The weird world of rating agencies and what it means for Africa


Credit rating agencies are key players in financial markets, no doubt. They provide important and generally sound opinions on a borrower’s creditworthiness, enabling companies and countries to attract much-needed investment to finance growth and development while clearly indicating to investors whether or not they are likely to recover. their money.

The line between profit and loss for investors often comes down to the information at their fingertips: what they value, how and what they compare each investment opportunity to. Hence the importance – and influence – of rating agencies.

So far, so good. The problem is, of course, that the global credit rating landscape is dominated, some would say monopolized, by three major players: Moody’s, Standard & Poor’s and Fitch; Moody’s and S&P together issue 80% of international ratings. And while they do a good job of rating developed economies, they don’t fully understand the emerging market context. For example, Moody’s has only one office in Johannesburg which serves the 28 countries it assesses on the African continent. It is simply impossible to fully understand the nuances and potential of such a diverse continent with such a limited vision.

The consequences are serious, especially for Africa, where borrowing is increasing and traditional sources of finance are drying up.

Why WEIRD countries dominate

The three main credit rating agencies have a particular fondness for WEIRD countries: Western, educated, industrialized, wealthy and democratic. It’s understandable – these countries have long histories with the most abundant, relevant and up-to-date data, collected from a variety of credible sources. But what about those countries, which are not part of the club, which are taking solid steps to develop their economy but which do not have the track record to show it? Right now they’re having a hard time looking at it, which is exacerbating a cycle of underinvestment that’s leading to unemployment and deteriorating infrastructure, which, you guessed it, further weakens their credit rating.

Rating agencies are naturally risk-averse and rely on their track record. But that means they are likely to miss the niche advantages that developing economies offer and where, by the way, the majority of people live and work.

So, as countries in Africa try to free themselves from various challenges, including corruption, unemployment, disease and institutions inherited from the colonial era, rating agency labels of “risky business” undermine their ability to shape a new narrative. As these countries struggle to climb out of the abyss they find themselves in, inflated credit ratings are trampling on them again.

For example, Ghana recently appealed against a ratings downgrade by Fitch and Moody’s, citing that it was “seriously concerned” that key data had been omitted from the assessments, including “the fiscal expenditure controls of 2022 and the initial 2022 budget adjustments”, as well as alleging “inaccurate balance of payments statistics…entirely based on a desk exercise (and) virtual discussions” without the agencies ever visiting Ghana.

So what can be done? Some believe it is time to take matters into our own hands with the creation of a pan-African credit rating agency to better contextualize African growth stories with adjusted methodologies and more nuanced weightings. However, such an entity will need to be credible to be taken seriously and have the desired effect.

Towards fairer assessments in Africa

On the eve of the 54th session of the Conference of African Ministers of Finance, Planning and Economic Development (CoM2022), the President of Senegal, Macky Sall, also currently at the head of the African Union, revived the interest in a pan-African credit rating agency to balance the “sometimes very arbitrary ratings” used by companies like Fitch, Moody’s and S&P. He cited research suggesting that “at least 20% of African countries’ rating criteria are based on more subjective factors, cultural or linguistic for example, which bear no relation to the metrics used to measure economic stability.” . As a result, the perceived risk of investing in Africa is higher and borrowing therefore has a premium.

Enter the Sovereign African Rating Agency (SARA), which was recently established as an independent entity with the potential to fulfill this pan-African rating agency role. In a recent interview, COO Zweli Maziya discussed what fairer valuation methodologies could look like. SARA suggests reviewing full reimbursement records and looking at naturalized growth rates, among other measures, to balance different combinations of variables across countries. However, despite the introduction of more nuanced and contextualized measures, their core business will continue to assess countries’ ability and willingness to meet their financial commitments.

Positively shaping Africa’s future financial landscape

A key change that an African rating agency should seek to bring to the table is a more forward-looking orientation. Many measures used by global rating agencies, such as per capita income, GDP growth, inflation, fiscal balance, and current account deficits, can be considered lagging measures, not leading measures. They are indicators of what has happened in the past, not what is to come. Africa has a great story to tell if you look at future demographics and resource potential. A credible and context-aware African rating agency might be better placed to tell this story. Two ingredients will be the key to its success.

First, it will need to partner with universities, business schools and research institutes around the world to ensure that the data collection and analysis, as well as the methodologies used for the assessments, are robust and credible. . Lack of adequate data is frequently cited by the Big Three rating agencies as a concern. Second, we will need sufficient regulation and oversight of what happens inside. Transparency is essential to ensure the credibility of research and evaluation methods. This of course applies to all rating agencies operating on the continent and may require the establishment of a continental regulator with teeth to protect countries that are unfairly downgraded and ensure proper guidance in line with global standards .

Overall, SARA will need to ensure that it avoids the perception – and reality – of becoming a mouthpiece for propaganda, spinning a positive story where there is none. He shouldn’t be afraid to collect data he doesn’t like; make reality his friend; and stick to facts, not fantasies.

An African credit rating agency has significant potential to shape a more promising economic story for Africa and to challenge other rating agencies as to what is measured and why; however, in practice it faces a delicate balancing act to deliver on its promise. He will need the support of key entities across the continent to help him on his journey.

Jon Foster-Pedley is Dean and Director of Henley Business School in Africa, President of the Association of African Business Schools, and Chairman of the British Chamber of Business in Southern Africa.


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