S&P ups its presence in Africa to counter critics

The Paris-based president of S&P Global Ratings says the ratings agency is increasing its presence in Africa, including its Johannesburg hub, in an effort to be more visible and counter perceptions that ratings agencies contribute to the continent’s high cost of capital.

SA’s Group of 20 (G20) presidency has made the cost of capital one of its focus areas amid calls in some quarters for an African ratings agency to challenge the “big three” global players and perceptions that international investors impose an unjustified “Africa risk premium”.

S&P Global Ratings president Yann le Pallec said credit ratings were just one input into investors’ pricing of African debt and S&P used a consistent, globally comparable and transparent methodology across all 140 sovereigns it rates, including 26 in Africa. However, it recognised it needed to be more visible and provide more education.  

“Starting a couple of years ago, we heard it loud and clear from the African community, both the states and the multilaterals, that their perception was we were not present enough on the continent, that our methodologies were a black box ... so we are mobilising more people, more domain experts, to come to the continent regularly,” Le Pallec said.

He was in Johannesburg recently to give the keynote address at S&P’s annual conference after leading a “very senior” team to the African Development Bank’s (AfDB) recent annual meetings in Abidjan.

This was the first time S&P brought such a senior delegation to the AfDB, which Le Pallec said was an incredible platform to increase the ratings agency’s visibility and to “send a strong message that, though it was in Abidjan, pardon the pun, we’re not hiding in our ivory tower”, he quipped.

“We welcome public scrutiny. Challenge us,” Le Pallec said. He emphasised, however, that ratings agency methodologies were public and stringently regulated, and that the cost of capital could not be reduced to just credit ratings.

“We don’t make the decisions. We don’t dictate the spreads in the market. We know that the credit rating is an important component, but we’re one of the cogs of a global ecosystem with many players, and global investors are free to put their money where they want, largely driven by their own individual risk return appetite,” he said.

Ratings agencies rely heavily on countries’ own economic data to feed into their models and in some cases will refuse to rate countries that cannot provide timely, high-quality information, as many poor countries struggle to do. Le Pallec pointed to significant improvements in recent years in the quality and availability of data from a number of African countries.

Ratings have made headlines globally in recent weeks, with Moody’s becoming the last of the big three ratings agencies to strip the US of its top-tier credit rating, citing the ballooning debt burden. S&P had already downgraded the US from triple A to double A in 2011, when US politics became very polarised, with fewer bipartisan agreements in Congress and repeated budget stalemates that raised questions over the predictability of US political practices and institutional framework.

S&P sees the unpredictability of global trade policies as the major risk to the global economy and to ratings. But it has been cautious about making changes to its base case, as it waits to see where tariffs will land. “We are treading a very fine line, but it’s not the first time ... we’ve had crisis situations that really required the same approach, which is to be forward looking, but based on facts and projections you can trust, so that you’re not behind the curve but at the same time not pre-empting or second-guessing what will come to pass,” Le Pallec said. “There’s no way we’re going to downgrade any entity on just the threat of tariffs until we know they’re real and will be enforced.”

S&P had cut its global growth forecast by 0.3 percentage points on May 1, but after positive US and China tariff moves in mid-May it said, assuming these held, it would raise its GDP forecasts closer to its previous base case in March and would not update forecasts at this juncture.

Le Pallec said last week that the agency expected Africa to grow much faster than advanced economies in coming years, with emerging market and frontier economies expected to contribute almost two thirds of global growth by 2035.

S&P Global’s Johannesburg office is the only one on the African continent, employing more than 200 people. All the group’s divisions are represented here, including its global market intelligence business (which is the firm’s largest division, providing data and information for clients), its commodities insights and credit ratings businesses, and S&P Dow Jones — the smallest but best known division, producing indices such as the iconic S&P 500.

However, many of its African ratings are done out of other offices, including Paris, Dubai or London — where the current lead SA sovereign analyst Ravi Bhatia is based.  

joffeh@businesslive.co.za