The African Union (AU) has announced plans to establish a new African credit rating agency in 2024. This initiative aims to address the AU’s concerns regarding what it perceives as biased assessments of countries on the continent by major global rating agencies, namely Moody’s, Fitch, and S&P Global Ratings.
Misheck Mutize, the lead expert for country support on rating agencies with the African Union, revealed that this new agency will be headquartered in Africa and will offer its independent assessments of the risks associated with lending to African countries. It will also provide additional context to assist investors in their decisions regarding African bonds and private lending opportunities.
Credit ratings play a pivotal role in influencing investor decisions in capital allocation. In Africa, the credit rating industry is largely dominated by the “big three” international agencies, which control approximately 95% of the global credit rating business. However, the AU, along with leaders from its member nations, has voiced concerns that the ratings provided by these agencies do not accurately evaluate the risk of lending to African countries.
Critiques have pointed out swift downgrades for African nations and delayed upgrades when warranted. Other concerns revolve around insufficient stakeholder consultation and perceived shortcomings in terms of independence and objectivity.
Despite these criticisms, the major rating agencies, Moody’s, S&P, and Fitch, maintain that their rating methodologies are consistently applied. Ravi Bhatia, S&P’s lead analyst for sovereign ratings, stated that the agency applies the same criteria globally. Similarly, a Fitch Ratings spokesperson emphasized that sovereign rating decisions are based on globally consistent criteria with transparently identified rating drivers.
A United Nations Development Programme study from April highlighted that African countries could potentially save up to $74.5 billion if credit ratings were based on less subjective assessments, citing disparities in the frequency of rating actions for African nations as an example.
The AU’s finance ministers previously passed a resolution in support of the agency’s establishment over the summer. This effort was initiated by the African Peer Review Mechanism (APRM), an AU branch formed in the previous year to enhance governance across the continent. The full AU executive council is expected to endorse the resolution in February.
The new agency is envisioned as a self-funded, private-sector-driven entity with AU oversight. Investors have shown a positive reception to this development, as they seek alternative sources of information for their investment decisions.
