The African Union's Credit Rating Agency Initiative -

The African Union (AU) is set to launch its own credit rating agency, by 2025, a move driven by long-standing concerns that the existing global rating agencies—Moody’s, Fitch, and S&P Global Ratings—do not fairly assess the risk of lending to African countries. This new agency, the African Credit Rating Agency (ACRA), aims to provide more balanced and comprehensive evaluations of African countries’ creditworthiness, addressing perceived biases and enhancing access to international capital.

Rationale Behind the Initiative

The AU’s decision to establish ACRA stems from several critical factors:

Perceived Bias in Existing Ratings: African leaders argue that the “big three” rating agencies often unfairly downgrade African countries, especially during crises like the COVID-19 pandemic. These downgrades can increase borrowing costs and hinder economic recovery efforts. The AU contends that the methodologies used by these agencies do not adequately consider the unique economic and social contexts of African nations.
Impact on Economic Development: Sovereign credit ratings significantly influence the flow of capital and the cost of borrowing for governments. Accurate and fair ratings are crucial for developing countries as they impact their ability to fund infrastructure projects, healthcare, and other essential services. A study by the United Nations Development Programme (UNDP) suggested that African countries could save up to $74.5 billion if credit ratings were based on less subjective assessments.
Support for Local Financial Markets: By providing more accurate ratings, ACRA aims to foster the development of local financial markets. This includes encouraging borrowing in local currencies and integrating African economies more effectively into global financial systems. The agency is expected to enhance investor confidence by offering transparent and contextually relevant assessments.

Benefits of the African Credit Rating Agency

Contextualized Assessments: ACRA will leverage its understanding of the domestic contexts of African countries to provide more detailed and informative ratings. This localized knowledge is expected to result in more accurate risk assessments, benefiting both African borrowers and international investors.
Enhanced Investor Confidence: By offering an alternative perspective to the global rating agencies, ACRA aims to increase transparency and trust in African financial markets. This could attract more foreign investment, as investors would have access to a broader range of opinions on credit risk.
Support for Sustainable Development: Fairer credit ratings could lower borrowing costs for African countries, enabling them to invest more in sustainable development projects. This aligns with the AU’s broader goals of promoting inclusive growth and development across the continent.

Challenges and Disadvantages

Acceptance by International Markets: One of the main challenges for ACRA will be gaining acceptance from international investors who are accustomed to relying on ratings from Moody’s, Fitch, and S&P. The credibility and influence of ACRA will need to be established over time.
Operational and Funding Issues: Ensuring the agency is well-funded and operates independently of political influence will be crucial. ACRA plans to be self-funded with significant private sector involvement. Maintaining this independence will be a continuous challenge.
Potential Conflicts of Interest: As a continent-based agency, ACRA might face scrutiny over potential conflicts of interest. Ensuring that its ratings are perceived as unbiased and objective will be essential to its success and credibility.
Technical and Capacity Building: Establishing robust methodologies and building technical capacity within the agency will require significant effort. ACRA will need to work closely with governments and statistical agencies across Africa to gather reliable data and develop sound rating practices.

The establishment of the African Credit Rating Agency represents a significant step towards addressing the perceived inequities in the global credit rating system. While the initiative promises numerous benefits, including more accurate risk assessments and enhanced access to capital, it also faces several challenges that will need to be carefully managed. As ACRA moves towards its planned launch in 2024, its ability to deliver on its promise of fair and contextualized credit ratings will be closely watched by stakeholders both within and outside Africa.