The credit rating industry in Africa is dominated by three international agencies: Moody’s, S&P and Fitch. Together they control an estimated 95% of the credit rating business globally.
Credit rating agencies are institutions that assess a borrower’s creditworthiness in general terms, or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money – an individual, a corporation, a state or provincial authority, or a sovereign government. Investors use a credit rating to make decisions about risk and return. So the rating is required if an institution wants to raise funds on financial markets.
South Africa was the first African country to receive a sovereign rating, in 1994. To date, 32 African countries have received a sovereign rating from at least one of the “big three” agencies.
But policy makers are increasingly dissatisfied with their approach and methodology. Some of the criticisms are that agencies are quick to downgrade African countries but slow when upgrades are due; that they fail to accurately account for risk perception; that they don’t consult adequately with stakeholders; and that they lack independence and objectivity.
A recent UN study showed that subjective biases in credit ratings had cost African countries a combined US$74,5 billion. This was through funding opportunities lost and excess interest paid on public debt.
Conditions are therefore ripe to advance the idea of establishing an African credit rating agency as a partial solution. China has its own state-owned rating agency, Dagong Global Credit Rating Company. The Arab countries are also calling for their own rating agency.
As a lead expert with the African Union on ratings agencies, I can explain the framework this agency would operate in and why it makes business sense. – Moneyweb
