Over the last two decades, more African nations have joined the sovereign debt system. While in the 1990s only South Africa had a sovereign credit rating, today, 32 out of 55 African countries are rated by one or more of the Big
Three credit rating agencies (CRAs): Standard & Poor’s, Moody’s, and Fitch.
Yet, the international financial architecture has systemic flaws that disproportionately affect African countries. In particular, the biased methodologies and external interpretations of the Big CRAs, accompanied by limited data, often fail to capture African economic realities, leading to negative credit ratings. These ratings then translate into higher borrowing costs for African stakeholders. Indeed a new report by Africa Practice and Africa No Filter found that negative news headlines have cost the continent USD 4.2 billion in annual debt interest payments.
This policy brief, prepared following an event at the 2024 IMF and World Bank Annual Meetings by Development Reimagined and Falémé Conseil, explores these challenges and provides a roadmap to ensure CRAs better align with African priorities.
The recommendations include:
1. Reforming CRA Methodologies: Quantitative metrics often disadvantage African countries by failing to account for their unique economic environments. CRAs need to collaborate with African institutions to develop more equitable assessment criteria.
2. Investing in Local Data and Regulation: African countries can challenge biased evaluations and ensure CRAs use comprehensive, localized insights by improving local data capacity and regulatory frameworks.
3. Establishing Regulatory Bodies: A supervisory mechanism, similar to the European Securities and Markets Authority (ESMA), could manage disputes and ensure fair treatment of African economies by CRAs.
4. Learning from Local CRAs: African countries should engage with local CRAs globally, such as domestic CRAs from South America and China, which often prioritize region-specific factors in their evaluations.
5. Expanding African CRAs: Supporting African CRAs will enable more contextually accurate assessments and reduce reliance on external CRAs.
6. Engaging Investors and Conducting ‘Homework’: African governments should proactively address CRA methodologies and engage investors with clear narratives and robust investment strategies.
7. Coordination on Big Three Reforms: African governments and stakeholders must coordinate efforts to reform the Big Three’s methodologies and address the “Africa Risk Perception,” which inflates borrowing costs unfairly.
This brief serves as a call to action for African and international stakeholders to build a more inclusive and fair credit rating system that reflects African priorities and realities. For more details, read the full policy brief;
