African countries have long complained they are being held back by unfairly high borrowing costs shaped by international credit ratings agencies. Now they are doing something about it.
Credit where it is due
It may have drawn little attention outside Africa but the continent’s leaders hope the launch last week of the African Credit Rating Agency (AfCRA) could help them save tens of billions of dollars in interest payments each year. Backed by the African Union, the agency is part of a drive for greater financial sovereignty in Africa and an attempt to address the shortcomings of the big three global ratings agencies there.
Moody’s, Standard & Poor’s (S&P) and Fitch, all of which are based in the United States, issue ratings that determine the borrowing costs for more than 95 per cent of the world’s rated debt. But African governments and firms have long complained that the big three agencies consistently give them poorer ratings than they apply to other parts of the world.
A report by the United Nations Development Programme (UNDP) in 2023 estimated that excessive risk premiums were costing African countries almost $75 billion each year in interest payments and foregone credit. Some African countries pay more to service their debt each year than they spend on health or education and high interest payments are also a drag on economic growth.
“Reducing interest rates paid by African countries on both domestic and foreign debt could greatly decrease the debt service burden they face,” the UNDP said.
“This, in turn, would enable them to repay the principal faster and free up funds for more investments in development.”
Twenty-three of the African Union’s 55 member states are not rated by the big three agencies at all, and others complain that their credit ratings are shaped by a lack of knowledge and expertise. When Moody’s downgraded Ghana’s debt in 2022, its lead analyst had not even visited the country and the government said the agency overlooked important data on fiscal consolidation.
African companies are also neglected by the international agencies with fewer than 4,000 firms across the continent covered by credit ratings. This compares with more than 800,000 in the EU and more than two million in the US.
AfCRA will be privately funded and independent of African governments and its backers are stressing the importance of independence to building its credibility. Mauritius minister of financial services and economic planning Jyoti Jeetun said it was not about getting more favourable ratings for African countries, but to ensure their economies were assessed more accurately
“Africa does not become more prosperous because we change the way we measure it. But the way we measure African economies and its enterprises can influence the way the world perceives its risk, its opportunities and its potentials,” she said.
“Because for too long, too much of Africa’s economic story has been viewed through the lenses designed elsewhere, using assumptions and frameworks that do not always capture our realities, our specificities. AfCRA is in part about ensuring that Africa’s economic reality is accurately understood.”
AfCRA is not the first attempt to establish an alternative to the American ratings agencies, and an initiative to create a pan-European rival to the big three more than a decade ago ended in failure. But the African move may have had an impact already, with Moody’s and S&P expanding their presence across the continent since planning for AfCRA began.
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