At the 38th African Union (AU) summit in Addis Ababa, Ethiopia, African leaders formalized the creation of a continent-specific credit rating agency. One initiative that could transform the continent’s economic landscape. The decision comes at a time when many African countries are seeking to enhance their economic autonomy and attract more foreign investment.
Being less dependent on Western rating agencies
Africa, with its 1.3 billion people and vast natural resources, has enormous economic potential. But the continent faces major challenges, including overreliance on Western ratings agencies. According to the World Bank, about 60 % of African countries are classified as having a credit rating below « Investment Grade », complicating their access to international markets and increasing the cost of borrowing.
In 2023, African countries’ public debt reached 1.15 trillion USD, according to the African Development Bank’s report. This has led many countries to seek alternative ways of improving their ratings and attracting investment. The AU’s creation of a credit-rating agency could address this urgent need.
Objectives of the Financial Rating Agency
Strengthening Economic Autonomy
One of the main objectives of this new agency is to strengthen the economic autonomy of African countries. By creating a local rating agency, the AU aims to reduce dependence on Western rating agencies, which are often perceived as biased. According to AU President Moussa Faki Mahamat, « the creation of this agency is a step towards the economic sovereignty of Africa ».
Improving access to finance
A more favorable rating could facilitate access to finance for African countries. Indeed, a higher rating can reduce borrowing costs and attract foreign investors. According to a McKinsey study, an improvement in a country’s credit rating can reduce interest rates by 1-2%, implying significant long-term savings.
Promoting Transparency and Accountability
The AU’s financial rating agency could also play a crucial role in promoting transparency and accountability among African governments. By establishing clear and objective scoring criteria, the agency could encourage governments to adopt more responsible economic policies and improve the management of their public finances.
Implications for African Economies
Impact on Foreign Direct Investment
The creation of this agency could have a significant impact on foreign investment in Africa. A more favorable rating could encourage investors to consider Africa an attractive destination.
Strengthening Local Financial Markets
The credit rating agency could also contribute to the development of local financial markets. By providing ratings to companies and governments, the agency could encourage the issuance of bonds and other financial instruments to local markets. This could bolster the liquidity and depth of African financial markets, thereby facilitating access to capital for local businesses.
Improving investor confidence
A local rating agency could also improve investor confidence in African economies. By providing ratings based on criteria tailored to African realities, the agency could help allay investors’ fears about volatility and the risks associated with African markets. It could also encourage institutional investors to diversify their portfolios to include African assets.
Challenges facing the AU
Establishment of Rating Standards
One of the main challenges for the CRA is the establishment of clear and objective rating standards. It will be essential to develop methodologies that take into account the economic and political specificities of African countries. This will require technical expertise and a deep understanding of local economic dynamics.
Building Market Confidence
For the credit rating agency to be effective, it will have to win the confidence of the financial markets. This means demonstrating independence and impartiality in the rating process. Investors need to be confident that the ratings provided by the agency are reliable and based on rigorous analysis.
Financing and Sustainability
Funding the rating agency will also be a challenge. Ensuring sustainable funding will be critical to the agency’s ability to function effectively. This could involve partnerships with international financial institutions, governments and private sector actors.
AU Economic Outlook
A Model for Other Regions
The AU’s creation of a credit-rating agency could serve as a model for other parts of the developing world. Other regional organizations could consider setting up their own credit rating agencies to enhance their economic autonomy and improve access to finance.
Deepening Economic Integration
This initiative could also strengthen economic integration in Africa. By providing ratings to countries and companies, the agency could facilitate intra-African trade and investment. This is part of the AU’s Agenda 2063, which aims to promote economic integration and sustainable development on the continent.
Long-Term Impact on Development
In the long run, the creation of this rating agency could have a significant impact on Africa’s economic development. By improving access to finance and promoting responsible economic policies, the agency could contribute to economic growth, job creation and improved living conditions on the continent.
