Flawed Credit Ratings Cost Africa $74.5bn a Year, UN Says

Inaccurate sovereign credit ratings that lack local context cost African countries an estimated 74.5 billion dollars a year in excess borrowing costs and lost financing, the United Nations says.

 

The UN Office of the Special Adviser on Africa gave the figure shortly before the formal launch of the Africa Credit Rating Agency (AfCRA) on Wednesday in Port Louis, Mauritius.

 

AfCRA is expected to provide independent, Africa-focused assessments of sovereigns, sub-sovereigns, companies and institutions.

 

The UN described the cost as a major development penalty on a continent whose actual record of default is better than prevailing perceptions of its risk suggest.

 

"Africa's actual default rate is far lower than what its credit ratings imply, yet the continent pays the highest cost of capital in the world," the UN said.

 

It said ratings that fail to reflect African economic realities adequately were estimated to cost the continent 74.5 billion dollars every year.

 

"That is a tax on Africa's development, paid for no good reason," the UN said.

 

 

The issue is of particular relevance to Nigeria, which has repeatedly raised concerns at the UN over what it sees as a disproportionate risk premium on African sovereign borrowing.

 

At an ECOSOC special meeting on credit ratings in March, Nigeria compared its borrowing costs with those of an unnamed, highly indebted European economy.

 

Nigeria told the meeting that its debt-to-GDP ratio was considerably lower, that it had never defaulted on its sovereign debt and that its foreign reserves were stronger.

 

Yet, Nigeria said, its recent dollar-denominated sovereign bonds carried yields of between 8.6 and 9.1 per cent, while the European country borrowed at about 3.9 to 4.0 per cent.

 

Nigeria also questioned why profitable banks and businesses could thrive within African economies while their governments remained below investment grade.

 

It argued that international rating agencies should engage more deeply with domestic investors and local economic actors, rather than rely mainly on assumptions generated outside the continent.

 

Nigeria further noted that the major global rating agencies had a limited physical presence across Africa, which could limit their understanding of local economic conditions.

 

 

According to the UN, AfCRA is meant to help close such information and methodology gaps through more transparent assessments rooted in African data, expertise and economic context.

 

It said the agency would give greater weight to factors those conventional ratings often fail to capture adequately, including informal-sector activity, vulnerability and resilience.

 

AfCRA is also expected to improve market intelligence and challenge historical biases built into perceptions of African sovereign risk.

 

The African Union (AU) said the agency would complement, not replace, existing international credit rating agencies.

 

It said AfCRA would operate independently and would be private-sector driven and self-funded, with governments barred from owning shares in order to protect its credibility.

 

The launch follows years of complaints by African governments those conventional sovereign ratings often raise their borrowing costs and restrict the fiscal space they need for development.

 

The UN Economic Commission for Africa (UNECA) said the new institution was part of broader efforts to reform Africa's financial architecture, deepen domestic capital markets and lower borrowing costs.

 

The AU said AfCRA would strengthen Africa's voice in global financial governance and promote more evidence-based assessments of African economies.