The African Union (AU) is planning to create its own sovereign credit rating agency. The move is aimed at reducing the continent’s reliance on foreign credit rating agencies, which have been criticized for their lack of understanding of African economies. Here are some key points about the AU’s plan:
What is a Credit Rating Agency?
A credit rating agency (CRA) is a company that assesses the financial strength of companies and government entities, especially their ability to meet principal and interest payments and the likelihood of default.
Dominating Credit Agencies
The credit rating industry is dominated by three major agencies, known as the “Big Three”: S&P Global Ratings (S&P), Moody’s, and Fitch Group. These agencies assess the financial strength of companies and government entities, especially their ability to repay debt5. They use letter grades to assign analyses and independent assessments of companies and countries that issue debt securities. The ratings differ among the three agencies, but they all provide investors with information about companies and the issuers of debt-based investments.
The Need for African-Focused Credit Agency
The proposal, detailed in a recent United Nations Economic Commission for Africa report, highlights deficiencies in current leading credit rating agencies, citing “significant errors in their ratings” due to narrow assessments that don’t take into account positive economic indicators and can impact the flow to capital in the region.
— Ahunna Eziakonwa, UN Assistant-Secretary General
We need to foster agency for African people to meet development aspirations and a system where risk can be fairly priced”
“It is envisaged that the ACRA would provide balanced and comprehensive opinions on African credit instruments to support affordable access to capital and the development of domestic financial markets,” the report states.
The African Union plans to create a new sovereign credit rating agency that it says could provide more accurate risk assessments for governments across the continent.
African Credit Rating Agency
In the first half of 2023, the top rating agencies issued 13 negative decisions to 11 African countries, according to a report by the United Nations Economic Commission for Africa. The negative assessments included rating downgrades and negative outlook analyses. The report did not provide further details on which countries were affected
“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.
In January, Moody’s, one of the leading credit rating agencies, downgraded the Nigerian government’s rating from B3 to Caa1. The agency cited “wide-ranging fiscal” pressures and “institutional weaknesses and social challenges” in the country as the reasons for the downgrade. However, Nigeria disputed the decision, which caused the value of Nigerian government bonds to fall. Longer-dated bonds were down the most, with the dollar-denominated 2051 Eurobond falling more than 2.8 cents in the dollar to 68.758 cents according to Tradeweb data. Only the Eurobond maturing this year fell less than 1 cent. As the bond prices tumbled, the premium or ‘spread’ investors demanded to hold Nigerian debt rather than ultra-safe U.S. Treasuries jumped 46 basis points to 777 basis points
“In the view of the Federal Government of Nigeria, by proceeding to downgrade the government’s rating after rigorous engagements on all the efforts the government has undertaken to stabilize the economy, confirms that the rating agency lacks the full appreciation of the country’s domestic environment in the context of the international political economy,” the UN report noted.
ACRA is a rating agency based in Moscow, Russia, that was established in 2015. ACRA is expected to launch in 2024 and proponents say that it could provide more precise credit ratings and economic outlook assessments that would make borrowing cheaper for African governments.
A United Nations Development Programme study in April revealed that African nations could potentially save almost $75 billion by adopting less subjective credit rating assessments. These savings would empower governments to retire their domestic and foreign debt principal and allocate funds toward investments in human capital and infrastructure development, as mentioned in the report
“We are at the heart of polycrisis and African governments are struggling with a drought in development financing,”
“We urgently need more fairness and justice in the way we conceptualize multilateral agencies. We need to foster agency for African people to meet development aspirations and a system where risk can be fairly priced.”Ahunna Eziakonwa, UN Assistant-Secretary General and UNDP Regional Director for Africa