Do we need an African rating agency?

According to The East African, Africa is developing a credit rating agency that will be established by the end of 2024 to address what it considers injustice.

According to the United Nations Economic Commission for Africa (Uneca), the African Credit Rating Agency (ACRA) would offer “balanced and comprehensive views” on African credit instruments. This would support access to affordable capital and the development of domestic financial markets.

Credit ratings are designed to measure a borrower’s risk of default and to assess the terms on which banks and others will lend to them.

With the support of the African Union (AU), the rating agency is expected to have the advantage of understanding Africa’s domestic environment and issuing more informative and detailed ratings than those issued by international rating agencies.

“A credit rating agency for Africa is an important step toward intra-continental integration, which would enable African governments to access capital and integrate the continent with global financial markets,” said Dr. Misheck Mutize, chief credit rating agency expert at APRM.

The two main reasons behind this initiative are to provide an alternative view to the big three and, secondly, to support activities in 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. Moreover, they are quicker to downgrade them during crises, such as the COVID-19 pandemic.

Therefore, the rating agency is expected to secure substantial activity in ratings of national instruments that are aligned with the continent’s objectives.

“There are many instruments that need ratings in local financial markets. The idea is that once the domestic financial market is sufficiently supported, countries should be able to borrow in local currency,” Dr. Mutize explained.

“International investors should also be able to participate through domestic financial markets. The agency would be self-financed and led by the private sector with AU oversight.”

In 2017, the AU decided to direct its African Peer Review Mechanism (APRM) to provide support to member states in the field of rating agencies.

AU finance ministers passed a resolution last year to endorse the new agency’s plan, an effort led by the APRM, an AU branch formed to improve governance across the continent.

The APRM, in collaboration with UNECA, convened a two-day retreat in Lusaka, Zambia, last week to discuss the next steps to operationalize the Africa Credit Rating Agency.

In addition to rating African borrowers through the African capital market, the Africa Credit Rating Agency has other immediate and strategic roles to play.

“First, the Africa Credit Rating Agency will need to work with governments and statistical agencies across 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 the unfair risk premiums and inaccurate assessment of our economies that have characterized Africa’s credit rating so far.” It is clear that this effort can do much to improve Africa’s credit rating.”

Second, the Africa Credit Rating Agency will also need to embark on a path of capacity building for Africans to equip them to formulate credit ratings and technically review credit ratings on African borrowers by external credit agencies.

“With these technical capabilities, we will be in an optimal position to bring out the facts about unfair risk premiums and inaccurate assessments of our economies by external rating agencies,” Muchanga explained during the two-day retreat held last week in Lusaka.

The operationalization of the Africa Credit Rating Agency comes amid the growing importance of domestic resource mobilization for Africa’s inclusive growth and sustainable development.

An April 2023 United Nations Development Program study 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 rating actions for African countries as an example.

The United Nations Economic Commission for Africa report found that in the first half of 2023, major rating agencies issued 13 negative decisions for 11 African countries. The negative ratings 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 its own dynamism,” Muchanga said.

Credit ratings remain a very influential tool that investors use for capital allocation.

An issue of fairness of ratings

This initiative on the African credit agency can either be a resounding success, in which case it will demolish the assignability of the big three credit rating companies, namely Standard & Poors, Moody’s, and Fitch, or an equally resounding failure, in which case it will burn up large quantities of financial resourcesin the short term.

If it succeeds, it will reveal what so many suspect and have suspected in the past, especially during the financial crisis, namely that the big three rating companies are nothing more than “rating supermarkets” that, by paying, more or less give the rating you want, as happened to so many real estate derivatives of the time. Or, even worse, acting with political biases. This could bring down the near-world monopoly of these companies and activate new, more fair, democratic and objective ways of rating credit.

Or it could be a failure and reveal a bias, the opposite, of a political nature that will lead to underestimating the economic and political risks of countries and projects on the African continent, thus leading investments to risky and insufficiently profitable targets, thus leading to the waste of valuable resources.