The Africa Credit Rating Agency (AfCRA) has officially been launched, marking a significant milestone in African institution-building. The agency's creation is the result of nearly a decade of efforts, dating back to 2017 when the African Union mandated the African Peer Review Mechanism to support member states in the field of credit rating agencies. The journey involved feasibility studies, design work, and political endorsement of a private-sector-driven model, with Mauritius chosen as its home.
The AfCRA is not intended to challenge the world's big three credit rating agencies - Moody's, S&P Global Ratings, and Fitch - but rather to complement them. Its mandate is to produce fair, independent, and contextually accurate assessments of African economies. The agency's launch is a notable achievement, considering the difficulty of building new institutions, particularly among 55 nation states. This development is part of a broader trend of African institution-building, with other initiatives including the African Peer Review Mechanism and the African Continental Free Trade Area.
The creation of the AfCRA is driven by the growing importance of creditworthiness assessment in development finance. African governments and businesses have ambitious plans for infrastructure, industrial capacity, human capital, and resilience against shocks, but these plans often require external financing. Access to international capital markets and the price paid for it depend heavily on creditworthiness. Sovereign credit ratings, issued by specialist agencies, provide an opinion on the likelihood of a borrower repaying debts fully and on time.
The distinction between investment-grade and speculative-grade ratings is crucial, with the former associated with significantly lower borrowing costs. Economists have found that crossing into investment-grade status can reduce borrowing spreads by 36%, compared to only 5-10% for upgrades within investment grade. Many institutional investors operate under mandates that forbid speculative-grade debt, making it essential for countries to achieve investment-grade status.
Creditworthiness assessments have become embedded in the rules of finance, influencing market access and the price of capital. In the US, financial regulators began recognising ratings from designated agencies in 1975 to set capital requirements for regulated institutions. This recognition has since expanded across securities, banking, and insurance regulation, making ratings a critical component of market access.
The AfCRA's launch converts years of discussion about African development finance, borrowing costs, and capital market access into a concrete institution. The agency's success will depend on its ability to provide accurate and independent creditworthiness assessments, which will, in turn, influence financing conditions for governments and businesses across the continent.
The implications of the AfCRA's launch are significant, with potential effects on borrowing costs, capital market access, and the broader economy. UN Trade and Development (UNCTAD) finds that developing countries pay, on average, around 200 basis points more than developed countries for internationally sourced capital. The AfCRA's presence may help reduce this gap, but its impact will depend on its credibility and the confidence it inspires in investors and markets.
Key points
- The Africa Credit Rating Agency aims to provide fair and independent creditworthiness assessments of African economies.
- The agency's launch is a significant milestone in African institution-building, with potential implications for borrowing costs and capital market access.
- The AfCRA's success will depend on its ability to provide accurate and independent assessments, influencing financing conditions for governments and businesses across the continent.
