Unfair Credit Ratings Cost Africa $74.5bn Annually – UN
The United Nations says inaccurate and context-poor sovereign credit ratings cost African countries an estimated $74.5 billion annually through higher borrowing costs and lost financing. The UN Office of the Special Adviser on Africa made the disclosure ahead of the launch of the Africa Credit Rating Agency, AfCRA, which was officially inaugurated in Port Louis, Mauritius, on October 7. The agency is designed to provide independent, Africa-focused assessments of sovereigns, sub-sovereigns, companies and institutions, complementing existing international rating agencies. The UN said Africa’s actual sovereign default experience is lower than prevailing risk perceptions suggest, yet the continent continues to face some of the world’s highest costs of capital. It said ratings that do not adequately reflect African economic realities contribute to what it described as a major development penalty. AfCRA is expected to address some of these information gaps by placing greater emphasis on African data, expertise and economic conditions, including factors such as informal-sector activity, vulnerability and resilience.
The issue has particular relevance for Nigeria, which has repeatedly raised concerns about the risk premium attached to African sovereign borrowing. At an ECOSOC special meeting on credit ratings in March, Nigeria compared its borrowing costs with those of an unnamed highly indebted European country, saying Nigeria had a lower debt-to-GDP ratio, had never defaulted on sovereign debt and had stronger foreign reserves, yet its recent dollar-denominated sovereign bonds carried yields of between 8.6 and 9.1 per cent, compared with about 3.9 to 4 per cent for the European country. Nigeria also questioned why profitable African banks and businesses could operate successfully while their sovereigns remained below investment grade and called for greater engagement by international rating agencies with local investors and economic actors. The African Union says AfCRA will complement, rather than replace, existing global agencies. It is intended to operate independently, be private-sector driven and self-funded, with governments barred from owning shares to protect its credibility.
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