Africa should develop regulatory mechanisms to supervise international Credit Rating Agencies (CRAs) to avoid erroneous assessments that discourage investment on the continent, a report has recommended.
The joint report by the Economic Commission for Africa (ECA) and the African Peer Review Mechanism (APRM) said that despite positive economic projections, sovereign credit ratings in Africa were getting worse.
This is contained in a statement by ECA on Thursday.
“African regulators need to develop regulatory mechanisms to supervise the work of international CRAs, operating within their respective jurisdictions, to ensure proper conduct of business and enforcement.
“It is imperative for regulators to ensure accountability on inaccurate rating opinions issued in Africa,” African experts said in the report, ‘African Sovereign Credit Review Mid-Year Outlook’.
NAN reports that a sovereign credit rating is an independent assessment of the creditworthiness of a country.
Sovereign credit ratings give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
The review report further recommended that African countries should regulate the publication of ratings and a rating calendar so as to curb impromptu rating announcements that disrupt financial markets.
“The recent downgrading of five African countries by the top three CRAs has reversed the optimism amongst investors on the international financial markets that African countries are recovering from the devastating COVID-19 economic shocks, ” the report stated.
It said that five African countries were downgraded by international credit rating agencies in 2023.
In 2023, Standard & Poor’s, Moody’s Investors Service and the Fitch Group downgraded Ghana, Nigeria, Kenya, Egypt and Morocco citing increasing government financing needs and pressures from the upcoming ‘wall of Eurobond maturities combined with poorly structured terms of international bonds.
Also, the global credit rating agencies based their downgrades on ‘weakening external liquidity position due to an unfavourable foreign exchange trajectory, the growth of debt service cost and the high yields on the Eurobond financial markets’.
It, however, said that Nigeria and Kenya had rejected Moody’s rating downgrades, citing lack of understanding of the domestic environment by the rating agencies and that their fiscal situation and debt were not as bad as estimated in Moody’s review.
The report also noted that Moody’s and Fitch also downgraded Egypt, in a move that has pushed up its borrowing costs to issue a sovereign bond at over 10 per cent. Egypt currently has the highest sovereign bond value outstanding in Africa at US$37.5 billion.
The report said challenges were noted during the review period and these included errors in publishing ratings and commentaries and that analysts were located outside the African continent to avoid regulatory compliance, fees and tax obligations.
Besides, the experts found that there were impromptu ratings and announcements that did not follow a rating calendar.
According to it, there was a herding behaviour amongst the rating agencies to follow other rating agencies’ actions, and increased rating analysts’ workload.
“All these result in failures to adhere to applicable surveillance policies and procedures,” the report said,
It, therefore, called on CRAs to acknowledge weaknesses in their institutional structures and to have more analysts in Africa to address challenges stemming from foreign-based assessments.
The report added, “Solution to these challenges lies in effective regulation and eliminating reliance on credit rating opinions.
“Effective regulation should ensure that rating agencies stay independent, keeping up the integrity and quality of the rating process.”
