LONDON (Reuters) – The African Union plans to establish a new African credit rating agency next year to address the group’s concerns that ratings given to countries on the continent are unfair, an official told Reuters.
The agency, which will develop its own assessment of the risks in lending to African countries, will depend on the continent, said Meshek Mutiz, a senior expert in country support for rating agencies with the African Union.
It will also add context to the information investors consider when deciding whether to buy African bonds or lend specifically to countries.
“We already have very strong private sector interest to support the implementation of this,” Motez said, adding that they are targeting a launch in 2024.
The African Union and leaders of member states from Ghana to Senegal to Zamia allege that the “big three” rating agencies – Moody’s, Fitch and Standard & Poor’s – do not fairly assess the risks of lending to African countries, and say they are quicker to downgrade their ratings during crises such as the Covid-19 pandemic.
The three rating agencies denied any bias and said their ratings follow the same formula across continents.
Moody’s and Standard & Poor’s did not immediately respond to a request for comment. Ravi Bhatia, chief sovereign ratings analyst at Standard & Poor’s, recently told Reuters that the agency consistently applies the same standards across all regions.
A Fitch Ratings spokesman said that all sovereign rating decisions use “globally consistent, publicly available criteria” and that all rating drivers have been clearly identified.
Existing bonds
In general, credit ratings are designed to measure a borrower’s risk of default, and to set the terms under which banks and others will lend to them. More than a dozen African countries have outstanding Eurobonds.
A UNDP study in April showed that African countries could save up to $74.5 billion if credit ratings were based on less subjective assessments, citing “idiosyncrasies” in the frequency of rating actions for African countries as an example.
Motez said the new agency was a push to change the narrative.
“Our goal was not to replace the Big Three,” he said. “We need them to support access to international capital. Our view was to broaden the diversity of opinions.”
“We know that the Big Three follow the opinion of other smaller rating agencies. They have acknowledged that other smaller rating agencies have an advantage in understanding local dynamics.”
African Union finance ministers passed a resolution over the summer to endorse the new agency’s plan, an effort led by the African Peer Review Mechanism (APRM), a branch of the African Union formed last year to improve governance across the continent. The African Union Executive Council is expected to adopt the same decision in February.
Mutis said that the agency will be self-financing and managed by the private sector under the supervision of the African Union.
He added: “Investors have been very positive. They want to see what the outcome of this will be.” “Any investor will pay attention to anything they are given information about.”
(Reporting by Libby George, Additional reporting by Mark Jones, Editing by Christina Fincher and Ed Osmond)
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