Africa Union flag with other Africa countries flags. PHOTO | SHUTTERSTOCK
Africa is working on a credit rating agency to be launched by the end of 2024 to address what it terms unfairness.
The proposal for the new agency, the African Credit Rating Agency (ACRA), as outlined by United Nations Economic Commission for Africa (Uneca) would provide “balanced and comprehensive opinions” on African credit instruments. This would then support affordable access to capital and the development of domestic financial markets.
Credit ratings are designed to gauge a borrower’s risk of default, and factor in the terms on which banks and others will lend to them.
With the backing that comes from the support of the African Union (AU), it is envisaged that the rating agency will have the advantage of understanding the domestic context of Africa, issue more informative and detailed ratings than those issued by the international rating agencies.
“An Africa Credit Rating Agency is an important step towards intra-continental integration that would enable African governments to access capital and integrate the continent with global financial markets,” said Dr Misheck Mutize - Lead Expert on Credit Rating Agencies at the APRM.
Read: Will a Pan-African credit rating agency help lower cost of loans?
“The two main reasons behind this initiative are to provide alternative opinion to the big three, and secondly, to support activities on the local financial markets. The proposed launch is scheduled for December this year.”
The AU argues that the “big three” rating agencies’ Moody’s, Fitch and S&P Global Ratings do not fairly assess the risk of lending to African countries.
They are also quicker to downgrade them during crises such as the Covid-19 pandemic.
Therefore, it is envisaged that the rating agency will secure substantial business in the ratings of domestic instruments that are aligned with the continent’s goals.
“There are a lot of instruments that need rating on the local financial markets. The idea is that once there is enough domestic financial market support, countries should be able to borrow in local currencies,” Dr Mutize explained.
“International investors should be able to also participate through the domestic financial markets. The agency would be self-funded and private sector driven with AU oversight.”
In 2017 the AU made a decision to direct its African Peer Review Mechanism (APRM) to provide support to member states in the field of rating agencies.
The AU finance ministers passed a resolution last year to endorse the plan for the new agency, an effort spearheaded by the APRM, a branch of the AU formed to improve governance across the continent.
Read: AU questions credit ratings of African states, mulls own tool
The APRM in collaboration with the UNECA last week convened a two-day Retreat in Lusaka, Zambia to discuss the next steps in operationalising the Africa Credit Rating Agency.
Beyond rating African borrowers through the African capital market, the Africa Credit Rating Agency has other key immediate and strategic roles to play.
“First, the Africa Credit Rating Agency will need to work with governments and statistics agencies around the continent to collect timely and reliable statistics," said Amb Albert Muchanga - AUC Commissioner for Economic Development, Trade, Tourism, Industry and Minerals.
“These statistics will be a buffer against unfair risk premiums and inaccurate evaluation of our economies which have so far characterized the credit rating of Africa. It is clear that this effort can go a long way in improving Africa’s credit rating.”
Second, the Africa Credit Rating Agency will also need to embark on capacity building of Africans to equip them to formulate credit ratings as well as technically review the credit ratings on African borrowers by external credit agencies.
“With these technical capacities, we shall be well placed to bring out facts of unfair risk premiums and inaccurate evaluation of our economies by external credit rating agencies,” Muchanga explained during the two-day retreat held last week in Lusaka.
The operationalisation of the Africa Credit Rating Agency comes against a background of the growing importance of domestic resource mobilization in Africa’s inclusive growth and sustainable development.
A United Nations Development Programme study in April 2023 showed that African countries could save up to $74.5 billion if credit ratings were based on less subjective assessments, citing idiosyncrasies in the frequency of ratings actions for African countries as an example.
Read: Linked capital markets will sustain Africa’s growth, experts say
The United Nations Economic Commission for Africa report found that in the first half of 2023, the top rating agencies issued 13 negative decisions to 11 African countries.
The negative assessments included rating downgrades and negative outlook analyses.
“It is on the basis of an African capital market that the Africa Credit Rating Agency will grow with a dynamism of its own,” said Muchanga.
Credit ratings remain a highly influential tool investors use in their capital allocation.
Rating agencies take a number of factors into account when assessing the level of risk associated with lending money to a government.
These indicators include the level of government debt, per capita income, GDP growth, the stability of financial institutions, inflation and default history, among others.
The credit ratings, which are independent judgements on a government’s creditworthiness, are particularly important for developing countries since the cost of borrowing can influence a government’s ability to fund everything from infrastructure programmes to healthcare services.
However, the credit rating industry in Africa is dominated by the three international agencies: Moody’s, S&P and Fitch.
Together, they control an estimated 95 percent of the credit rating business globally.
“These developments have reversed the optimism amongst investors on the international financial markets that African countries are recovering from the devastating Covid-19 economic shocks,” the report states.
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