The imperative for an indigenous credit rating agency in Africa
The imperative for an indigenous credit rating agency in Africa
By Lucy Ogalue, News Agency of Nigeria (NAN)
In the ever-evolving landscape of global finance, Africa stands at a crucial juncture with its burgeoning economies, industries, and a young, dynamic workforce.
The continent holds immense potential, yet, in spite of these promising indicators, Africa still grapples with a significant challenge one of which is the absence of a robust credit agency tailored to its unique economic landscape.
Credit rating is an evaluation of the credit risk of a prospective debtor, predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
Credit rating represents an evaluation from a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency’s analysts.
African economies, both emerging and established, face hurdles when it comes to accessing credit on favorable terms.
Traditional credit rating agencies, predominantly based in the West, often lack the level of understanding required to accurately assess African businesses and sovereign entities.
Consequently, this knowledge gap perpetuates a cycle of limited access to affordable credit, hindering the continent’s growth prospects.
In the intricate space of global finance, Africa’s economic potential shines brightly, yet, in spite the continent’s vast opportunities; its journey to prosperity faces a formidable obstacle, which is the absence of a credible, indigenous credit rating agency.
Stakeholders, experts, partners and shareholders on the continent have strongly advocated the creation of an Afrocentric credit rating agency, designed to better understand and fairly assess the continent’s conditions.
Dr Akinwumi Adesina, President, African Development Bank (AfDB), has been an ardent advocate for rectifying the disparity in rating, emphasising the critical need for Africa to have its own credit-rating institution.
Adesina contends that major international credit rating agencies often paint an inaccurate picture of African risk, unfairly penalising the continent.
Speaking at the 2024 AfDB Annual Meeting in Nairobi, he said although the continent needed its own rating institution, it was not intended to replace the global rating agencies.
“What the Heads of States are saying is that saying is that they want a counterpart institution that understands the conditions in the continent better.
“There is need for reform in the global rating system. The global system has to change. We need to create a fair response that rates African countries properly and with equity.
“Africa is not asking for a pass, but there needs to be a fair process that rates African countries properly. It is about fairness, it is about equity, it is about making sure that both sovereign and non-sovereign are rated properly,” he said.
Similarly, while speaking at the Chatham House in London, Adesina highlighted how Africa was unjustly perceived, as being riskier than other regions, in spite evidence to the contrary.
He said over the past five years, the AfDB had facilitated investments exceeding 180 billion dollars in Africa underscoring the continent’s immense potential for growth and development.
The AfDB boss said: “Africa is not any riskier than any other part of the world. Perception is not reality.
“Over the past five years, we have brought investors to Africa and mobilised well over 180 billion dollars in investment interest. This tells you the opportunities are limitless.
“For Africa to rise and shine brightly among the global community of nations we must accelerate structural transformation and finance its implementation. This is the key to unlocking Africa’s development opportunities.“
Addressing participants at the 2024 AfDB meeting in Kenya, President William Ruto also called on the AfDB to establish an African Credit Agency and conduct a comprehensive review of African states’ Gross Domestic Product (GDP) to reflect their true economic status.
Ruto disclosed how perceptions had impacted Kenya’s credit rating on Eurobond issuance.
According to him, countries on the continent borrow from international markets at rates far above those paid by the rest of the world, often up to eight to 10 times more.
He said these rates were said to factor in an arbitrary risk profile that is notably not applied when considering mineral extraction, even in areas of active conflict.
President Nana Akufo-Addo of Ghana expressed similar sentiments while addressing the 35th Africa Union summit in Addis Ababa, Ethiopia.
He said: “We need to guard against the continuing consequential stranglehold of rating agencies, which has affected the cost and access to capital markets for African countries”.
Experts argue that the problem with African debt is not just the interest that is paid on them, but also the tenure of the loans as repayment periods tend to be shorter than for elsewhere around the world.
Mr Jeffrey Sachs, an American economist, academic and public policy analyst, said long-term development cannot be based on short-term loans.
“Thus, the loans granted to Africa should have at least a 25-year term, or longer. Short-term borrowing is dangerous for long-term development,” Sachs said.
For Dr Mohammed Adam, Ghana’s finance minister, establishing an African sovereign credit rating agency would ensure a balanced, accurate, and comprehensive assessment of credit risk.
He said it would therefore facilitate access to competitive capital and foster domestic financial market development across the continent.
The minister decried what he described as unfair assessments of developing countries by international rating agencies.
“If we have our own rating agency, we will have an alternative professional second opinion.
“When challenged, the facts can be brought to bear, and I think the AfDB should lead by organising stakeholders to determine the modalities.
“Such a stakeholder meeting is crucial to build credibility that will reflect the ratings given to African nations,’’ the media quoted Adam as saying.
According to a United Nations Economic Commission for Africa (ECA) report, in the first half of 2023, the top rating agencies issued 13 negative decisions to 11 African countries, including downgrades and negative outlook assessments.
The report stated: “These developments have reversed the optimism among investors on the international financial markets that African countries are recovering from the devastating Covid-19 economic shocks.”
To address these credit rating issues, the ECA and the African Peer Review Mechanism (APRM) hosted a workshop in Accra from July 9 to July 12.
The event brought together stakeholders and major credit rating agencies, including S&P Global and Moody’s, to discuss the credit rating methodologies.
The workshop aimed to provide a comprehensive understanding of the factors that influence these ratings and to identify actionable steps that African countries could take to enhance their creditworthiness.
“By bringing together diverse stakeholders we can foster a deeper understanding of credit rating methodologies.
“We work collaboratively to improve the financial stability and economic prospects of African nations,” Sonia Essobmadje, Chief of Section on Innovative Finance at ECA said.
McBride Nkhalamba, Acting Director, Governance and Specialised Reporting at APRM, highlighted the significance of the initiative.
Nkhalamba said that consistency in policy communication and transparent reporting were imperative in fostering investor confidence and mitigating potential rating downgrades.
Amb. Albert Muchanga, African Union (AU) Commissioner for Economic Development, Trade, Tourism, Industry and Minerals, says the continent was on track to establishing a credit rating agency by 2025.
According to Muchanga, the project was at the operationalisation stage, adding that APRM, AfDB, African Export-Import Bank and AU Commission are involved in the task. (NANFeatures)
**If used, please credit the writer and News Agency of Nigeria.
