Why does Africa need an independent credit rating agency?

By Amit Jain and Jaco Maritz

Despite liberalising their economies, carrying out painful structural reforms and working hard to manage fiscal discipline sovereign African states have had to pay up higher rates on their borrowings than most other emerging economies. This is often because the "big three" – Moody’s, Standard & Poor’s, and Fitch Ratings – run, what can only be described as an international ‘credit rating cartel’ that determines the creditworthiness of every country. They have underinvested in hiring African analysts and have often shown a propensity to lump African economies together when assessing their economic performance.  The resulting misperception of risk has cost Africa up to US$46bn. But with the expected launch of the Africa Credit Rating Agency (AfCRA) in June this year (2025) that problem may be soon be over. The AfCRA aims to offer a more credible creditworthiness ratings for sovereign governments, public-sector entities, and corporations in the continent. Proponents argue that it will better reflect the realities of African economies.

Sovereign credit ratings play a crucial role in determining a country’s access to international capital. These ratings inform investors about the risks and opportunities associated with lending to governments, influencing the availability and cost of funding. Institutional investors, such as pension funds and mutual funds, often require investment-grade ratings before including a country’s debt in their portfolios. The designation of a country’s debt as “investment grade” or “speculative” significantly affects the volume of capital it can attract and the interest rates it must pay. A higher credit rating can lead to lower borrowing costs, while a downgrade can make financing prohibitively expensive. Additionally, credit ratings serve as an indirect signal to foreign direct investors evaluating opportunities in emerging markets. This gives them enormous influence in the international financial architecture. The global influence of credit rating agencies was thrown into spotlight in the aftermath of the 2008 financial crisis which exposed the shortcomings of financial regulatory frameworks and investors whose decision criteria are hardwired into credit ratings. It was also shown earlier during the 1998 Asian Financial Crisis how credit rating agencies can reinforce boom-bust cycles of economies where capital markets react to ratings, which then systematically influences investment flows into and out of an economy.

Over the past decade, 94% of African countries have seen their credit ratings downgraded. Only Botswana and Mauritius enjoy investment-grade ratings. Estimates suggest that a one-notch rating upgrade could unlock an additional US$15.5bn in financing for the continent. According to certain calculations, the misperception of risk has cost Africa over US$24bn in excess interest payments and more than US$46bn in forgone lending opportunities. Unlike in 2023, when no country in Sub- Saharan Africa issued a sovereign bond, 2024 saw 9 countries issue a combined US$13.45bn – US$5.7bn in the first half of the year and US$7.75 billion in the second half. However, interest rates on these bond issuances have nearly doubled compared to the rates on similar tenors and amounts issued 5 to 10 years ago. For example, Cameroon issued a US$812.2 million Eurobond at a coupon rate of 5.95% in June 2021, compared to the 10.75% coupon on the August 2024 issuance.

Critics argue that the methodologies used by the big three agencies lack transparency, and key assumptions remain opaque. Subjective factors – such as cultural and linguistic biases – often skew ratings against African countries. Incumbent credit rating agencies often fail to account for the long-term economic benefits of climate-related investments, which, despite initial fiscal burdens, could strengthen economic resilience. “Africa will no longer accept to be misjudged by the scales of global credit rating agencies that overlook our reality,” vowed President William Ruto of Kenya recently. “By relying on flawed models, outdated assumptions, and systemic bias, these agencies have painted an unfair picture of our economies, leading to distorted ratings, exaggerated risks, and unjustifiably high borrowing costs,” he railed.

Weak Methodology

There are two key challenges to the current methodologies that credit rating agencies use. On the quantitative end, they use several empirical variables to determine 90% of the variations in credit ratings, including but not limited to; GDP per capita, GDP growth, inflation, the ratio of non-gold foreign exchange reserves to imports, the ratio of the current account balance to GDP, and debt default history as well as the level of economic development. Additionally, the ratings of developing countries are negatively affected by two more variables - increases in international interest rates and the structure of exports and their concentration. This means that by design, African countries are at a disadvantage when it comes to how they are measured after receiving debt relief. A third of African countries are spending a significant portion of their revenues on debt servicing. Conservative ratings drive borrowing costs higher, making it difficult for African governments to manage their debt.

