A body affiliated to the AU is pressing ahead with plans to explore the establishment of a credit ratings agency as members, once again, question the integrity of international agencies.
An ad hoc technical committee, led by the African Peer Review Mechanism (APRM), held its second meeting this month in Johannesburg to solicit expert input on concerns about ratings agencies, mainly S&P Global Ratings, Moody's and Fitch Ratings — the three largest worldwide.
Ratings bodies were blamed for not accurately rating risky mortgage-backed securities that led to the 2008 economic recession, at the time casting doubt on their integrity.
Now the AU is reviewing the engagements between ratings agencies and African governments and seeking solutions to resolve the concerns over a higher degree of adverse ratings and outlooks that have been assigned to many states on the continent.
McBride Nkhalamba, head of research at the APRM secretariat, said a "whole host of proposals" had been received from AU members and other stakeholders, which would be tested by policy organs and eventually gazetted to form an official position.
Creditworthiness has a huge impact on investment.
— Eddy Maloka
CEO of the APRM
The ad hoc committee also discussed the parameters of a feasibility study into an African credit ratings agency, but the study "is not the final determinant" of whether an agency would be set up, Nkhalamba said.
In 2017, the AU directed the APRM to provide support to member states in terms of policy options, strategies and actions in response to regional and international credit ratings agencies. A framework to guide this support is also being considered.
Eddy Maloka, CEO of the APRM, said in opening remarks at the meeting: "The creditworthiness of countries has a huge impact on attracting foreign direct investment. It also has a direct bearing on the cost of funding on the sovereign debt."
Among concerns AU members have raised are the integrity of the methodologies used to rate African governments and the consistency of the ratings between similar circumstances in Europe and Africa.
An example cited was the better ratings for sovereigns such as Greece, Portugal and Italy though they had crisis conditions.
But ratings agencies have apparently refused to upgrade the fastest-growing African countries that are performing well, such as Ethiopia and Rwanda, according to a concept note compiled by the APRM.
The note further raised issue with junk status rating, saying it was inaccurate because a high number of African countries continued to receive long-term concessionary loans not subject to credit ratings.
Also, almost all sovereign bond issues on the continent were oversubscribed, proving investor interest despite the junk status ascribed by ratings agencies.
Political risk
Agencies are also accused of overemphasising political risk in the rating criteria, which undermines potential growth embedded in African economies.
But S&P and Fitch, which both have SA in junk rating, have rejected the allegations.
S&P said that "without exception" it used "one set of rules for everyone".
"The market values S&P Global's sovereign ratings because of their consistent and predictable performance, including across the range of our ratings on African sovereigns."
Fitch said it relied on a proprietary, quantitative sovereign rating model (SRM) that was applied consistently across developed-market and emerging-market economies. "The factors that are most heavily weighted in the SRM are structural features, including quality of governance, which is encapsulated by a composite of the World Bank's governance indicators.
"This includes political risk amongst many other factors, and has a weight of 20% in the SRM."
Nkhalamba said the process would be rigorous and the earliest an official position should be expected is next year. "Anything else is speculation."
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.