African countries are heavily indebted to the tune of $1.8 trillion as at 2022, according to data from the United Nations Conference on Trade and Development (UNCTAD), and in 2024 alone, these countries would pay $163 billion in interests.
Speaking at the recently held High-Level Dialogue on the establishment of an Africa Credit Rating Agency, Dr Claver Gatete, the Executive Secretary of the United Nations Economic Commission for Africa (ECA) says as a result of the situation, the importance of credit ratings for Africa’s economic progress is undeniable.
He notes that in spite of that, chronically low ratings from the three international rating agencies, S&P Global Ratings (S&P), Moody’s, and Fitch Group, have continued to underserve Africa.
He noted that currently, out of 33 African countries with sovereign credit ratings from at least one out of the three major rating agencies, only two (Botswana and Mauritius) are in the investment grade.
“Moreover, three African frontier market countries (Ethiopia, Ghana and Zambia) have defaulted on their sovereign debts. All three have approached the G20 Common Framework for debt treatment, but the process has been lengthy and complex,” he said.
Dr Gatete points out that Africa faces a massive debt challenge, as the continent is expected to pay $163 billion in 2024 just in interest.
“Multiple downgrades from already low levels have exacerbated Africa’s current fiscal challenges. The fiscal space has been put under pressure by rising borrowing costs, reduced investor confidence, triggered capital flight and aggravated risk perceptions. Credit rating downgrades have been a major contributor to these factors,” he said.
He indicates that in 2023 alone, 17 downgrades were recorded across nine African countries, with only a single upgrade granted to the Republic of Congo.
“The fallout of these actions includes high debt repayment costs, with approximately 60 per cent of countries allocating more resources to external debt interest payment than investments in social and climate actions. All these are occurring when Africa is in urgent need of resources to achieve the SDGs and Agenda 2063 targets. These trends cannot continue if we mean business about Africa becoming the global solutions powerhouse.
That is why we cannot relent in pushing for the reform of the global financial architecture as we go to the Summit of the Future,” he said.
Acknowledging the profound impact of credit ratings on African economies, Dr Gatete said credit ratings reflect agencies’ opinion on countries’ economic fundamentals, fiscal strength, and the resilience of their financial systems.
“Being in the ratings business for over 100 years, the three credit ratings agencies have gained significant credibility and trust of various stakeholders, and especially investors. Credit ratings are also important for the countries, especially as they strive to gain and improve access to capital markets.
Against a backdrop where Africa’s most pressing need today is how to finance its development, we must invest in the development of our domestic markets,” he said.
According to Dr Gatete, while a functioning Africa Credit Ratings Agency (CRA) brings both cost and benefits, on balance it is a very positive development.
He also noted that, however, managing and improving credit ratings is a complex process that requires coordinated efforts at national, regional and continental levels. It will be also important to manage expectations regarding what the Africa CRA could achieve in terms of commercial success and investor trust in the near term, as the market continues to be dominated by the three largest agencies.
“It is therefore imperative that we address the fundamentals; First, at the national level, we must focus on strengthening macroeconomic and overall governance to bolster our economic stance; Second, improvements in data quality, availability, and transparency are crucial, as is better coordination among government entities. We must enhance the technical capabilities and promote deeper engagement of governments with rating agencies,” he said.
Thirdly, he said African regulatory environment for the ratings process matters and learning from best practices is critical, noting that an experience of Europe in establishing a regulatory agency following a debt crisis more than a decade ago can help bring to attention good practices while avoiding pitfalls.
He also said, whilst several countries have already established domestic regulatory bodies for rating agencies, continental harmonization and optimization remain critical.
“This will ensure that African nations speak with one voice, advocating for transparency, fairness and accountability in both rating assignments and processes.
We must also ensure that mechanisms for recourse and oversight are in place when disagreements arise with rating agencies,” he added.
Dr Gatete said as African countries adopt the Pact for the Future, there should be no reason why Africa cannot look ahead with optimism.
“An Africa Credit Rating Agency offers a strategic opportunity to complement the existing global rating agencies. It will serve as an important capacity building tool for African institutions involved in the rating process and prepare them for future interactions with the agencies.
We can engender local expertise, expand the corporate ratings market to attract new investments, and offer an alternative, African-centered perspective based on rigorous research.
If well done, these actions can help build market confidence and trust,” he said.
He stated that it is for these reasons that the United Nations Economic Commission for Africa, is working with governments and partners like the APRM to produce the annual Africa Sovereign Credit Ratings Report, which provides an overview of rating actions and offers policy recommendations.
“Furthermore, we are developing national capacities through e-learning trainings and targeted technical assistance, with countries such as Mali, Guinea and Ethiopia having benefitted from this. We also cooperate with other UN agencies working in this area, as shown by our recent participation in a workshop organized by UNDP,” he said.
Urging African countries to work together to define the strategic and operational frameworks of this envisaged rating agency, he encouraged dialogue, exchange of innovative ideas, and the building of strong partnerships.
“I am confident that this initiative will not only enhance Africa’s credit ratings and ease access of our countries to international bond markets, but it will also contribute to the broader development of our financial markets,” he said.
By Emmanuel K Dogbevi
