By Coletta Wanjohi
The creditworthiness of African countries being determined primarily by three global agencies – Standard and Poor's (S&P), Moody's, and Fitch – is increasingly becoming a sore point across a continent that often feels hard done by these risk ratings.
President William Ruto of Kenya mirrored Africa's anguish when he spoke recently of "arbitrary desktop ratings with no tested empirical facts".
"Credit rating agencies should not be used as the new agents of extorting emerging economies with procured risk ratings that distort interest rates, making debt servicing unbearable," he said.
Since 1994, South Africa became the first in the continent to be rated for creditworthiness; at least 32 countries have received assessments from either of these global credit agencies.
With time, a consensus has been building among African countries that the three agencies have been "unfair" in their ratings.
The United Nations Conference on Trade and Development (UNCTAD) says misleading assessment makes African countries repay more by way of interest on debt than would have been required had the ratings reflected the reality of their respective economies.
“African countries are paying eight times more interest on loans than their European counterparts, and four times more than the US on account of distorted assessment by global credit agencies," says Rebeca Grynspan, secretary general of UNCTAD.
Single narrative
A credit rating is described as an independent assessment of a country's creditworthiness, giving investors an insight into the level of risk associated with investing in the debt of a particular nation, plus any political risk.
However, the criticism over credit rating agencies’ enjoining mainstream monetary policies and leading countries into excentric dependent economic structures tears between whether such agencies fully implement the independent assessment.
"The importance of credit ratings that more accurately reflect economic fundamentals for Africa cannot be overstated, as it directly affects the cost of borrowing and has significant implications for both financial and developmental outcomes," states a recent report by the UN Development Programme.
A 2023 report by the United Nations Development Programme shows that "African countries could save up to US $74.5 billion if credit ratings were based on less subjective assessments."
"Beware of single narratives," warns Ken Gichinga, chief economist at Mentoria Economics, a Kenyan business analytics consulting firm that develops business strategies for companies across Africa.
"If we have agencies using the international spectrum only to make decisions, that may be dangerous. Some agencies gauge countries based on the prominence given to governance; others do so based on macroeconomic performance. Hence, an investor doesn't have a united spectrum," says Gichinga.
In 2023, S&P, Moody's and Fitch downgraded Ghana, Nigeria, Kenya, Egypt and Morocco. Nigeria and Kenya rejected the ratings, arguing that the assessment of their creditworthiness failed to consider domestic factors in terms of economic performance.
"I don’t think these credit rating agencies are really that big an issue," argues Erick Mokaya, founder of Mwango Capital, an economic digital platform. He says these credit agencies generally reflect on what tangible changes need to happen in the economy.
"You can disagree with them once in a while, but more often than not, most rating agencies are paid by countries to do the assessment. Hence, they can disagree with them, but not to such a great extent."
An African agency
A joint report by the Africa Peer Review Mechanism and the UN Economic Commission for Africa accuses Moody's, Fitch and S&P of making "significant errors in their ratings". Yet, they continue to influence global financing decisions and the flow of capital.
In 2019, the African Union started creating an African credit rating agency. However, having a continental rating agency as a feasible alternative remains on paper.
Mokaya says the fact that the three international credit agencies have not been replaced by international competition means it will be "tough" to form one easily.
"How neutral will an African continental credit agency be? Will it give an African country good ratings even if the data suggests it needs to improve economically?" he wonders.
Other experts say that for any continental outfit to succeed, the first principle would be to set assessment parameters relevant to Africa.
"We see a few African-owned rating agencies coming up, but they will have to build muscle in market analysis and forecasting," economist Gichinga explains.
“For them to be credible, they have to go beyond just giving letter grading. They need to show their depth of understanding in global economics analysis by using the data they can access."
As the continent awaits a possible continental credit rating agency, experts suggest that an interim solution would be to gather and disseminate as much data as possible among the current international rating agencies in a bid to get a fairer assessment.
This will likely reduce assessment distortions that make Africa appear like a premium risk to investors and lending institutions.
