Integration Council can help move capital around.
Availability of data would help improve ratings assessments
Better data collection and management would also help. Availability of quality data would lead to improved ratings assessments by reducing subjectivity. Meanwhile, accountants and finance professionals can help by producing high-quality financial statements and analysis to counter information asymmetry. Robust assurance frameworks lower investor scepticism.
The Lomé conference advanced an interesting solution: an African credit rating agency. This is a great idea, but proponents must be mindful that such an agency would, from its birth, already be tainted by the reason for its creation – to give better credit ratings to African sovereigns. The agency would therefore have to work much harder than others to achieve and maintain credibility. Even so, all and any efforts aimed at eliminating the damaging African premium would be worth the cost.
