TRUST FROM WITHIN: Need for African credit ratings agency

GIDEON ASARE SACKITEY 

Gideon A. Sackitey, who contributed this piece from Accra, Ghana, is a journalist and media professional with over 20 years in news agency journalism, strategic communications, broadcasting and public information. A graduate of the prestigious University of Media Arts and Communications, he is a respected figure in Ghana’s media landscape and, until recently, was the Public Information Officer for the UN Mission in South Sudan.

Picture this: a thriving agricultural startup in Accra is ready to expand. It has local support, a sustainable model, and a loyal customer base. But when it applies for financing, international credit agencies rate its prospects lower simply because it’s based in Ghana — not because of its track record.

Take another look. Imagine a young entrepreneur in Nairobi with a solid business plan and a promising startup but is faced with high interest rates and cautious lenders. She has watched her peers struggle to grow despite their hard work and innovation, largely due to international credit ratings overlooking Africa’s on-the-ground realities.

What if Africa had its own credit ratings agency — one that can understand its entrepreneurs, local markets, regional risks, and growth potential from within?

An African credit ratings agency could be the key to unlocking a fairer, more accurate financial landscape for the continent’s transformative industrial giants and emerging entrepreneurs that are matching squarely, products from everywhere in the world.

Isn’t it time to explore what such an agency could mean for African economies on their terms?

So I was happy when last month the African Peer Review Mechanism (APRM), in collaboration with the United Nations Economic Commission for Africa (UNECA), and the United Nations Development Programme (UNDP) Regional Bureau for Africa, hosted a High-Level Dialogue on the establishment of the Africa Credit Rating Agency (AfCRA) at the AU Permanent Mission to the United Nations.

This event brought together global policymakers, financial institutions, private sector leaders, and development partners to develop ideas, explore possibilities, gather insights, and foster agreement among all parties to forge strategic partnerships for an AfCRA.

The APRM chief executive officer Ambassador Marie-Antoinette Rose Quatre opened the dialogue, emphasising the critical role of reliable credit ratings in fostering economic growth and stability. She said an AfCRA will provide independent assessments of creditworthiness tailored specifically for African markets.

“The creation [of AfCRA] is crucial for ensuring Africa receives accurate, unbiased, and fair assessments of the risks and opportunities within its economies. This initiative will help address the information asymmetry that has long disadvantaged Africa in the global financial system.”

Dr. Mohammed Amin Adam, Ghana finance minister, no doubt is all for the African sovereign credit rating agency.

“This would ensure a balanced, accurate, and comprehensive assessment of credit risks, facilitating access to competitive capital and fostering domestic financial market development across the continent, compared to the current regime of unfair assessments of developing countries by international rating agencies.

“If we have our rating agency, we will have an alternative professional second opinion. When challenged, the facts can be brought to bear, and I think the African Development Bank should lead by organising stakeholders to determine the modalities,” he directed.

According to a United Nations Economic Commission for Africa 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. “These developments reversed the optimism among investors on the international financial markets that African countries were recovering from the devastating Covid-19 economic shocks,” the report said.

President Akufo-Addo 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”.

Addressing the 2024 African Development Bank’s Annual Meetings in Nairobi, Kenya’s, President William Ruto went further by calling on the AfDB President Akinwumi Adesina to establish an African Credit Agency and conduct a comprehensive review of African states’ Gross Domestic Product (GDP) to reflect their true economic status.

President Ruto showed how perceptions had impacted Kenya’s credit rating on Eurobond issuance, stating, “Kenya faced higher interest rates due to geopolitical conflicts far in Niger, 4,585 kilometres away.

The three major international rating agencies – Fitch Ratings, Moody’s, and S&P – have come under intense scrutiny as many countries have questioned their sovereign credit ratings and rightly so.

Background

For many, the importance of an African-owned credit rating agency potentially offers significant advantages over the current reliance on international agencies. The status quo, in which Africa depends on global rating agencies – such as Moody’s, Standard & Poor’s, and Fitch has often drawn criticism for several reasons, including perceived biases, what I call inadequate contextual understanding of what constitutes African economies, and sometimes unreasonably high-risk premiums that can hinder access to affordable capital.

The “Big Three” credit rating agencies – Fitch, Standard & Poor’s, and Moody’s – each have unique origins, shaped by the growth of industrial finance and the increasing need for reliable assessments of financial risk.

Moody’s, founded in 1909 by John Moody, started as a way to provide information on railroad bonds, which were crucial for industrial expansion in the U.S. Moody’s developed the first system of credit ratings to give investors a sense of the risk associated with different bond issuers. This system helped standardise assessments of creditworthiness and laid the groundwork for what became the modern credit rating industry.

Standard & Poor’s traces its roots to 1860 when Henry Varnum Poor began publishing financial information on the U.S. railroad industry to help investors make informed decisions. The company became Standard & Poor’s after merging with another financial information provider in 1941. By the 1950s, S&P was offering bond ratings that were becoming essential for assessing a company’s financial stability across various sectors (S&P Global).

Established in 1914 by John Knowles Fitch, Fitch initially published financial statistics to help investors understand the emerging U.S. corporate bond market. Known for innovations like the “AAA” to “D” rating scale, Fitch grew its reputation for providing reliable evaluations of company and government credit risk, eventually becoming a global player alongside Moody’s and S&P.

