An African credit rating agency? Easier said than done

Arab News

21-06-2025

https://arab.news/6h6ad
Africa's sovereign debt crisis is not merely a story of fiscal mismanagement or external shocks. It is amplified by a systemic anomaly: The continent pays more to borrow than its peers with comparable economic indicators.
This penalty, often termed the 'African premium,' costs the region an estimated $24 billion annually in excess interest payments, and has deprived it of more than $46 billion in potential lending. With 20 low-income African nations in or near debt distress, and 94 percent of rated African sovereigns downgraded over the past decade, the search for solutions appears to be culminating in the establishment of an African Credit Rating Agency, or AfCRA for short.
For now, the move is being framed as both a corrective measure and a symbol of financial sovereignty. Yet while politically sound, it faces profound operational and philosophical challenges. Even if the ambition to establish the agency is framed as a bold act of sovereignty, the terrain it seeks to conquer is littered with the wreckage of similar aspirations in richer, better-equipped regions.
Granted, the financial logic behind the move is well-established: Africa's sovereign debt is routinely mispriced, with subjective and often opaque assessments by the 'Big Three' credit rating agencies — Moody's, Fitch and S&P — inflating risk perception and pushing average borrowing costs ever higher.
As a result, total annual lending losses and excess interest payments exceed annual official development aid to the continent. That Africa is being 'penalized' beyond its macroeconomic fundamentals is no longer a niche theory among a few experts, policymakers or scholars at poorly attended conferences, it is a measurable economic hemorrhage.
But attempting to correct this through AfCRA introduces a dilemma. Can a continent hobbled by thin capital markets, erratic fiscal transparency, and a fragmented political economy build a ratings agency that would be perceived as credible by the very investors it seeks to court?
The evidence so far is not encouraging. Europe, despite its institutional depth and capital abundance, has failed to create a viable alternative to the Big Three, even after sinking more than €300 million ($346 million) into various experiments, all of which ended in regulatory quagmires or strategic surrender.
The most successful nonaligned agencies, such as Scope in Europe or Morningstar DBRS in Canada, only survived by serving niche markets and accepting that they could not displace the incumbents.
Africa's task is even tougher. Most of the continent's 21 Eurobond issuers are repeat borrowers, yet their ratings have on average worsened since their inaugural issuances. This contradicts the usual pattern in emerging markets, where familiarity tends to reduce pricing premiums. Even the most prominent issuers — Egypt, Nigeria and South Africa — have faced frequent downgrades, often based on models that lack local granularity or fail to consider governance heterogeneity.
Furthermore, agencies frequently do not send analysts to the countries they rate; Fitch has no office at all on the continent, and both S&P and Moody's operate out of a single office in Johannesburg, covering dozens of vastly different economies.
Meanwhile, unsolicited ratings, those issued without government request or input, are both more common in Africa and more damaging. Moody's leads the way in such unsolicited assessments, despite objections by African governments to their inherent opacity.
It is not surprising, therefore, to see a resurgent push for an independent agency, given the cost of delays. Between 2021 and 2024, for instance, the average coupon on African Eurobonds nearly doubled to just under 11 percent, even as fundamentals remained stable.
The continent pays more to borrow than its peers with comparable economic indicators.
Hafed Al-Ghwell
Moreover, the absence of localized assessment left 22 African countries unrated, starving them of institutional capital. When Botswana and Mauritius secured investment-grade ratings, they accessed financing at 300-400 basis points below regional peers. At a continental level, each one-notch upgrade in a rating could unlock more than $15 billion in much-needed capital.
The cost of waiting is clear and unambiguous. Yet, the creation of AfCRA cannot be reduced to a matter of injustice alone. The economics of operating a credit rating agency are ruthless. Even the most optimistic forecasts suggest that the launch of a credible African agency would require $400–500 million in capital, an amount that dwarfs the annual budget of the African Union itself.
A very familiar, and suffocating, dependency loop swiftly kicks in; the AU's own programs remain more than 60 percent funded by the EU and other external partners, and if these same entities are now expected to bankroll an 'African-owned' ratings apparatus, the concept begins to cannibalize its own purpose.
Beyond the matter of funding, AfCRA would also find itself confronted by the same structural hurdles that felled its European predecessors. Regulatory legitimacy, for one thing, cannot be assumed. In many global markets only ratings from the Big Three are recognized, particularly among institutional investors bound by prudent regulation.
Even with improvements in rating models, the acceptance of new agencies into the portfolios of pension funds or sovereign wealth funds hinges on an arduous and opaque process of validation by regulators located far outside Africa. Without international regulatory recognition, AfCRA risks becoming an advisory service masquerading as an agency; technically useful but irrelevant where it matters.
Even if credibility can somehow be established, the pipeline of rating activity might not justify the operating costs. Government debt issuance in Africa remains sporadic and constrained. Moreover, much of the domestic debt, particularly in Francophone Africa, is already absorbed by regional banks under arrangements that do not require third-party ratings.
Corporate appetite for ratings is growing but still shallow. GCR Ratings, once Africa's most promising homegrown agency, did not consider government bond ratings a serious business line, and it has since been acquired by Moody's, effectively reversing the localization effort.
And then there is the governance risk. Africa's existing national and regional agencies have not been free from scandal. Recent cases, such as West African agency DataPro's withdrawal from a local firm because of a fraudulent rating that was exposed by a US research organization, highlight the fact that domestic proximity does not immunize against error or, worse, complicity.
Creating an agency without a ferociously independent mandate, transparent methodology, and hard, legal accountability would not reduce bias, it would simply substitute one form of distortion for another.
Ultimately, the issue is not whether Africa deserves better ratings; it certainly does. However, establishing an agency without first fixing the deficits in data integrity, fiscal reporting, macroeconomic coherence, and regulatory independence might produce only a costly mirror image of the very system it seeks to escape.
A credible alternative cannot be built on grievance alone, but it could be a catalyst for data reform, methodological innovation, and investor dialogue, which might finally ensure that finance costs reflect Africa's true risk and not perceived ghosts from the past.
However, such an undertaking must emerge as a result of discipline, innovation and, above all, proof of its usefulness to markets. Otherwise, AfCRA runs the risk of being filed away in the continent's growing archive of initiatives that were politically resonant but financially futile.