As the G20 Summit approached, the conversation around a new African credit ratings agency was gaining momentum. The proposal has broad political appeal: many argue that global agencies such as Moody’s, S&P and Fitch systematically under-rate African economies, forcing them to borrow at higher costs. But a key question remains: will a home-grown agency meaningfully change outcomes, or will it simply measure the same realities in different units?
This debate isn’t just about sovereign debt. Credit ratings affect the cost of borrowing for governments and corporates alike – and by extension, the intercompany lending rates multinationals apply across Africa. If perceptions of risk shift, it could influence how transfer pricing analyses are benchmarked.
In other words, when a nation is seen as high-risk, lenders charge higher interest rates. Those same perceptions filter down to private companies operating there, even affecting how multinationals operating in a country price loans between their own group companies. If an African ratings agency were to help improve the continent’s perceived creditworthiness, borrowing could become cheaper across the board, from governments and banks to businesses and their subsidiaries.
Read Full Article on Mail & Guardian
[paywall]
That would make it easier to invest, grow and create jobs. A sovereign rating acts as the ceiling for all borrowers within that country. If a government’s creditworthiness is considered poor, no local company can be rated higher – even if it has sound fundamentals.
That matters because large companies often lend money between their own subsidiaries, just like a bank would. To make sure those internal loans are fairly priced, they use credit ratings to see what interest rate an independent lender would charge. If a country or company has a low rating, the cost of borrowing rises – and that affects how much interest the business pays and reports for tax purposes.
It’s a circular problem. A perception of sovereign risk filters through to company-level financing, raising costs for business and potentially reducing profitability. An African ratings agency could, in theory, change that dynamic – but only if it’s credible.
The proposed Africa Credit Rating Agency (AfCRA), to be headquartered in Mauritius under the African Union’s umbrella, aims to provide that alternative view. Backed by Afreximbank and several African development institutions, it promises a methodology better suited to African realities. Ian Macleod, Co-Founder and Head of Strategic Narrative at Boundless World, believes that new thinking is overdue.
“We typically look at African markets with a long-term view – years, decades, even generations,” he says. “That requires understanding foundational factors like demographics, early education and savings levels. These are powerful forces that shape a society and an economy.
Importantly, they tend only to change gradually. While one needs to monitor and account for variables that can change by the day, week or month, it is useful to read these against the backdrop of these heavy foundations.” The Boundless World team has developed analytical frameworks that can add nuance to a ratings methodology.
[/paywall]
