Calls grow for an African credit ratings agency

As African countries search for capital to close the continent’s $100bn (R1.8-trillion) infrastructure financing gap, the idea of starting an African Credit Rating Agency (AfCRA) to reduce the cost of capital is gaining traction.

With new multilateral ties taking shape on the global stage and established economies scrambling to strengthen ties with Africa, the continent has called for changes in the sovereign credit rating, saying unfavourable assessments by agencies such as Moody’s, Fitch, and S&P make it harder for them to access capital and subject them to high rates.

Speaking to Business Times on the sidelines of the Infrastructure Africa Symposium recently, Zambian minister of urban development & infrastructure Charles Milupi said the country’s debt challenges crowded out financial resources that the government wanted to use to develop catalytic infrastructure.

“We recognise that Africa ... in fact third world countries, are at a disadvantage because of how [rating agencies] rate us, sometimes unfairly, and as a result of that the cost of capital in Africa is very high. We have said, going forward, [for] those who want to work with us, we have four criteria.

“First, we want [the] cost of capital to be the right cost. We are poor. Why should it cost us much more to get capital? Two, technology. We want to have access to world-class technology at the right cost. Three, we want to exploit natural resources, but we don’t want them going out as raw material. Fourth, when we have investments ... we want our people involved.”

We recognise that Africa ... in fact third world countries, are at a disadvantage because of how people that rate us, sometimes unfairly, and as a result of that the cost of capital in Africa is very high 

—  Zambian minister of urban development and infrastructure Charles Milupi

Calls for an AfCRA have grown since the African Peer Review Mechanism meeting in Zambia earlier this year, where delegates agreed that such an agency should be established and launched by the end of this year.

The organisations believe that an AfCRA will counter the impact of the “big three” sovereign credit ratings agencies on the cost of capital and introduce methodologies favourable to the economic realities of African and developing countries.

Milupi said it took a lengthy set of consultations for the Zambian government to reschedule its debt of about $22.5bn and achieve a $800m “haircut” from bondholders and, while there was relief, the default was about four years ago.

While last year’s Brics summit in Johannesburg made no specific resolutions to establish a Global South-friendly credit ratings agency, it encouraged multilateral financial institutions and international organisations to play a constructive role in building global consensus on economic policies.

Pan-African Capital Holdings chair Iraj Abedian said while he welcomed the idea, he was not convinced that an African credit ratings agency’s framework or methodologies would differ in a way that its objective ratings would make capital more accessible for African economies.

“It’s a political project. In terms of the fundamentals of economies and social and financial markets, it’s going to make extremely little difference. It’s like saying you will go on an annual health check-up and if your blood pressure is too high, it’s too high ... somebody has to tell you.

“African or Asian agency suggests that an African physician will understand your body better than an Asian or a Mexican one. The established ratings agencies have a framework which is not hidden, so it’s unclear how this agency would be different.”

Still, he said, the urgency for affordable and accessible capital for African economies is as desperate as ever.

Delivering a recent address in Cape Town, minister of public works and infrastructure Dean Macpherson said South Africa’s public sector investment into infrastructure had to increase from 5.4% of GDP in 2019 to 10% in 2030.

Department of trade, industry & competition acting head of investment promotion Yunus Hoosen told Business Times Brics Plus strongly indicated the importance of making more options available for African nations.

“Within the Brics Plus, we’ve established the New Development Bank, which focuses particularly on [the] financing of infrastructure projects and there are a few members of Brics from the African continent. I am sure that there are significant opportunities to finance infrastructure projects through that development bank itself.”

He said he was supportive of any initiative that would make capital more accessible for African nations. “There’s always lots to do. There’s always more to do. If the capital is cheaper, we must go for it.”

Development Bank of Southern Africa group executive of origination and coverage Mohan Vivekanandan said the real test of an AfCRA would be whether African and global institutional investors regarded the institution as having credibility and independence.

A Moody’s spokesperson said the agency welcomed new entrants to the credit ratings agency space, as market needs are best served when a diversity of views compete based on analytical rigour and quality.

“Moody’s’ role in sovereign debt markets is to objectively assess credit risk using a transparent methodology to assign ratings that reflect the likelihood an issuer will meet its debt obligations on time and in full.

“We stand by the performance of our sovereign credit ratings, the application of our global methodology, and the rigorous processes we employ to ensure their accuracy, independence, and integrity.”

S&P Global Ratings said it welcomed competition because the market benefits from diverse opinions on credit risk that are independent, transparent, and comparable across asset classes and geographies.

“It is our job to act with objectivity and transparency as we provide our point of view and to call credit risks as we see them. We are committed to the highest standards in our ratings activities, and our opinions and measures of risk are rooted in our deep experience.”

S&P said the correlation between the development of sovereign and credit ratings exists because advanced economies display stronger levels of transparency, policy predictability, flexibility, and a higher wealth level as expressed by their GDP per capita.

Fitch Ratings declined to comment.