The African Union is gearing up to launch a new credit rating agency for the continent in the coming year, aiming to address concerns about the fairness of existing ratings assigned to African nations. An official, speaking to Reuters, disclosed this development.
The proposed agency, which will operate within Africa, intends to provide a fresh perspective on the risk associated with lending to African countries.
- “Our goal has not been to replace the big three…we need them to support access to international capital. Our view has been to widen the diversity of opinions,” Mutize speaking to Reuters.
Misheck Mutize, who serves as the lead expert for country support on rating agencies within the African Union, explained that this agency would supply contextual information to investors when they are making decisions about purchasing African bonds or extending private loans to African nations.
- “Our goal has not been to replace the big three…we need them to support access to international capital. Our view has been to widen diversity of opinions,” said Mutize
- “We know the big three follow the opinion of other smaller ratings agencies. They’ve acknowledged that other smaller ratings agencies have got an edge in understanding domestic dynamics.”
AU countries accuse major rating agencies of bias
The African Union, in collaboration with member nations such as Ghana, Senegal, and Zambia, alleges that the major three credit rating agencies—Moody’s, Fitch, and S&P Global Ratings—have displayed bias in their evaluations of lending risks in African countries.
They argue that these agencies tend to downgrade African nations more swiftly, especially during crises like the COVID-19 pandemic.
However, all three of the major rating agencies vehemently deny any bias and maintain that their rating methodologies are consistent across continents.
As of now, Moody’s, Fitch, and S&P Global Ratings have not responded immediately to requests for comments on this matter. Ravi Bhatia, the lead analyst for sovereign ratings at S&P, recently asserted that the agency applies the same criteria uniformly across all regions.
What you should know about credit ratings
In essence, credit ratings serve as a tool to assess the likelihood of a borrower defaulting and help determine the terms under which financial institutions and others will provide loans. It’s important to note that more than a dozen African countries currently have international bonds outstanding.
In July this year, during the 5th Ordinary Session of the Specialized Technical Committee focused on “Improving Africa’s Access to Capital: Debt Management and the Rising Influence of Credit Rating Agencies”., AU finance ministers approved a resolution supporting the establishment of a new agency.
This initiative was led by the African Peer Review Mechanism (APRM), a branch of the AU created last year to enhance governance throughout the continent. It is anticipated that the full AU executive council will also endorse this resolution in February.