Credit rating is a highly influential tool for attracting investment since investors channel their investments to destinations having low risks and avoid high risk countries. Downgrades make the host country pay more interest and higher insurance premiums. The hue and cry recently made by the African countries and the most recent appeal made by AU chairperson Macky Sall should be seen from this perspective that Africa should have its own credit rating agency.
Empirical evidence is there to support the assertion of the AU chairperson, particularly in the context of the Covid-19 pandemic and even before. Of the 54 countries in the continent, 32 are upfront against sovereign downgrades. That would mean 56% of the countries in the region are declared as high- risk destinations, while the world average is only 31%. Conversely, this would mean the counties having declared as high risk zones have to pay high rates of interest and higher insurance premiums while accessing funds. The high point is that African countries blame that sometimes the assessment are subjective, based on cultural and language issues and importantly wrong and biased assessment of the ground realities.
Impact analysis of sovereign downgrades have to be discerned. For instance, in 2020 November credit rating agencies Fitch, S&P and Moody’s lowered South Africa’s sovereign ratings into junk zone. South Africa currently has a debt of nearly US$260 billion, or 63.3% of the GDP. Its debt-to-GDP ratio, because of the downgrades, is expected to reach 90% by 2023. With the ratings downgrade, the cost of borrowing and servicing the debt are increasing and the government will either have to cut back on social spending or tax more, the least a developing country can afford to implement from a political angle .
A recent example is Ghana. In February this year, Moody’s downgraded Ghana’s long term currency sovereign rating, stating that the country was facing liquidity challenges. Country’s finance minister lamented that the downgrade was based entirely on inaccurate balance of payment statistics and causal discussions and desktop exercises, thereby meaning that it was bereft of ground level realties. There are other glaring complaints also, which are omitted for the sake of brevity.
The need for a pan -African rating agency was felt for quite some time. The African Union has been moving towards an African Peer Review Mechanism (APRM) as a precursor to establish an African credit rating agency. The APRM was given the responsibility to constitute a specialized technical committee to look into the matter back in 2018 because of the consistent bias towards African countries by Moody’s S&P and Fitch.
It is a fact that African countries need funds now more than ever before Because of two important things. Foremost is to come out of the pandemic blues, which devastated almost all economies. This was compounded by the vagaries still in operation emanating from the Russia- Ukraine war. The funds, mostly private equity, have to come from all over the world, mostly long -term ones, which move in accordance with sovereign ratings accorded by the rating agencies. Africa bets on two main funds-Green bonds and Euro bonds. Both funds have great bearing on Africa. To reduce the global carbon footprint, the world has to reduce the usage of fossil fuel and more of green energy. That needs newer forms of rare earth like cadmium, lithium and the like. Africa is a reservoir of these precious metals or alloys that can transform the ecological landscape. Can it leverage these inherent capabilities and potentials for better accessing funds?
Secondly, the continent should reduce its undue dependence on bilateral funds, which most often come with a lot of opaque and hidden conditions whether they are from East or West. Private equity funds normally free of such bearings since they flow to destinations where the risks are low and returns are high.
Last but not the least, considerable ground work has to be carried out to make the sovereign rating more acceptable and appealing. That needs professional handling of ratings by experts and analysts and not driven by any country-specific or region focussed agenda. That underscores the need for active involvement of organizations like AU, AfDB and AfCATA in evolving rating norms and other details to convert the aspirational goal into a real one.
