The Africa Credit Rating Agency (AfCRA) has been formally launched, marking a significant milestone in African institution-building. The effort to establish the agency has been almost a decade in the making, with the African Union giving the African Peer Review Mechanism a mandate to support member states in the field of credit rating agencies in 2017. By 2019, African institutions were examining the feasibility of creating an agency of their own. The new agency is not meant to challenge the world's big three credit rating agencies - Moody's, S&P Global Ratings, or Fitch - but to produce fair, independent, and contextually accurate assessments of African economies.
The launch of AfCRA is part of a broader effort to strengthen African institutions. The African Peer Review Mechanism, established in 2003, is a voluntary process through which African states assess and strengthen governance across participating countries. The African Continental Free Trade Area is another example of continental institutions being created or expanded. The African Union has also secured a stronger formal voice within global economic governance, becoming a permanent member of the G20 in 2023. These developments demonstrate a growing recognition of the importance of African institutions in shaping the continent's economic future.
The creation of AfCRA is driven by the growing importance of creditworthiness assessment to the financing of development. Governments and businesses across Africa have ambitions for infrastructure, industrial capacity, human capital, and resilience against shocks, but these ambitions often outrun what domestic revenue alone can finance. External financing is needed, and access to international capital markets depends heavily on how creditworthy a borrower is judged to be. Sovereign credit ratings exist to supply that judgment, and the ratings have a significant impact on borrowing costs and access to capital markets.
The boundary between investment grade and speculative grade ratings is particularly consequential. Economists at the International Monetary Fund found that crossing into investment grade status reduced borrowing spreads by 36% beyond what macroeconomic fundamentals alone would predict. In contrast, upgrades within investment grade had a much smaller effect, and no measurable effect was found within speculative grade. This threshold matters because many institutional investors operate under mandates forbidding speculative-grade debt entirely or even partially.
Sovereign creditworthiness can also influence financing conditions beyond the government itself. Banks, state-owned enterprises, and private companies can find their own borrowing conditions affected by changes in sovereign risk. This is particularly true when their credit profiles are closely tied to the state or the domestic financial system. A downgrade can have far-reaching consequences, affecting not only sovereign debt markets but also the financing conditions facing the wider economy.
Ratings have become embedded in the rules of finance itself. In the US, financial regulators began formally recognizing the ratings of designated agencies in 1975 to help set capital requirements for regulated institutions. This recognition has since multiplied across securities, banking, and insurance regulation. As a result, a rating becomes part of the machinery governing market access, not simply an opinion offered to it.
The launch of AfCRA is a significant step towards addressing the challenges faced by African countries in accessing international capital markets. UN Trade and Development finds that developing countries paid, on average, around 200 basis points more than developed countries for internationally sourced capital between 2012 and 2023. The new agency has the potential to improve the accuracy and fairness of credit ratings, reducing borrowing costs and increasing access to capital markets for African governments and businesses.
Key points
- The Africa Credit Rating Agency aims to produce fair, independent, and contextually accurate assessments of African economies.
- The agency's launch is a significant act of African institution-building, demonstrating a growing recognition of the importance of creditworthiness assessment to the financing of development.
- The boundary between investment grade and speculative grade ratings has a significant impact on borrowing costs and access to capital markets.
