Africa should develop regulatory mechanisms to supervise international credit rating agencies (CRAs) to avoid erroneous assessments that discourage investment on the continent, an experts report has recommended.
鈥淎frican regulators need to develop regulatory mechanisms to supervise the work of international CRAs operating within their respective jurisdictions to ensure proper conduct of business and enforcement. It is imperative for regulators to ensure accountability on inaccurate rating opinions issued in Africa,鈥� African experts said in a report,听.
Poor ratings affect investment in Africa
The joint report by the UN Economic Commission for Africa (UNECA) and the African Peer Review Mechanism (APRM)听 says despite positive economic projections, Sovereign Credit ratings in Africa are getting worse.
A sovereign credit rating is an independent assessment of the credit worthiness of a country. Sovereign credit ratings give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
The review report further recommended that African countries should regulate the publication of ratings and a rating calendar so as to curb impromptu rating announcements that disrupt financial markets.
鈥淭he recent downgrading of five African countries by the top three CRAs has reversed the optimism amongst investors on the international financial markets that African countries are recovering from the devastating COVID-19 economic shocks, " the report said, citing that five African countries were downgraded by international credit rating agencies in 2023.
In 2023, Standard & Poor's, Moody's Investors Service and the Fitch Group downgraded Ghana, Nigeria, Kenya, Egypt and Morocco, citing increasing government financing needs and pressures from the upcoming 鈥榳all of Eurobond maturities combined with poorly structured terms of international bonds.
Besides, the global credit rating agencies based their downgrades on听 鈥榳eakening external liquidity position due to an unfavourable foreign exchange trajectory, the growth of debt service cost and the high yields on the Eurobond financial markets.鈥�
However, Nigeria and Kenya have rejected Moody鈥檚 rating downgrades, citing lack of understanding of the domestic environment by the rating agencies and that their fiscal situation and debt were not as bad as estimated in Moody鈥檚 review.
Egypt currently has the highest sovereign bond value outstanding in Africa at $37.5 billion.
The report said challenges were noted during the review period and these included errors in publishing ratings and commentaries and that analysts were located outside the African continent to avoid regulatory compliance, fees and tax obligations.
Besides, the experts found that there were impromptu ratings and announcements that did not follow a rating calendar and there was a herding behaviour amongst the rating agencies to follow other rating agencies鈥� actions, and there was increased rating analysts鈥� workload.
Improving Africa鈥檚 poor ratings
All these result in failures to adhere to applicable surveillance policies and procedures, the report said,听calling on CRAs to acknowledge weaknesses in their institutional structures and to have more analysts in Africa to address challenges stemming from foreign-based assessments.
鈥淪olution to these challenges lies in effective regulation and eliminating reliance on credit rating opinions," said the report, adding that, 鈥淓ffective regulation should ensure that rating agencies stay independent, keeping up the integrity and quality of the rating process.鈥�
Click听听to download the report.
