UNDP lists issues informing poor credit rating in Africa

A country’s credit rating indirectly serves as a signal to potential investors, informing them about the risk profile of sovereign borrowers.

Sovereign credit ratings which are determined by three global agencies – Standard and Poor’s (S&P), Moody’s, and Fitch serve as the highest benchmark for the ratings of the country’s corporate and public sector entities, such as regional or municipal bodies.

According to a report by the United Nations Development Programme (UNDP) – Regional Bureau for Africa, Africa has 32 countries that are currently being rated.

Out of these, 13 states have received unfair credit ratings and have been locked from accessing an additional US$31 billion in new financing for sovereign credit.

The severely affected state in Sovereign Bonds in Domestic currencies is South Africa, closely followed by Egypt.

With two exceptions – Botswana and Mauritius – the ratings of African economies are of speculative (non-investment) grade.

According to UNDP, the research literature on credit ratings highlights several issues including;

(a) a bias in favor of the home country of the rating agencies or its economic allies,

(b) a bias against most forms of government intervention,

(c) a tendency for ratings to fluctuate with the business cycle,

(d) and a conflict of interest (since the bond issuer pays the rating agency).

UNDP says that if the ratings were more in line with economic fundamentals, the 13 listed states could have an additional US$45 billion in funds available, considering both the savings in interest costs and the additional financing.

Reducing interest rates paid by African countries on both domestic and foreign debt could greatly decrease the debt service burden they face.

“This, would enable them to repay the principal faster and free up funds for more investments in development,” reads the report in part.

Credit ratings indirectly influence Foreign Direct Investment (FDI) by affecting the perception of a country’s investment climate and its ability to repay its debts.

Adjusting credit ratings that are inconsistent with countries’ macroeconomic reality could also improve risk perception and lead to increased FDI flows.

By improving their credit ratings, African countries could attract more FDI, which is crucial for long-term economic growth and development.

Africa has a number of Credit Rating Agencies (CRA) including Metropol Credit Rating Agency (MCRA) which is licensed by Kenya’s Capital Markets Authority (CMA) and Rwanda Capital Market Authority.