The African Union has announced plans to establish a new sovereign credit rating agency. The proposed African Credit Rating Agency (ACRA) is intended to provide a more nuanced and accurate assessment of economic conditions and credit risks within the continent.
The initiative, detailed in a recent report by the United Nations Economic Commission for Africa (UNECA), seeks to address perceived deficiencies in the current international credit rating system. The UNECA report criticises leading global credit rating firms for their frequent inaccuracies and narrow assessments, which, according to the report, fail to fully capture positive economic indicators and are detrimental to African nations’ access to capital.
Sovereign credit ratings, which evaluate a government’s creditworthiness, play a crucial role in determining borrowing costs and capital flows. For many developing countries, including those in Africa, these ratings are vital for securing funding for infrastructure projects, healthcare, and other essential services.
The existing major credit rating agencies—Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings—employ various rating scales to evaluate sovereign credit risk. Their assessments impact borrowing costs significantly. However, UNECA’s report suggests that these agencies have made “significant errors” in their ratings of African countries, often resulting in negative implications for these nations’ economic prospects.
The UNECA report highlights that in the first half of 2023, the top rating agencies issued 13 negative decisions affecting 11 African countries. These included downgrades and negative outlooks, which have contributed to a reversal of investor optimism regarding Africa’s recovery from the economic impacts of the COVID-19 pandemic.
For instance, one of the prominent rating agencies downgraded Nigeria’s sovereign credit rating from B3 to Caa1 in January 2023. The downgrade was attributed to “wide-ranging fiscal pressures” and “institutional weaknesses and social challenges” within the country. The Nigerian government disputed the rating, arguing that the agency’s decision did not adequately consider the efforts made to stabilise the economy.
The UNECA report underscores that such downgrades have resulted in a decrease in the value of Nigerian government bonds and have exacerbated economic challenges. The proposed ACRA is envisioned to offer a more comprehensive and balanced assessment of African credit instruments, which could potentially make borrowing more affordable for governments across the continent.
The ACRA, slated for launch in 2024, is expected to bring about significant changes. Proponents argue that it will provide more accurate credit ratings and economic outlooks, which could help reduce borrowing costs and enhance investment in crucial sectors such as infrastructure and human capital development. A study by the United Nations Development Programme (UNDP) revealed that if African credit ratings were based on less subjective assessments, the continent could save nearly $75 billion. These savings could be redirected towards repaying existing debt and investing in development projects.
The need for an African-based credit rating agency has also been emphasised in discussions at the 2023 World Bank/IMF Spring Meetings, where African ministers and development actors highlighted the urgent need for more fairness and equity in financial assessments. Ahunna Eziakonwa, UN Assistant-Secretary-General and UNDP Regional Director for Africa, stressed the importance of creating systems that accurately reflect the economic realities of African countries. Eziakonwa argued that fostering greater agency for African nations is crucial for achieving developmental goals and ensuring that risks are fairly priced.
The proposal for ACRA is part of a broader effort to enhance Africa’s financial infrastructure and reduce dependency on external financial assessments. By establishing a credit rating agency rooted within the continent, the African Union aims to improve the accuracy of economic evaluations and support the development of domestic financial markets. The initiative reflects a growing trend towards increasing regional self-reliance and addressing systemic issues that have historically hindered African economic growth.
The success of ACRA will depend on its ability to gain credibility and effectively measure the diverse economic conditions across African countries. It will need to demonstrate its capability to provide reliable assessments that can compete with the established global agencies. As the agency prepares for its launch, stakeholders will be keenly watching to see how it influences the financial landscape in Africa and whether it can achieve the intended impact on borrowing costs and investment flows.
In summary, the African Union’s plan to create the African Credit Rating Agency represents a significant step towards addressing the limitations of existing international credit rating systems. By offering a more tailored and accurate assessment of credit risks within the continent, ACRA aims to enhance Africa’s access to capital and support its development aspirations. The establishment of ACRA reflects a broader ambition to strengthen regional financial systems and promote economic stability across Africa.
