EDITORIAL: It’s not just the ratings agencies

It’s not entirely clear why the Vatican opted to sponsor a report on Africa’s cost of capital. But with the global finance for development conference set to start in Spain next week and the G20’s finance track set to meet in Durban next month, the Vatican-funded Jubilee Report is timely.

SA has put the high cost of capital high on the agenda of the G20 for this year’s presidency, because debt costs so often cause debt distress in Africa and other developing regions and because of their importance given the continent’s urgent need for capital for development and infrastructure.

One of the Jubilee Report’s findings is the popular, even populist, one about global ratings agencies, on which it places much of the blame for the high cost of capital. Ratings exert “outsize influence on sovereign debt dynamics”, the report charges. It urges reforms to the landscape of private credit agencies and calls for the creation of a new global public ratings agency that will rate African sovereigns more in line with their actual risk profiles.

Calling out the big global ratings agencies is hardly a new pastime, nor one confined to Africa. Indeed, as the UK-based think-tank ODI puts it: “Everywhere in the world, the ‘Big Three’ credit ratings agencies — Fitch, S&P and Moody’s — have a way of rubbing people the wrong way.” But the so-called Africa risk premium has become a particular issue for the continent in recent years, with concerns that the ratings agencies overestimate countries’ risk of default, fuelling negative perceptions that cause investors to demand returns that are out of proportion to the actual risks of lending to African countries. The African Development Bank has argued that Africa is one of the world’s least risky continents. It has called for the creation of an African Rating Agency.

The CEO of Africa’s largest banking group, Sim Tshabalala of Standard Bank, has chimed in, as he did again this week, calling out the ratings agencies saying there was a gap between the economic fundamentals and the ratings attributed to particular countries.

The context shouldn’t be forgotten: many African countries spend more on debt costs than on education and health, as the Jubilee Report points out. But that is not only because of high debt costs. It is because debt itself is high, with public debt levels having soared globally and on the continent over the past decade.

The IMF found in a 2023 study that Sub-Saharan African countries did indeed pay more to borrow on global bond markets than their peers elsewhere. But the difference was explained away once you took into account their particular challenges — such as a lack of transparency on the public finances, low levels of financial development and poorer-quality public institutions, as well as large informal sectors.

That suggests that countries could and should do a lot more in their own right to address negative perceptions by ratings agencies and investors. Not only do they need to work on developing their own financial markets, particularly their local currency bond markets, but they also need to manage their public finances better, and more transparently. As Tshabalala said, countries must get their own act together to provide investors and ratings agencies with the information they need to assess risk properly.

Crucially, too, it’s not just ratings agencies that shape the cost of credit. And creating more of them won’t help to solve the problem. As S&P has pointed out, ratings are just one input into investors’ risk-reward assessments. Investors are free to choose whether to put their money into a country, and at what price. African countries can work harder to make themselves attractive and transparent, not to mention less dependent on external financing. But they will still need plenty of help from abroad and the G20 can and must help, as SA’s agenda intends, by pushing for “bigger and better” multilateral development institutions that can do more to drive affordable capital into the continent, as well as for broader reforms to global finance to enable support for Africa’s development.

Much as everyone loves to hate the ratings agencies, the problem is more complex, as is the solution.