The African Union (AU) is preparing to inaugurate a new credit rating agency for the continent in the upcoming year, to tackle concerns regarding the fairness of current credit ratings assigned to African nations, according to an official who spoke to Reuters.
The proposal follows complaints by African leaders that rating agencies have been unfair to African nations.
In July of this year, during the 5th Ordinary Session of the Specialized Technical Committee, which centered on “Improving Africa’s Access to Capital: Debt Management and the Rising Influence of Credit Rating Agencies,” AU finance ministers gave their approval to a resolution endorsing the establishment of a new agency.
Tekedia Mini-MBA edition 14 (June 3 – Sept 2, 2024) begins registrations; get massive discounts with early registration here.
Tekedia AI in Business Masterclass opens registrations here.
Join Tekedia Capital Syndicate and invest in Africa’s finest startups here.
This initiative was spearheaded by the African Peer Review Mechanism (APRM), a branch of the AU established last year to promote governance improvements across the continent. It is expected that the full AU executive council will also ratify this resolution in February.
Credit ratings function as a tool to evaluate the probability of a borrower defaulting and play a crucial role in determining the terms under which financial institutions and other entities extend loans.
The proposed agency, which will operate within Africa, aims to offer a new perspective on assessing the risk associated with lending to African countries.
“Our goal has not been to replace the big three…we need them to support access to international capital. Our view has been to widen the diversity of opinions,” Misheck Mutize, who serves as the lead expert for country support on rating agencies within the African Union, told Reuters.
Mutize explained that this agency would furnish investors with contextual information when they are making decisions regarding the acquisition of African bonds or extending private loans to African nations.
“Our goal has not been to replace the big three…we need them to support access to international capital. Our view has been to widen diversity of opinions.
“We know the big three follow the opinion of other smaller ratings agencies. They’ve acknowledged that other smaller ratings agencies have got an edge in understanding domestic dynamics,” Mutize said.
More than a dozen African countries presently have outstanding international bonds.
The African Union, in collaboration with member nations such as Ghana, Senegal, and Zambia, asserts that the three major credit rating agencies—Moody’s, Fitch, and S&P Global Ratings—have exhibited bias in their assessments of lending risks in African countries. They argue that these agencies tend to downgrade African nations more swiftly, especially during crises like the COVID-19 pandemic.
However, all three of the major rating agencies vigorously deny any bias and maintain that their rating methodologies remain consistent across continents.
The rating agencies are yet to comment on the development. But earlier, Ravi Bhatia, the lead analyst for sovereign ratings at S&P, affirmed that the agency applies the same criteria uniformly across all regions.