The African Union has backed the launch of the Africa Credit Ratings Agency (AfCRA), aimed at providing an alternative viewpoint to the "big three" global credit ratings agencies - Fitch, Moody's and S&P. The agency, based in Mauritius, will judge the creditworthiness of countries, businesses and institutions. This move is expected to counter unfair assessments that make it more expensive for African nations to borrow money. The African Peer Review Mechanism, the institution behind AfCRA, says 23 countries on the continent are not rated at all by the traditional agencies.
Low credit ratings have real-world effects, as investors charge more interest to lend money. According to estimates by the Organisation for Economic Co-operation and Development, on average, it cost Africa nine dollars for every $100 borrowed in international markets in 2024, compared to about $4.70 for emerging markets in Asia and $6.50 in Latin America. African leaders argue that the traditional agencies overlook the continent's huge informal sectors, which do not easily show up in official data. This can lead to unfairly low credit ratings.
The launch of AfCRA is not just a response to "Africa's unhappiness with the incumbent players," according to Hannah Wanjie Ryder, chief executive of consultancy Development Reimagined. The theory behind AfCRA is that it will be able to look at African economies with clearer eyes. Ryder made these comments at a recent seminar organised by the Chatham House think tank. The agency's founders say there will be no government interference in its ratings decisions.
The first test of AfCRA's credibility will be whether it will downgrade an African government. If not, investors risk seeing it as the continent marking its own homework. Analysts say that a rating agency is judged on independence and accuracy, not where it sits. Jacob Oreki, a management consultant at Kenya's Strathmore University Foundation, said that if AfCRA will not downgrade an African sovereign, markets will treat it as advocacy.
Nigeria's President Bola Tinubu welcomed AfCRA, saying that Africa is not asking for favourable ratings, but fair ratings grounded in the continent's fundamentals and reforms. The agency aims to offer a more accurate picture of African economies, taking into account the informal sector and domestic savings. This could lead to lower borrowing costs for African nations.
The choice of Mauritius as AfCRA's home was partly due to its established financial services industry. The agency's launch is the result of nearly a decade of talks. African leaders hope that AfCRA will provide a more balanced view of the continent's economies and help reduce borrowing costs.
The success of AfCRA will depend on its credibility and accuracy. If it is seen as independent and reliable, investors will base their decisions on its ratings. The agency's impact will be closely watched by investors, analysts, and African leaders.
Key points
- The Africa Credit Ratings Agency aims to provide fairer assessments of African economies.
- The agency's launch is a response to concerns about unfair ratings from traditional agencies.
- The success of AfCRA will depend on its credibility and accuracy.
