The African Union has been asserting itself in credit rating and assessment matters in recent times.
Through its Africa Peer Review Mechanism agency, an organization initially set up as a mutual governance watchdog among African states, it has launched a campaign to provide an alternative to the work of the Big 3 (Fitch, Moody’s and S&P) global credit rating agencies in Africa and to justify the urgent need for an Africa-based credit rating agency known as AfCRA.
The recent decision by Fitch, a New York-based rating agency, to downgrade Africa’s second-largest multilateral development bank (MDB), Afreximbank, to BBB – one notch above junk status – has infused fresh energy into the African Union’s campaign.
The African Union’s position is fortified by a number of plausible propositions: credit ratings affect the cost of credit to Africa, which worsens the debt service crisis, thereby depriving the continent of resources to fund its development.
Furthermore, some analysts say that they can discern a systemic bias against Africa by the Big 3 rating agencies, all of which are of American origin.
With such a background, how can anyone object to a dedicated African rating agency?
A closer look at the African Union’s position, however, reveals cracks in its policy proposals and advocacy stance.
The Afreximbank situation
So far, the African Union has argued the following:
a) The Fitch rating action against Afreximbank is technically flawed because the latter’s claims that Ghana, Zambia and South Sudan are in default is incorrect. In the view of the African Union, these countries are merely ‘inviting’ Afreximbank to negotiate restructuring.
b) The treaty establishing Afreximbank grants it ‘preferred creditor status’ and, therefore, the countries would, at any rate, have no legal basis to default.
Both arguments are hard to sustain in the face of clear facts to the contrary.
Ghana had itself said that it has been in default for two years, an action that has attracted subtle rebukes from some African Union executives. Zambia hasn’t paid its dues to Afreximbank since 2021. And Afreximbank has had to take South Sudan to court in an attempt to get its money back.
Per Fitch’s rules, the debt only needs to be overdue for six months to be classified as non-performing. The total debt outstanding from these countries is also enough to tip Afreximbank over the 6% non-performing threshold that Fitch considers an elevated credit risk.
Regarding the ‘preferred creditor status’ point, the Abidjan charter that created Afreximbank is silent on it. The chapters on immunities and privileges do not mention the issue of debt treatment and how the seniority of the Cairo-based Bank’s loans should be ranked in any way. This is in complete contrast to treaties establishing organizations for whom preferred creditor status is essential, such as the European Financial Stabilization Mechanism.
It is, in fact, not very congruous that the Heads of State, when establishing Afreximbank would have wanted it to have preferred creditor status, since its mandate was supposed to be trade finance for the African private sector. It is settled practice that loans to the private sector do not benefit from preferred creditor status. So, for example, rating agencies do not apply preferred creditor status to the International Finance Corporation’s private sector lending. When Afreximbank was founded in 1993, the Heads of State could not have anticipated the sovereign exposures it now has.
In fact, despite those sovereign exposures, 92% of Afreximbank’s exposures are still to the private sector. About 40% of its shareholders are risk-taking private entities. All this is in stark contrast to entities like the AfDB and the World Bank, which do enjoy preferred creditor status and are fully owned by governments.
Africa now has quite a diverse group of multilateral financial institutions. Some have very specialized roles. Should each and every one enjoy preferred creditor status? If so, who would be left to bear the brunt if an African country needs to restructure its debt?
AfCRA
The African Union’s push for a new rating agency that suffers none of the imperfections of the Big 3 has to be founded on a stronger critique than its attack on the Fitch rating action on Afreximbank.
Whilst the argument that an alternative voice with a deeper exposure to Africa is a reasonable starting point for advocating for AfCRA, there are still important issues that have not been fully addressed. The evidence for systemic credit bias against Africa is contentious, making it a weak base to mount a new policy organisation.
a) To build a truly world-class credit rating agency to match the reputation of the Big 3, whilst also deepening coverage across African sovereigns and corporates and assessing domestic and international issuances, would cost a ton of money. Aborted efforts to create such an entity for Europe in the aftermath of the global financial crisis, when anger against the Big 3 was most intense, were budgeted to cost roughly $400 million. So far, there is no clear business model disclosed for AfCRA to show that it can raise serious funding.
b) In partial response to the concern about financial sustainability, the African Union has said that AfCRA will be fully private. That means it will not be an African Union agency. It will merely be African Union-endorsed. The only private technical partner it has disclosed is India-originated CareEdge. The question that arises is this: there are at least half a dozen regional rating agencies already based in Africa, why would the African Union endorse a startup?
c) The same question could be broadened. There are roughly 150 rating agencies in the world. African governments can go to any of them if there is a feeling that the Big 3 are biased. The real reason they go to the Big 3 is because they control 95% of the market in key international capital centres. That is why, even though Afreximbank has a triple-A rating from a Chinese agency, CCXI, and an A2 rating from a South African one, GCR, it is the Fitch one everyone is talking about. Why would investors give a startup rating agency more attention than the Big 3?
d) Unsurprisingly, other regions, such as the Caribbean, that have created an alternative rating voice and kept it active for more than two decades have not reported any decline in Big 3 influence.
The African Union lacks the supranational status of the likes of the European Union; it’s confined to policymaking. That policy role has been sorely missed in the design of a continental financial architecture that can address burning questions, such as how to ration preferred creditor status among Africa’s fast-growing ranks of development finance institutions, and set up a financial stabilization mechanism (on par with the European Union’s) with unqueried preferred creditor status.
Perhaps, it should refocus on such core mandates and reduce dysfunction, rather than getting directly involved in execution-heavy matters, like credit ratings, where it has limited street cred and capacity.