The African Union is contemplating the establishment of an independent credit rating agency aimed at providing more accurate assessments of financial risks to governments in the region.

Proposal for African Credit Rating Agency (ACRA)

The African Union is considering the establishment of a new credit rating agency that it believes could provide more accurate assessments of financial risks to governments.

The proposal to create the African Credit Rating Agency (ACRA) was detailed in a recent United Nations Economic Commission for Africa report. The report criticizes major rating agencies for frequent errors in their assessments, emphasizing their narrow scope that fails to fully consider positive economic indicators, thereby affecting capital flows.

« ACRA aims to offer balanced and comprehensive evaluations of African credit instruments, supporting affordable capital access and national financial market development, » the report states.

Sovereign credit ratings

Sovereign credit ratings, which provide independent judgments on a government’s creditworthiness, are particularly crucial for countries with significant economic growth. Indeed, borrowing costs can influence a government’s ability to finance everything from infrastructure programs to health services.

Rating agencies consider several factors when assessing the level of risk associated with lending money to a government. These indicators include :

• Public debt levels
• Per capita income
• GDP growth
• Financial institution stability
• Inflation and history of payment defaults

Currently, three agencies are considered the most important : Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings. Rating scales vary, but all three use alphabetical scales, with AAA being the highest level and C or D being the lowest. Pluses, minuses, and numbers are also used to denote finer gradations of creditworthiness.

Credit rating agencies : Controversial assessments

The United Nations Economic Commission for Africa report reveals that during the first half of 2023, major rating agencies issued 13 negative decisions against 11 African countries.

These negative assessments included rating downgrades and negative outlook analyses. « These developments reversed investor optimism in international financial markets, where African countries were seen recovering from the devastating economic shocks of COVID-19, » the report states.

Nigeria’s case : Disputed evaluation of local context

one of the major credit rating agencies downgraded Nigeria’s government rating from B3 to CAA1 in January. This decision, according to the agency, was due to « significant budgetary pressures » and « institutional weaknesses and social challenges » in the country.

However, Nigeria contested this decision, leading to a decline in the value of Nigerian government bonds. « From the perspective of the federal government of Nigeria, lowering the government’s rating after rigorous commitments to all efforts made by the government to stabilize the economy, confirms that the rating agency lacks full appreciation of the country’s domestic environment in the current context and the context of international political economy, » notes the UN report.

ACRA : Scheduled launch in 2024

ACRA, expected to launch in 2024, could provide more accurate credit ratings and assessments of economic prospects. This would make borrowing cheaper for African governments. In April 2023, a study by the United Nations Development Programme revealed that African countries could save nearly 75 billion USD if credit ratings were based on less subjective assessments.

These savings would enable governments to « repay principal on their domestic and external debt and free up funds to invest in human capital and infrastructure development, » the report states.

The creation of an African credit rating agency was also discussed at a gathering of African ministers and development stakeholders during the 2023 spring meetings of the World Bank and IMF.

« We are at the heart of a poly-crisis, and African governments are grappling with a shortfall in development financing, » said Ahunna Eziakonwa, UN Assistant Secretary-General and Regional Director for Africa at UNDP, in a statement. « We urgently need more equity and justice in how we design multilateral agencies. We must encourage African peoples to respond to their development aspirations and establish a system in which risk can be assessed fairly. »