The Africa Credit Rating Agency has formally launched, culminating an effort that began in 2017 when the African Union tasked the African Peer Review Mechanism with examining credit ratings’ role in the continent’s economies.
By 2019, African institutions were studying the feasibility of creating their own agency.
Feasibility and design work followed, then political endorsement of a private-sector-driven model, the selection of Mauritius as its headquarters, and now the launch itself.
The African Peer Review Mechanism frames the new agency not as a challenger to Moody’s, S&P Global Ratings or Fitch, but as complementary to them.
Its mandate is to produce what it describes as fair, independent and contextually accurate assessments of African economies.
African institution-building
The agency’s creation belongs to a period in which continental institutions have been built or expanded across several domains.
The African Union also secured a stronger formal voice within global economic governance, becoming a permanent member of the G20 in 2023.
The rating agency’s function differs from these bodies. It does not lend money, as a development bank does, or facilitate payments and trade rules, as the continental trade architecture does.
It is being built to evaluate creditworthiness.
The why
Governments and businesses across Africa have ambitions for infrastructure, industrial capacity, human capital and resilience against shocks. These ambitions outrun what domestic revenue alone can finance, typically requiring external financing.
Access to capital markets, and the price paid for it, depends heavily on how creditworthy a borrower is judged to be.
Sovereign credit ratings supply that judgment. A rating is an opinion, issued by one of a small number of specialist agencies, about the likelihood that a borrower will repay its debts fully and on time.
Ratings run on a scale from secure investment grade categories down through progressively riskier speculative-grade ones. Speculative grade ratings are associated with markedly higher borrowing costs than investment grade ones.
The most consequential distinction in this system is the boundary between investment grade and speculative grade, conventionally set at BBB-, or its equivalent Baa3 on Moody’s scale.
Economists at the International Monetary Fund, Laura Jaramillo and Catalina Tejada, examined 35 emerging market economies between 1997 and 2010.
They found that crossing into investment grade status reduced borrowing spreads by a substantial margin, compared with only 5%-10% for upgrades within investment grade, and no measurable effect within speculative grade.
The threshold matters because many institutional investors operate under mandates forbidding speculative grade debt. Crossing it can change the pool of buyers willing to lend as well as the price.
Sovereign creditworthiness can also influence financing conditions beyond government itself.
Banks, state-owned enterprises and private companies can find their own borrowing conditions affected by changes in sovereign risk, particularly when their credit profiles are closely tied to the state or the domestic financial system.
A downgrade tends to reach into the financing conditions facing the wider economy, often at the moments when governments and businesses most need room to respond, such as external shocks or a pandemic.
Ratings have also become embedded in the rules of finance itself. In the US, they are used to help set capital requirements for regulated institutions, and that recognition has since multiplied across securities, banking and insurance regulation.
Once ratings are written into rules determining what standard of debt regulated institutions may hold, a rating becomes part of the machinery governing market access, not simply an opinion offered to it.
UN Trade and Development (UNCTAD) has reported that developing countries paid, on average, around 200 basis points more than developed countries for internationally sourced capital between the start of 2012 and May 2023.
Years of discussion about African development finance, borrowing costs, capital market access and reform of the international financial architecture have often treated creditworthiness assessment as one input among many, acknowledged and debated but rarely built around directly.
The Africa Credit Rating Agency converts that discussion into an institution with a headquarters, a regulatory process and a launch date.
The real questions
Whether the agency succeeds, whether it challenges the big three, and what happens if it fails are all valid questions.
Daniel Cash, who has witnessed the development of the new agency over the years, writes that he sees the real questions differently at this point.
He is eager to see what this act of institution-building can contribute to African agency within the global financial architecture, and excited to see African leaders organise around an issue that directly affects their citizens.
He describes himself as personally humbled by the commitment of those working behind the scenes to build an institution for which there is no obvious blueprint.
Reaching the point of launch deserves to be recognised as an important milestone for the credit rating field, and above all for African institution-building.
Source: The Conversation
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