African countries are losing an estimated $74.5 billion every year because of sovereign credit ratings that the United Nations says do not adequately reflect the continent’s economic realities.
The UN Office of the Special Adviser on Africa disclosed this ahead of the formal launch of the Africa Credit Rating Agency (AfCRA) in Port Louis, Mauritius.
According to the UN, inaccurate or context-poor credit assessments increase borrowing costs for African governments and limit their access to financing.
The organization said Africa’s actual record of sovereign defaults was significantly better than prevailing risk perceptions suggested, yet countries on the continent continued to face some of the highest costs of capital globally.
The UN described the estimated $74.5 billion annual loss as a development burden resulting from what it considers inaccurate assessments of African sovereign risk.
Nigeria raises concerns over borrowing costs
Nigeria has previously challenged what it considers disproportionately high risk premiums attached to African sovereign debt.
At a special meeting of the UN Economic and Social Council (ECOSOC) on credit ratings in March, Nigeria compared its borrowing costs with those of an unnamed highly indebted European country.
The Nigerian government said its debt-to-GDP ratio was considerably lower, the country had never defaulted on its sovereign debt and its foreign reserves were stronger.
Despite this, Nigeria said its recent dollar-denominated sovereign bonds attracted yields ranging between 8.6 and 9.1 per cent, while the unnamed European country borrowed at approximately 3.9 to 4.0 per cent.
Nigeria also questioned why profitable banks and companies could operate successfully within African economies while the sovereigns of those same countries continued to receive relatively low credit ratings.
The country has argued that international rating agencies should engage more extensively with domestic investors and economic actors to gain a better understanding of local conditions.
New African rating agency launched
The newly established Africa Credit Rating Agency, AfCRA, is expected to provide independent assessments of African sovereigns, sub-sovereigns, companies and institutions.
The UN said the agency could help address information and methodological gaps by placing greater emphasis on African data, local expertise and economic conditions.
It is also expected to consider factors such as informal-sector activity, economic vulnerability and resilience, which the UN said may not always receive sufficient attention in conventional credit assessments.
The African Union said AfCRA would complement rather than replace existing international credit rating agencies.
The agency is expected to operate independently, remain private-sector driven and fund its own activities. Governments will not be allowed to own shares in the institution, a structure intended to safeguard its independence and credibility.
Can AfCRA reduce Africa’s borrowing burden?
The launch of AfCRA comes amid wider efforts to reform Africa’s financial architecture and deepen domestic capital markets.
The UN Economic Commission for Africa said the institution could contribute to efforts to reduce borrowing costs and improve the continent’s access to development financing.
However, the agency’s effectiveness will ultimately depend on whether investors and international financial institutions regard its assessments as independent, transparent and analytically rigorous.
For Nigeria and other African economies, the central issue remains whether improved assessment of sovereign risk can translate into lower borrowing costs and greater fiscal space for development.