Of course, Malaysia has its two bodies – RAM Ratings and Malaysian Rating Corporation Bhd (MARC) (Investopedia.com)

These agencies expanded globally, playing an increasingly powerful role in international finance by rating governments, financial institutions, and corporations worldwide. However, their focus and methodologies were built largely on Western financial norms.

It is at this point that one will want to question their suitability in not just the diverse markets in Africa, but the unknown values, resources and resource potential Africa possesses, which is largely ignored or not recognised.

Benefits, challenges of African-owned credit rating system 

So like I said earlier, if that agricultural startup in Accra and the young entrepreneur in Nairobi, like many others, are backed up with statistical facts from their indigenous credit rating agency, propping up information about their potential to create mass of jobs, transform their national economies, and potentially be the source of a cancer-healing derivative among others, they, most assuredly, would not only survive; but thrive and become the resilient global institutions in their respective industry sectors. How?

Contextualised understanding of African economies

An African-owned agency could better understand the specific risks, challenges, and potential of African economies, which are often unique compared to other regions. This could help issue fairer and more nuanced ratings that account for African nations’ distinct economic structures, demographic trends, and development trajectories.

It would recognise positive long-term trends, like rising middle classes, and improve overall political stability, which international agencies overlook or underappreciate.

Reduction of perceived bias

Usually, African nations often feel that global credit ratings are influenced by external geopolitical factors or based on metrics that disproportionately favour developed economies. An African-owned rating agency could work to reduce this perception by ensuring more locally relevant and balanced evaluations.

The perception of biassed ratings has been Africa’s bane all these years. It affects investment flows, as investors often rely heavily on these ratings. A locally controlled agency will not blur reality. It might inspire greater confidence in African markets by delivering assessments that Africans consider fair and acceptable and trends within their marketplace.

International agencies often apply risk premiums that elevate borrowing costs, as they view African economies as inherently riskier. An Africa-owned rating agency, with its nuanced understanding, might assign ratings that lead to more favourable borrowing terms.

With lower perceived risk and thus reduced borrowing costs, African countries could finance development projects more affordably, especially in areas such as infrastructure, healthcare, and education, all key sectors for the growth they need most.

Capacity building and independence

Still one more crucial area is developing a continent-wide rating agency. This no doubt could build capacity within Africa’s financial sector, fostering financial independence. It could also help African institutions develop a strong analytical framework for assessing creditworthiness across the continent.

An African agency would allow African countries to have more control over their financial narratives and economic positioning, reducing dependency on foreign institutions and fostering a more self-sufficient financial ecosystem.

Greater credibility in assessing intra-African investments

With the African Continental Free Trade Area (AfCFTA) fostering more intra-African trade and investment, an African rating agency could play a key role in assessing the creditworthiness of African businesses and projects within the continent. This could support cross-border investments and strengthen regional economies.

Intra-African investments could be encouraged by a rating agency that understands the unique dynamics of African trade and commerce, thereby fostering deeper regional integration.

Challenges of an African-owned rating agency

In meeting or achieving these goals the rating agency will definitely meet challenges. Some of these are:

• Establishing credibility and investor confidence

A new Africa-owned rating agency would need to build credibility on the global stage to gain acceptance by international investors. Without established trust, investors might still defer to the ratings of international agencies, at least in the early stages.

Building credibility would require transparency, robust methodologies, and independence from political influence to ensure the agency’s ratings are trusted internationally.

• Ensuring independence from political influence

African nations would need to ensure the agency operates independently of political pressures, which could otherwise compromise its credibility. This is particularly important if the agency’s ratings are to be respected by investors both within and outside Africa.

Safeguards would need to be in place to prevent any country’s influence over the agency’s operations and ratings, as political interference could result in biassed assessments and reduce investor trust.

1.  Alignment with international standards

To be accepted and respected globally, an Africa-owned credit agency would need to align its methodologies with international best practices, ensuring its ratings are rigorous and comparable with established global agencies.

Training and capacity building for analysts, combined with adherence to global rating methodologies, could help mitigate scepticism from international markets and make African ratings credible in comparison to international agencies.

1.  Cost and resource requirements

We must note that setting up a credit rating agency requires substantial resources, including data infrastructure, skilled analysts, and regulatory oversight. African countries would need to invest significantly in building these capacities.

Ongoing costs for data collection, analysis, and continuous rating updates could be substantial. This investment, however, could ultimately yield economic benefits if it results in fairer credit ratings.

If done successfully, an African-owned credit rating agency could transform Africa’s financial standing by addressing the existing limitations in global ratings. It would empower African nations to control their own financial narratives, improve access to affordable financing, and support the development of African economies based on criteria that reflect local realities. Additionally, it could stimulate intra-African investments by providing a reliable rating framework for investors within the continent, fostering regional growth and integration.

In establishing an African-owned credit rating agency comes with challenges, the potential benefits of financial independence, fairer assessments, and lower borrowing costs present a compelling case. However, such an agency could complement global ratings by providing a more Africa-centred perspective, ultimately creating a more balanced and nuanced assessment of African economies that benefits both local and international investors with an obvious benefit for the former.

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