Africa-Press – South-Africa. African countries are still assessed by a credit ratings system whose judgments are based on weak assumptions.
Africa is rich. Rich in people, resources, ideas, and potential. Yet many of its countries are trapped in a financial paradox: while global investors chase higher returns, African countries face some of the highest borrowing costs. Why does this imbalance persist? Because countries are still assessed by a credit ratings system that was not built with Africa in mind, and which continues to price the continent’s future based on weak assumptions.
In today’s world, credit ratings are no longer just technical signals for bond traders. They are gatekeepers of global finance. They determine the cost of borrowing in many countries, as well as who is willing to invest, and whether dreams of infrastructure, education and healthcare can be financed without sinking into debt. The high cost of borrowing in Africa can be linked to risk perceptions, which are shaped by a country’s credit rating. Of the 34 African countries currently rated by the Big Three global ratings firms – Moody’s, Fitch’s and Standard & Poor – only two are investment grade. This makes the vast majority of African countries susceptible to crippling interest rates that crowd out development spending.
The real issue is that the process is not always fair. Credit rating agencies apply both quantitative and subjective measures, ranging from governance “scores” to analyst judgments, which penalise countries for perceived, but not always proven, risks. As a result, African countries lose out on billions in financing, not because they have mismanaged their economies, but because they are misjudged.
Credit ratings purport to be forward-leaning assessments of a country’s creditworthiness. But recent experience suggests that an emphasis on historical perspectives and an unhelpful degree of subjectivity disadvantages African countries and downplays their economic potential. High-level global initiatives like FfD4 and South Africa’s Presidency of the G20 are focusing on practical steps that can be taken to address these issues. A lot of emphasis is being paid to reforming debt sustainability analysis (DSAs), including introducing natural capital, capping debt service levels to free up fiscal space, and revisiting loan classifications so that investments in critical infrastructure, energy and technology do not cast a pall on the prospects of African economies.
Guaranteeing socio-economic progress and societal stability is critical if African countries are to become less dependent and more self-sustaining. Their role in enhancing sovereign credit ratings is critical in lowering the cost of borrowing to fill the estimated $1.3 trillion financing gap (of which $402bn is needed for fast-tracking structural transformation). Even if concessional financing were to return to pre-Covid levels, they would not be sufficient to fill this gap. African countries are recognizing the opportunity to turn the corner and invest in reforms and capacity enhancements that will improve their credit ratings. Recent upgrades include Nigeria (from Caa1 to B3 by Moody’s on May 30), Ghana (from default to CCC+ by S&P on May 19), and Togo (from B to B+ by S&P, April 18). While these developments are encouraging, we know that much more needs to be done.
UNDP’s Africa Bureau is partnering with AfriCatalyst, the African Union’s Africa Peer Review Mechanism, UN Economic Commission for Africa, and the Africa Center for Economic Transformation to support efforts to enhance sovereign credit ratings in Africa. Since July 2024, over 120 senior officials from 18 African countries have received customized instruction in credit ratings methodology, processes and data requirements. The initiative will also be launching an e-Course in October 2025 to complement the practical workshops and webinars. The initiative also deploys world-class credit ratings advisors to work alongside national governments and provide timely, bespoke national capacity building opportunities and mentorship. The paucity of data is a major obstacle to better credit ratings, since it leaves more room for credit ratings agencies to use guesses in their assessments of African countries’ creditworthiness. This is why the initiative’s web portal highlights methodologies, data sources, and even peer-comparisons of key macroeconomic and institutional indicators for all countries with available data.
Africa is at a critical juncture. African countries are making crucial strides with economic transformation. Africa’s big ocean economies like Cape Verde and Mauritius are forging ahead with blue economy initiatives such as fisheries and aquaculture that promote economic growth and improve livelihoods while preserving marine ecosystems. Under new management, Guinea’s iron ore mines are reshaping value chains in order to optimise value retention. The continent’s $58.4bn creatives industries, particularly from Nigeria, lead the way in shaping opportunities for youthful entrepreneurship. We must ensure that Africa can capitalise upon this once-in-a-generation opportunity. And enhanced credit ratings can hold the key to unlocking requisite and affordable financing. In fact, Africa had the lowest default rate at just 1.9%, versus that in Eastern Europe (12.4%), Latin America (10.1%), North America (6.6%), Asia (4.6%), and Western Europe (4.6%) , based on project loans originated in 1983-2018 from consortium members.
The outcomes of the 4th Financing for Development Conference (FfD4) are being watched closely across Africa, especially by the 751 million Africans who live in countries that spend more on repaying exorbitant interest rates on debt than they invest in health and education, because creative and targeted development financing initiatives could lower sovereign borrowing cost and make it easier for them to accelerate progress towards the 2030 Sustainable Development Goals and the African Union’s Agenda 2063.
Yes, governments on the continent must do their part. Strong data systems, coherent debt strategies, and consistent engagement with rating agencies are essential. But so is global reform. The institutions that set the terms of access to capital must open the books on how ratings are assigned and commit to leveling the playing field.
Strategic partnership is key to delivering results in credit ratings. No institution is big enough to solve this issue, which is why UNDP, and its partners are engaging with the big three rating agencies and private sector investors. The ratings agencies support our capacity building work and are also open to suggestions on methodological improvements. The private sector provides both the demand for more accurate credit ratings as well as feedback from investors on the quality of ratings. African credit rating agencies have a critical role to play, adding granular data and important context often lacking in global ratings of African economies.
If we want a future that is fair and sustainable, we must fix how we value the present. And that starts by rating African countries differently.
source: african.business
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