A report commissioned by the late Pope Francis has called for the reform of private credit ratings agencies, saying they exert “outsized influence on sovereign debt dynamics”, with the matter set to be hotly debated during SA’s presidency this year of the Group of 20 (G20).
SA has made the high cost of capital one of its G20 focus areas, amid perceptions that ratings agencies and international investors impose an unjustified “Africa risk premium” that makes it costly for African countries to borrow on the market.
The Vatican report was authored by the Jubilee Commission, which includes a group of 30 experts such as Nobel laureate and Columbia University Prof Joseph Stiglitz, former Argentinian economy minister Martín Guzmán and Haruhiko Kuroda, a former Bank of Japan governor.
The report, released on Friday, is titled “The Jubilee Report: A blueprint for tackling the debt and development crises and creating the financial foundations for a sustainable people-centred global economy”. Its findings are expected to be discussed at the fourth International Conference on Financing for Development in Seville, Spain, which starts on June 30, at the UN General Assembly in New York, the US, in September, and at the G20 leaders’ summit in Johannesburg in November.
The report found that 54 developing countries spend 10% or more of their tax revenues on interest costs.
Since 2014 the average interest burden for developing countries has almost doubled, with debt distress most severe in Africa, the only region where public debt has been growing faster than GDP, the report found.
“Approximately 57% of the continent’s population — 751-million people, including nearly 288-million living in extreme poverty — reside in countries that spend more on servicing external debt than on education or healthcare,” it said.
Fear of downgrades
It identified factors behind the surge in debt, with the role of ratings agencies being one of them. It said the fear of downgrades discourages timely restructurings and reinforces stigma, and even multilateral development banks have circumscribed their activities over worries about downgrades.
The report said that while investors need to know the risks associated with different investments, the evidence of the accuracy of credit ratings agencies remains weak.
“This gives enormous power to these agencies, whose interests typically do not coincide with a broader public interest or the interests of developing countries.”
The report said a partial remedy to problems it has identified with ratings agencies is the creation of a global public credit rating bureau and “legislative reforms that allow this public rating body to serve as a substitute for the private rating”. “Advanced countries have delegated responsibility for risk assessment to these private bodies in their regulatory frameworks, for instance allowing certain fiduciaries to invest only in securities for which these private bodies give an investment-grade rating.”
However, S&P Global Ratings president Yann le Pallec countered negative perceptions on a recent visit to Johannesburg. He said while S&P welcomed public scrutiny, ratings were just one input into investors’ pricing of African debt.
“We don’t dictate 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,” Le Pellec told Business Day in an interview.
He emphasised, too, that the agency used consistent, transparent methodologies across all 140 countries it rated.
Call for reforms
The Vatican-backed report also calls for the reform of the IMF and other multilateral institutions, urging these bodies to end the approach of promoting austerity to maximise the repayment of external debt.
“IMF-supported programmes have often emphasised import compression and fiscal austerity in times of recession. These policies may generate foreign exchange in the short term but undermine long-term development and recovery,” the report reads.
“They exacerbate poverty, stall climate action, and erode social trust. Instead, rather than amplifying external shocks, multilateral institutions should support countercyclical programmes that stimulate recovery, reduce vulnerability, and support investment in a just and green transition.”
It was a concern that to meet obligations to external creditors, debt-distressed countries are sacrificing investments in education, healthcare, infrastructure and climate resilience, it said.
The study calls for the promotion of local currency financing, urging developing countries to invest in building robust domestic capital markets and promote financing in local currencies to reduce exposure to currency mismatches and external shocks.
“In the absence of a global legal framework for sovereign debt restructurings, the possibility of just debt resolutions depends, in large part, on the will of all, including the most powerful, to act in the spirit of solidarity.”
‘Unprecedented debt crisis’
Pretoria has noted that “Africa is grappling with an unprecedented debt crisis”, and “there is a need for bold and urgent action on a comprehensive plan to deal with the high levels of debt of Africa and other developing countries”.
Standard Bank, Africa’s largest lender by assets, has publicly called out ratings agencies for overestimating Africa’s risk profile, which it says burdens the continent with high debt costs.
This year African countries will pay close to $89bn in external debt service costs.
SA took over from Brazil as G20 president in December, with the US next in line when SA’s presidency ends in November. The AU was accepted as a permanent G20 member of the bloc in 2023.
With Hilary Joffe
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