African Credit Rating Outlook Improves

AfCRA is not intended to replace the big three agencies but rather to complement them by offering an alternative perspective. Its backers argue that a homegrown agency, with a better understanding of African economies, can provide more accurate and informative assessments. As of today, 22 African states do not get rated by any credit rating agency. This is a gap that AfCRA could cover.

The establishment of a multilateral African credit agency initially raised concerns about potential conflicts of interest and whether international investors will trust its assessments. But as the establishment of AfCRA becomes inevitable the established international credit ratings agencies have started to review how they rate African economies. This has led to a marked overall improvement in African credit rating outlook.

There was an increase in positive rating actions than downgrades and negative outlooks in the second half of 2024. Eleven countries had their ratings and outlooks upgraded. The dominant sentiment towards positive rating actions reflects growing optimism about Africa’s political and economic prospects. S&P Global Ratings had the highest number of rating activities in Africa during the second half of 2024, taking rating actions on 13 countries – 4 downgrades, 4 upgrades, 4 negative changes in outlook and 1 positive change in outlook. Rating upgrades were not driven by significant positive changes in fundamentals, but rather by an improvement in international credit rating agencies’ confidence in African governments’ ability to meet their fiscal financing needs and debt obligations. Downgrades and negative changes in outlooks were based on expectations of widening budget deficits, worsening government debt-to-GDP ratios, weak data quality and underreporting of spending.

The operationalisation of an African-owned credit rating agency would be a critical milestone as the continent seeks to strengthen its position in global financial markets. Credit ratings significantly influence capital inflows, borrowing costs, and investment decisions by international investors.

To ensure fair and objective assessments, it is imperative that Africa’s economic outlook and sovereign balance sheets are evaluated by a rating agency that prioritises the continent’s long-term economic interests. Establishing AfCRA will help address structural biases in global credit assessments and enhance Africa’s ability to attract investment on competitive terms.

Once established as a professional and private sector driven rating agency, AfCRA could influence the approach and methodology of the current existing rating agencies in credit risk assessment for Africa.

Fair and accurate credit risk assessment

African leaders have repeatedly emphasised the need for fairer credit rating practices, pointing out the disproportionate impact of high borrowing costs on their economies. The collective debt burden of the continent is inching closer to the US$1 trillion mark and conservative rating is making it harder for African countries to manage debt. It is hoped the AfCRA will contribute to the improvement of rating opinions and accuracy of assessment by offering alternative and additional perspectives.

The Agency’s niche will primarily derive from its context-sensitivity which will allow it to generate more comprehensive credit insights, using competent experts based in Africa and its relatively better access to data - One that would better reflect the economic realities of African economies / markets and support their socio-economic development goals.

Specifically, it should aim to set the bar globally in three ways: first by being the most transparent sovereign rating agency in the world; second by being the most localised sovereign rating agency in the world; and third by being the sovereign rating agency that creates robust and credible methodologies that use data that measures actual African risk rather than perceived African risk.

AfCRA could have unique perspectives on rating methodologies. For example, it could adopt a more inclusive methodology by including – say - 40% of qualitative data based on local knowledge of the country or entity being assessed. Some boutique credit rating agencies, such as the Sovereign Africa Ratings, have included the asset base of the continent and embraced a more quantitative methodology. Similarly, the rating assessment of AfCRA could be an improvement from the Big Three as it would account for unique factors such as natural assets and the informal sector. By doing so the AfCRA can play a central role in reducing the costly “Africa risk premium” that drives up the borrowing costs for Africa.

 

References

'Reducing the cost of finance for Africa Report - April 2023', United Nations Development Programme, April 2023

'Retreat to finalise establishment of the Africa credit rating agency: Lusaka-Zambia', African Peer Review Mechanism, 25 March 2024

'African leaders convene on establishment of homegrown solution, the Africa Credit Rating Agency', African Union, 07 February 2025

'AU creates rating agency to tackle bias, unlock funds', Engineering News, 14 February 2025

'X post', William Samoei Ruto, 14 February 2025

'African Union launching credit rating agency to overcome perceived bias', BNE IntelliNews, 17 February 2025

AFRICA SOVEREIGN CREDIT RATING OUTLOOK, 2024 year-end outlook, AU

Reimagining Credit Rating Agencies for African Priorities, Development Reimagined, Feb 2025