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Africa’s debt problems were high on the agenda at last week’s IMF-World Bank meetings. Around 20 low-income African nations are either bankrupt or at high risk of debt distress. And across the continent, high interest rates, soaring inflation and sluggish economies have made post-pandemic debt piles harder to shrink.
Regional policymakers reckon an “Africa premium” is also to blame. This, they say, is the additional cost nations face when raising finance, simply for being African. They argue it stems from bias and inaccuracy in the credit scores given by the “Big Three” American credit rating agencies, S&P Global, Moody’s and Fitch — which account for 95 per cent of the global ratings market.
In recent years, African finance ministers have increasingly voiced concerns over their credit ratings, and have called for the creation of the continent’s own scoring institution. Just this week, regional experts are meeting in Nairobi to discuss how to improve credit assessments across the continent. The African Union expects an African Credit Rating Agency (AfCRA) — which has been in the works since 2022 — to launch next year.
African nations do tend to have a higher cost of capital relative to peers with similar economic profiles. But it is hard to ascertain how much of this premium might reflect misguided perceptions, or realities around idiosyncratic political risks and structural economic challenges. Rating agencies also argue that they apply the same, rigorous debt sustainability framework to all sovereigns, whether in Africa or not.
That does not mean the complaints of Africa’s policymakers are baseless. Credit ratings are not an exact science, and the Big Three have quickly reversed credit opinions in the past. Rating agencies combine economic analysis — using metrics such as economic growth, debt ratios, and foreign reserves — with a qualitative assessment of policies, institutions, and political and geopolitical dynamics. All of these may have an impact on creditworthiness. But the quality and reliability of Africa’s national statistics is poor. The Big Three agencies also have limited on-the-ground presence in the continent, which raises doubt over their ability to conduct holistic assessments.
This means that even if there is no systemic bias against African nations, there could still be flaws in their rating methodologies. Last year, the UN Development Programme estimated that African nations could save up to $75bn in excess interest payments and forgone lending if the agencies based scores on a more “objective” credit model.
An Africa-led credit rating agency is no panacea, however. First, poor governance, a lack of market depth, and complications in restructuring loans are the main culprits for the continent’s indebtedness. The Big Three can be easy scapegoats. Second, a nation’s ability to repay its debts depends on more than economic models. That means judgments on issues like political dynamics are always necessary. AfCRA may lack credibility with investors if it is seen as too favourable to local debtors. Building trust will be crucial, given that most capital comes from outside the continent.
There could be merit in AfCRA if it was refocused to raise regional data quality and share analysis with the established agencies. The Big Three would also be wise to raise their presence in the fast-growing, young continent which is garnering more investor interest. Africa faces an enormous investment gap to tackle climate change and boost productivity, which means fair and accurate financing costs are essential.
Even if the assessment of Africa’s credit ratings can become more granular, the biggest drivers of its high borrowing costs will still remain. Regional finance ministers should not be distracted from important, but difficult, public finance reforms. These include improving tax collection and phasing out wasteful subsidies. Multilateral debt restructuring efforts must also continue. Indeed, it will take a lot more than Africa’s own credit rating agency to turn the continent’s cash flow problems around.