Why AU wants credit rating body for Africa

Dar es Salaam. The African Union (AU) has initiated discussions about the proposed African Credit Rating Agency (ACRA) to offer more accurate, balanced and comprehensive opinions on African credit instruments.

The global credit rating landscape is largely dominated by three major agencies – Moody’s, Fitch and S&P Global.

These entities wield considerable influence over international financing decisions and the flow of capital.

However, recent events have underscored the fallibility of these agencies' ratings, casting doubt on their accuracy and objectivity.

According to the African Sovereign Credit Review 2023 Mid-Year Outlook, during the first half this year, rating actions were predominantly negative.

The report is issued jointly by the Economic Commission for Africa (ECA) and the African Peer Review Mechanism (APRM).

“A total of thirteen negative rating actions – seven downgrades and six negative changes in outlooks – were assigned to eleven countries,” the report reads in part.

“This trend has raised questions about why Africa’s credit ratings are not reflective of the current global ‘economic recovery phase’,” it adds.

The report states that the “Big Three” agencies have continued to make significant errors in their ratings, yet they continue to influence global financing decisions and the flow of capital.

These concerns led to calls by the AU to examine the feasibility of establishing a local agency, the ACRA, as an independent entity of the union to provide alternative credit ratings to the “Big Three”.

“It is envisaged that the ACRA would provide balanced and comprehensive opinions on African credit instruments to support affordable access to capital and the development of domestic financial markets,” the report says.

Repoa executive director Donald Mmari told The Citizen that the idea of establishing a local credit is a step forward in reshaping the narrative around African economies and ensuring that credit ratings accurately reflect the continent's economic realities.

“Context matters and the parameters used in these international rankings create an impression of how Africa is viewed by funders and investors,” he said.

“If we have our own ACRA, international investors can access different perceptions and analyses the average,” Dr Mmari added.

In 2023, African countries including Kenya and Nigeria had their credit ratings downgraded by Moody’s Investor Service, while Tunisia and Egypt had their credit ratings downgraded by both Moody’s and Fitch. Tanzania had experienced favourable ratings.

In its regular country update, which was issued in April, Moody’s Investors Service gave Tanzania a rate of B2 Positive, attributing it to the positive outlook to lessened political risks in Tanzania, the country’s engagement with the international community, and its structural reform agenda.

June 2023 Fitch Ratings also assigned Tanzania a rating of “B+” with a stable outlook, saying it reflects the country’s “fairly strong macroeconomic performance with high real GDP growth and contained inflation, a moderate level of debt, and increased reform momentum backed by a new IMF programme.

A senior economist and retired University of Dar es Salaam (UDSM)’s lecturer, Prof Delphin Rwegasira, said the proposed agency will help Africa in creating financial narratives which are balanced and have comprehensive opinions.

“However, there is an important question that will follow – will the international communities trust the local agency?” he asked.

“International investors and institutions are accustomed to using the ratings provided by well-known global agencies as a benchmark for evaluating investments. Will they be convinced by our local agencies?” Prof Rwegasira further queried.

His views echoed a recommendation by the African Peer Review Mechanism (APRM), which stated that African regulators need to develop regulatory mechanisms to supervise the work of both international and regional CRAs operating within their respective jurisdictions to ensure proper conduct of business and enforcement.

As part of their regulatory response, African regulators also will be required to regulate the timing of rating issuance, says APRM.