How an African credit rating agency can tame risk perception

While preparing a keynote speech on risk, debt and credit ratings in Africa, I asked an AI-powered application this question: is it riskier to invest in Africa or send men and women to the Moon? The response was interesting. The question was undoubtedly on our leaders and experts’ minds as they gathered on the margins of the 38^th African Union Summit in Addis Ababa.

On the agenda was the progress on shaping the African credit rating agency (AfCRA). It aims to provide another perspective on risk perception and international credit rating agencies assessments that do not work for Africa. Risk misperception has reportedly cost the continent over $24bn in excess interest and more than $46bn in forgone lending. The objective is also to provide more data and accurate and contextualised economic assessments resulting in more nuanced evaluations of governments’ credit worthiness.

I had welcomed the initiative while underlining the need to focus on financial markets development in Africa. This matters for Africa’s financial sovereignty and to diversify the sources of funding for crucial infrastructure development needs. It could also help to gradually rebuild a shrunk fiscal space over time. According to the IMF’s regional economic outlook for Sub-Saharan Africa in 2025, fiscal challenges will persist with a deficit estimated at about 4% of GDP, with a slight reduction due in part to several countries’ fiscal consolidation efforts.

In such a context, the African credit rating agency should help provide a more balanced view and offer additional data to potential investors interested in Africa. However, setting up the agency will take time. The competitive landscape, largely dominated by the “big three” international credit rating agencies (Fitch, S&P Global Ratings and Moody’s), should prompt those leading this task to be strategic and to define the value propositions for the (AfCRA). There could be three of them.

Working with existing private African credit rating agencies

Inasmuch as an African credit rating agency may be the solution, it will come with its own challenges about staffing, funding, and governance. Therefore, we should use what we have, and intensify collaboration with the credit rating agencies already on the continent. These are interlocutors that not only understand our local context and the complexities of our economies, but are also independent, while caring for quality and high standards. Strengthening that collaboration is necessary and will also offer regional perspectives as several of these private companies work beyond their country. This collaboration, based on quantitative and qualitative data, will provide a more objective assessment, and help better capture the specificities of our economies. The prevalence of informality is one of them and gets discarded even though it generates income and jobs. This could be an angle for the AfCRA.

The African credit rating agency should propose assessments that are pertinent yet complementary to existing ones. For example, this could mean focusing on rating regional economic communities (RECs). This is relevant to raise capital for regional infrastructure development that underpins intra-African trade. The African Continental Free Trade Area (AfCFTA) remains constrained by low levels of infrastructure and productive integration. As shown in the African regional integration index (ARII) report, a joint publication by the African Union, the African Development Bank, and the UN Economic Commission for Africa, these two dimensions were the lowest, scoring 0,220 and 0,201 respectively on a scale where 1 represents perfect integration. Proposing to rate joint regional infrastructure projects and RECs could provide the impetus needed to fast-track implementation of the AfCFTA. This will reinforce cohesion and be beneficial to harmonising national frameworks.

Quality, timeliness, and availability of data is crucial

The value of an African credit rating agency will largely be determined by investors’ use of its data. Establishing it means that we must overcome some of the challenges also faced by the “big three”. Lack of sufficient hard data on African economies is a major one. According to the 2023 report of the Open Data Inventory, which assesses the coverage and openness of official statistics on a scale of 0 to 100, 33% of African countries scored between 20 to 40 and 35% between 40 to 60. Only one country scored between 60 to 80.

There is room for improvement to enhance collection, analysis, and release of pertinent data for a wide range of users, including investors. The quality, timeliness, and availability of data is crucial. This will be key to establishing the credibility of an African credit rating agency together with objectivity, transparency, high standards, and analytical robustness. In this regard, the agency should leverage artificial intelligence and other digital tools.

In addition, increasing data availability should be combined with understanding credit rating agencies’ methodologies and processes. Understanding how they operate underpins one’s ability to challenge their assessments. South Africa, the first country to be rated in Africa, has a long-standing experience in dealing with credit rating agencies. Challenging credit ratings may not necessarily change the outcome. However, it would send a signal that, while putting things into perspective, countries do not just accept ratings as such. Ongoing trainings, peer learning and experience sharing are equally crucial. Regulation and oversight, while also enhancing the way we engage with international credit rating agencies through capacity building and peer learning, may yield positive results.

Finally, the discussion about risk perception is intrinsically related to owning and shaping our narrative. It is about writing our stories, as author Chimamanda Ngozi Adichie said: “The single story creates stereotypes, and the problem with stereotypes is not that they are untrue, but that they are incomplete. They make one story become the only story.”