THE African Union (AU) is taking proactive steps to address concerns over the fairness of credit ratings assigned to African countries. According to an official statement made to Reuters, the AU plans to launch a new African credit rating agency in 2024. This agency will independently assess lending risks in African nations, with the goal of providing additional context for investors contemplating the purchase of African bonds or extending private loans.
Misheck Mutize, the lead expert for country support on rating agencies with the African Union, explained, ‘We already have quite a huge interest in the private sector to support the implementation of this,’ adding that they are targeting a formal launch in 2024.
The AU, along with leaders from member nations spanning from Ghana to Senegal to Zambia, has raised concerns about the practices of the ‘big three’ global ratings agencies—Moody’s, Fitch, and S&P Global Ratings. They argue that these agencies do not fairly assess the lending risk associated with African countries, often resorting to quicker downgrades during crises like the Covid-19 pandemic.
It’s worth noting that Moody’s, Fitch, and S&P Global Ratings have consistently denied any bias, asserting that their rating methodologies remain consistent across continents. Ravi Bhatia, S&P’s lead analyst for sovereign ratings, emphasised that the agency applies the same criteria uniformly across regions.
In essence, credit ratings serve as an indicator of a borrower’s risk of default and play a crucial role in determining the terms on which banks and other entities lend to them. Several African countries have outstanding international bonds, making fair and accurate credit ratings particularly significant.
Mutize underscored that the establishment of the new agency aims to diversify opinions rather than replace the existing major agencies. He noted, ‘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,’ highlighting that the major agencies often follow the lead of smaller ratings agencies with a deeper understanding of domestic dynamics.
The AU finance ministers have passed a resolution, affirming their support for the new agency during the summer. The effort is spearheaded by the African Peer Review Mechanism (APRM), a branch of the AU established last year to enhance governance across the continent. The full AU executive council is expected to adopt the same resolution in February.
The new agency is envisioned to be self-funded and driven by the private sector, with oversight from the AU. Plans are underway to create a pitch book for potential investors and collaborators, although it is too early to determine which private sector entities and multilateral organisations will operate the agency.
Mutize added, ‘Investors have been quite positive. They want to see what will be the output of this,’ emphasising that any initiative providing valuable information is of interest to investors.