The African Credit Rating Agency: Bringing Investment Grade to a Neglected Debt Market
Credit: Iwaria Inc.
Many of the highly acclaimed government and development economics thinkers of our time have postulated various solutions to raise the living standard across Africa. These schemes involve anything from broad domestic and international incentive programs to acute experiments on how to best increase the use of malaria nets or water-purifying pills. However, these plans which have demanded billions of dollars to execute have yielded varying results, often entirely failing to impart any sustainable change in behavior, economy, and living standards. Paul Collier’s Bottom Billion highlights the numerous efforts made to save a billion people who are suffering in failing states across the globe. These states, despite intensive international aid programs, continue to regress into war and corruption, consequently trapping their populations in the “bottom billion.” The vast majority of these states are in Sub-Saharan Africa, the home of some of the lowest living standards in the world and unsurprisingly the focus of many international aid coalitions. While philanthropists and governments alike have poured billions of dollars into raising the living conditions of the “bottom billion,” the acute successes that they’ve had, pale in comparison to their numerous interventional failures. However, despite the current state of development economics in Africa, which is by necessity highly targeted and rarely replicable across cultures and geographies, there is a potentially effective measure in the establishment of the African Credit Rating Agency that would meaningfully shift the living standards of those “bottom billion” trapped in weak sovereigns.
Now bear with me through the necessary, but potentially mundane overview of the African debt market as of now.
The global debt market is an exchange in which sovereigns can issue dollar-denominated government debt as a capital-raising mechanism. Conceptually, it is no different from a business in the US taking out a loan. The interest rate on this loan, or sovereign debt in the case of a government, represents the risk that the issuer poses to the lender. The higher the interest rate, the higher the perceived risk of the client and therefore the higher the annual payment the client must make in order to maintain access to this capital. Clearly, determining the true risk of a government is a critical task in valuing this sovereign debt. However, what if I told you that the three largest rating agencies in Africa, S&P, Moody’s, and Fitch, were systematically overestimating the risk that issuers on the continent posed?
While this claim has been hypothesized by many, only recently did reputable organizations and corporations pick up on the highly concerning theme. The UN Development Program ran an analysis on the thirteen African nations that could afford to maintain any credit rating at all from one of the “Big Three,” S&P, Moody’s, and Fitch, and discovered a highly concerning bias. The researchers benchmarked the ratings off of the theoretically unbiased Trading Economics scores and found that relative to these, the “Big Three” were far more pessimistic on specifically Sub-Saharan African Nations. In the example of a US business taking out a loan, imagine that the lender is unreasonably biased against a certain individual, charging him far greater interest payments than their business truly deserves. In Sub-Saharan Africa, this surplus cost driven by the bias of the “Big Three” Syndicate is costing the thirteen rated nations an estimated 2.2 bn annually. (Assa and Gevorkyan 2023, 29) Furthermore, if rated on a more subjective basis, these nations could draw down an additional 31.0 bn in credit facilities given the representative interest rates. (Assa and Gevorkyan 2023, 29) This is to say there’s a very costly credit problem in Sub-Saharan Africa that is caused by the undue bias of the major American ratings agencies.
This problem cascades down the different levels of business as well. Capped by the “sovereign ceiling,” corporate debt is not allowed to be rated higher than the sovereign debt in Africa. As we’ve premised, fundamentally misrated sovereign debt will therefore cost African businesses millions of dollars in additional interest payments and billions of dollars of foregone credit capabilities. The paralyzing inefficiencies of the sovereign and corporate African credit markets are perhaps one of the most dangerous and simultaneously overlooked issues in the sphere of developmental economics.
Despite the grip that Moody’s, S&P, and Fitch have on the current market, The African Credit Rating Agency poses an alternative to nations’ pure subjection to international rating bias. Proposed by African Union officials in 2019, the Agency would be composed of numerous credit bureaus across the continent which would guard against the vague and highly destructive downgrades from the “Big Three,” while providing insight and fairer ratings to African sovereigns. By focusing solely on Africa, with intimate knowledge of the workings of each respective government, the Agency could provide otherwise inaccessible insight into the true risks and upsides in each economy. Rather than downgrading a promising nation for vague “institutional weaknesses and social challenges,” which was the explanation for Nigeria’s recent downgrade from B3 to Caa1, the African Credit Rating Agency would provide far more detailed, quantitative analysis. (Feingold 2023) Additionally, there are over twenty nations in Africa that cannot afford a credit rating from the “Big Three.” These markets, young yet important, are entirely devoid of reasonable financing options and the African Credit Rating Agency claims that they will make these a priority. Outside of purely sovereign ratings, the nature of the Agency would also allow it to oversee the ratings of smaller corporates, financing, and IPOs across the continent. Given the prevailing failures in the existing rating market, refreshing quantitative and substantive qualitative evaluations would result in billions of additional, fairly rated dollars being put to use in African economies.
This week, politicians, financiers, and businessmen are meeting in Zambia at a summit to plan out the intricacies of this agency. While it will take a tremendous diplomatic and economic effort, having lost out on an estimated 75 bn given the structural failures in the credit market, there is certainly continent-wide motivation to coordinate this initiative. (Feingold 2023) Time will tell, however, amidst the despair and exasperation that one might feel in confronting these grave systematic failures, the formation of an African Credit Rating Agency may offer a glimpse into the ingenuity that no Western malaria or cholera aid study could ever illicit. Furthermore, amid a bleak developmental landscape, the African Credit Rating Agency may be enough to catalyze the rise of Collier’s “bottom billion.”
Bibliography
Gevorkyan, Aleksandr. Assa, Jacob. 2023. “Lowering the Cost of Borrowing in Africa, The Role of Sovereign Credit Ratings.” United Nations Development Programme: 29.
Feingold, Spencer. 2023. “The African Union wants to create its own credit rating agency. Here’s why.” World Economic Forum, October 9th, 2023.