AfCRA is expected to reduce the cost of credit ratings for African countries and businesses, increase their access to capital markets, and ensure a fairer representation of their creditworthiness.
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Leaders listening to Kenya's Ruto as the discuss creation of African Rating Agency
African Countries are increasingly finding it harder to access credit on the international market compared to those in other regions.
Joy Gessa, a Senior Economist at the Ministry of Finance, Planning and Economic Development says that lenders are Les willing to lend to Africa because they consider African countries riskier to lend to, hence the stricter terms and conditions like high interest rates and shorter debt maturity.
The lenders make their decisions based on the ratings of countries by the three major international rating agencies: S&P Global (formerly Standards and Poor's), Fitch and Moody's.
Unfortunately, she says, the rating agencies are driven by several factors that do not favour countries like Uganda, including not having a presence in the country and making reports without adequate research on the economies.
She says Uganda is supporting other African countries and the African Union's move to establish a credit rating agency they would consider independent and genuine.
African leaders on Friday met in Addis Ababa, Ethiopia at a Presidential Dialogue on the Establishment of an African Credit Rating Agency (AfCRA), which represents a pivotal step in asserting Africa’s position on global financial governance, according to the AU.
A policy paper notes that AfCRA’s objective is not to compete with or replace the three international credit rating agencies, but rather to complement them by providing an alternative perspective.
"It will focus on filling gaps in data and analysis, addressing regional nuances, and promoting African financial integration, hence allowing for a diversified view of creditworthiness and foster collaboration for mutual benefit."
It is estimated that in 2021, the rating agencies downgraded Africa's ratings by an average 56 percent compared to the global average of 36 percent due to the effects of COVID-19 on economies.
AfCRA is expected to reduce the cost of credit ratings for African countries and businesses, increase their access to capital markets, and ensure a fairer representation of their creditworthiness.
It will also provide a platform for promoting African projects and investments, driving economic growth and regional financial stability.
AfCRA plans to maintain the highest standards of objectivity, impartiality, and transparency, with Its methodology integrating both quantitative and qualitative factors, ensuring an accurate and fair assessment of creditworthiness.
This will also mean engaging stakeholders, including governments, private sectors, and civil society, to build trust and accountability.
Kenya President William Ruto, while speaking at the ongoing told dialogue on the sidelines of the 38th Ordinary Summit of the AU, called the ratings of the global agencies "misguided" on African realities, which will no longer be accepted.
"By relying on flawed models, outdated assumptions, and systemic bias, these agencies have painted an unfair picture of our economies, leading to distorted ratings, exaggerated risks, and unjustifiably high borrowing costs," he said.
According to Ruto, the establishment of an Africa Credit Rating Agency, backed by credible data that accurately reflects Africa’s reality, will unlock the much-needed finance to fund the continent’s development programmes and bring meaningful change to the people.
The establishment process is currently underway, including stakeholder consultations and capacity-building initiatives.
"An African-led credit rating agency will not only provide more balanced assessments of sovereign and corporate creditworthiness but will also empower African nations to negotiate better terms in global financial markets," Monique Nsanzabaganwa, the Deputy Chairperson for the AU Commission, told the dialogue.
African leaders and institutions have for long challenged the ratings by the international agencies with, at least 29 official statements from 12 African countries rejecting them.
Expert researchers and consultancies report that the "biased" ratings add 4.2 Billion Dollars in extra debt interest payments annually, while others say they cost the continent some 75 Billion Dollars in lost opportunities.
