Credit Rating

Ratings Bias Costs Africa Billions of Dollars, Says Standard Bank CEO

The African Peer Review Mechanism, African Development Bank, African Export-Import Bank and African Union Commission have announced plans to ensure such an entity is rolled out next year. 

November 8, 2024
468 1 minute read
Ratings Bias Costs Africa Billions of Dollars, Says Standard Bank CEO
Standard Bank CEO Sim Tshabalala

African countries face higher costs of financing because of inflated risk perceptions from credit-ratings companies, the head of the continent’s biggest bank said.

A United Nations Development Programme study last year showed that subjective risk assessments by ratings companies resulted in $75 billion of added costs and foregone revenue by African countries, Standard Bank Group Ltd. Chief Executive Officer Sim Tshabalala said at a Future Investment Initiative Institute conference in Riyadh on Monday. He described the added costs as “preposterous” and “unconscionable.”

“This perception issue does make a massive difference and needs to be addressed,” he said.

Tshabalala’s remarks echo growing calls in Africa for changes to the way credit-rating companies assess risk on the continent, with leaders including Senegal’s former president and Zimbabwe’s finance minister calling for the creation of a pan-African agency.

The African Peer Review Mechanism, African Development Bank, African Export-Import Bank and African Union Commission have announced plans to ensure such an entity is rolled out next year.

Also Read: Regulators and Experts push for Adoption of a Credit Rating culture

Even when African countries have similar ratings to countries elsewhere, they end up paying more for debt, with loans subjected to credit spreads that are much wider than warranted, said former Senegalese Economy Minister Amadou Hott.

In some instances, African nations pay as much as 500 basis points more for debt than other sovereigns that have the same rating, he said, citing an unspecified study of 15 countries on the continent.

“When the other country pays 5% on a bond, African governments pay 10% on the bond,” he said. “Five hundred basis points over 20 years on a $1 billion loan is another $1 billion of extra cost,” which can increase countries’ debt vulnerability if left unaddressed, Hott said.

Tshabalala cited the examples of South Africa and Denmark, which he said despite having similar institutions, policies and processes, yet have divergent ratings: while the Nordic country is rated AAA, South Africa has a full house of junk ratings.

“It’s really hard to understand why there’s such a big difference,” he said.

Source; Bloomberg

November 8, 2024
468 1 minute read
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Lawrence Baraza

Lawrence Baraza is a dynamic journalist currently overseeing content at Metropol TV Digital. With a keen focus on business news and analytics, Lawrence guides the platform in delivering insightful, data-driven content that empowers its audience to make informed decisions. Lawrence’s commitment to quality and his ability to anticipate market trends make him a key figure in the digital media landscape. His work continues to shape the way business news is consumed, making a significant impact in the field.

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