The African Union is set to unveil the African Credit Rating Agency (ACRA) in 2024 to challenge the often flawed ratings from giants like Fitch, Moody’s, and S&P. These major firms have been criticized for their inaccurate assessments of African economies, leading to expensive borrowing costs. ACRA aims to provide more accurate and balanced evaluations, potentially saving African nations billions and boosting investment in critical areas like infrastructure and healthcare. This new agency could transform how Africa is perceived by global investors and reshape the continent’s financial future.

The African Union claims that by establishing a new sovereign credit rating organization, it will be able to give countries all around the continent more precise risk evaluation reports World Economic Forum.

The United Nations Economic Commission for Africa recently released a study (view below) outlining the idea for the new organization, the African Credit Rating Agency (ACRA), claiming that the top credit rating companies in the market today make “significant errors in their ratings.” According to the paper, inaccurate ratings might affect the flow of capital in the area and are frequently based on constrained evaluations that ignore favorable economic indications.

“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 states.

Albert Muchanga, the commissioner for development, trade, tourism, industry, and minerals for the African Union, told reporters in Accra, Ghana, that a credit ratings agency aimed at catering to the unique requirements of the continent’s sovereign debtors is anticipated to begin operations by year’s end.

He also stated that the institution will be independent and not under the African Union’s ownership.

The AU Commission, African Export-Import Bank, African Development Bank, and African Peer Review Mechanism are spearheading the endeavor. Muchanga stated that in order to guarantee its execution, they are presently in the process of creating the final work plan.

National Credit Ratings

Independent assessments of a government’s creditworthiness, known as sovereign credit ratings, are especially crucial for developing nations since borrowing costs can affect a government’s capacity to pay for anything from healthcare services to infrastructure projects.

When determining the degree of risk involved in lending money to a government, rating agencies consider several factors. These metrics include, among other things, the amount of public debt, GDP growth, per capita income, inflation, default history, and the soundness of financial institutions.

We need to foster agency for African people to meet development aspirations and a system where risk can be fairly priced.

— Ahunna Eziakonwa, UN Assistant-Secretary General

The three agencies that are thought to be the most important today are S&P Global Ratings, Moody’s Services, and Fitch Ratings. Although rating systems vary from company to company, the main three agencies employ alphabetical systems, with AAA representing the highest rating and C or D the lowest. Sublevels of creditworthiness are also indicated by pluses, minuses, and digits.

African Credit Assessment Agency

Concerns about unfair treatment by international credit rating agencies, which they claimed led to higher interest rates in comparison to other emerging markets and developed countries, prompted African finance ministers to first suggest the notion in 2021.

According to a report by the United Nations Economic Commission for Africa, 11 African countries received 13 unfavorable rulings from key rating agencies in the first half of 2023. Rating reductions and pessimistic outlook assessments were among the bad evaluations.

“These developments have reversed the optimism amongst investors on the international financial markets that African countries are recovering from the devastating Covid-19 economic shocks,” the report states.

For example, one of the top rating agencies reduced the Nigerian government’s grade from B3 to Caa1 in January. The government cited “wide-ranging fiscal” pressures, “institutional weaknesses and social challenges” in the nation as the reasons for the decision.

Nigerian government bonds lost value as a result of Nigeria’s disagreement with the ruling.

“In the view of the Federal Government of Nigeria, by proceeding to downgrade the government’s rating after rigorous engagements on all the efforts the government has undertaken to stabilize the economy, confirms that the rating agency lacks the full appreciation of the country’s domestic environment in the context of the international political economy,” the UN report noted.

Proponents claim that the ACRA, which is scheduled to begin in 2024, might offer more accurate credit ratings and assessments of the economic prospects, lowering the cost of borrowing for African countries.

According to a United Nations Development Programme research published in April, African nations could save around $75 billion if credit ratings were determined by less subjective evaluations. As to the analysis, the governments would be able to utilize the saved money to settle their international and domestic debt and allocate cash towards infrastructure development and investments in human capital.

During the 2023 World Bank/IMF Spring Meetings, a meeting of African ministers and development players included a discussion of the establishment of an African credit rating agency.

“We are at the heart of polycrisis and African governments are struggling with a drought in development financing,” Ahunna Eziakonwa, UN Assistant-Secretary General and UNDP Regional Director for Africa, said in a statement. “We urgently need more fairness and justice in the way we conceptualize multilateral agencies. We need to foster agency for African people to meet development aspirations and a system where risk can be fairly priced.”

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Read the report below:

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