Call for change in way credit ratings agencies deal with Africa

Leaders of the Global South and economists have slammed credit ratings agencies for what they call “arbitrary” sovereign ratings and requirements, which raise the cost of capital for African and other emerging markets.

Speaking at the 2025 AGM of the African Export-Import Bank (Afreximbank) in Abuja, Nigeria, US economist Jeffrey Sachs said ratings agencies conduct sovereign ratings differently from company ratings, using “crude, cookie-cutter” methodologies based on “useless indicators”.

“Africa's growth prospect is actually the highest in the world, something that ratings agencies don't understand and don't even incorporate into their models,” Sachs said. “They don't know it, in fact.”

Earlier this month, credit ratings agency Fitch downgraded Afreximbank from BBB to BBB- with a negative outlook.

Sachs said African governments individually needed to show ratings agencies their scenarios for the next 25 years to demonstrate why the African markets will not default. He urged the agencies to adjust their approach to ratings.

“The ratings agencies need to get that right. And so this is work both on the African side and on the ratings agency side. I'm somewhere in between the schools of thought, and I see that there is a deal to be made. But it requires some hard work to make that deal. The ratings are wrong but it's not a matter of just saying that, it's a matter of showing that.”

Sachs said credit ratings agencies' use of the “sovereign ceiling” principle — where no company can have a higher credit rating than that of the country in which it is based — was just one example of how their rating models are “completely outmoded”.

Former prime minister of Jamaica PJ Patterson told the meeting that Global South developmental challenges — including infrastructure gaps, war and climate disasters, and poor education and health care, were worsened by declining access to affordable finance from traditional development financial institutions.

Arbitrary commercial credit ratings, which inflate the cost of borrowing, are derisking strategies that constrain our countries' access to the overseas intermediary and correspondent banking relations that have traditionally been crucial for financial outflows.

—  PJ Patterson, former prime minister of Jamaica

“Arbitrary commercial credit ratings, which inflate the cost of borrowing, are derisking strategies that constrain our countries' access to the overseas intermediary and correspondent banking relations that have traditionally been crucial for financial outflows,” Patterson said.

Samaila Zubairu, CEO of the Africa Finance Corporation and president of the Alliance of African Multilateral Financial Institutions (AAMFI), told the AGM on Wednesday that Afreximbank was a critical institution being subjected to “arbitrary” conditions by established ratings agencies. This undermined its transformational work.

“Afreximbank has become more than a bank,” Zubairu said. “It has become a pillar for African self-reliance and a first responder in moments when others hesitate ... Together, AAMFI members manage a collective balance sheet exceeding $70bn [R1.2-trillion] ... Africa has more than $4-trillion in domestic capital. The interesting thing is that more than $1-trillion of that is in non-banking assets.”

Rosa Whitaker, a US businesswoman who was the first assistant trade representative for Africa in former US presidents Bill Clinton's and George W Bush's administrations, told Business Times that the conditions of established ratings agencies were not designed with Africa’s economic realities in mind.

“Even the international credit ratings were not designed with Africa in mind. So I am happy with the fact that Afreximbank has been a shock absorber of such and is pioneering the establishment of a credible international credit rating,” Whitaker said.

While she acknowledged the risk of credibility challenges in establishing a new credit ratings agency to rate African countries and institutions, she supported Afreximbank’s call for a new agency to provide fairer ratings to the continent.

The Fitch report said its rating of Afreximbank reflected increasing risk exposure related to sovereign lending, particularly to heavily indebted countries such as Ghana, Zambia and South Sudan, which are all undergoing, or emerging from, debt restructuring.

In response to the downgrade, Afreximbank said the rating “hinged on the erroneous view ... that the treaty establishing Afreximbank ... can be violated by the bank without consequences.” 

Denys Denya, a senior executive at the institution, told delegates that this year’s meeting was themed “Building the future on decades of resilience” due to recent reminders that various institutions have sought to “undermine” Afreximbank’s mission since its inception.

Calls from Afreximbank AGM delegates were in tune with a recently released Vatican report commissioned by the late Pope Francis that called for reform among credit ratings agencies, whose treatment of African banks raised the cost of capital for already poor economies.

The report from the Jubilee Commission, chaired by economist Prof Joseph Stiglitz, said credit ratings agencies exert “outsize influence on sovereign debt dynamics and developing countries face new risks, from climate change to the post-war international economic architecture”.

The report said rich countries have failed to live up to their promises to help developing countries and have markedly decreased their inflows into emerging market regions, especially inflows directed primarily at enhancing growth and reducing poverty.

Sim Tshabalala, CEO of the Standard Bank Group, told a B20 meeting in South Africa this week that African countries must “get their act together” to improve transparency and provide money managers and ratings agencies with the information they need to properly assess country risk.

The African Development Bank estimates that the continent needs $107bn a year to meet its infrastructure needs and can fund only about half of this, leaving an $85bn annual gap and a gap of about $30bn for South Africa.

Tshabalala added that the B20's task force would make recommendations to make it easier and faster to execute infrastructure on the continent and close the financing gap. — Additional reporting by Hilary Joffe

• Magubane was invited to the AGM as a guest of Afreximbank