The African Union (AU) has unveiled plans to launch a new African credit rating agency in 2024. This initiative seeks to address the AU’s concerns about what it views as biased evaluations of African countries by major global rating agencies such as Moody’s, Fitch, and S&P Global Ratings.
Misheck Mutize, the leading expert on rating agencies for the African Union, disclosed that this new agency will be headquartered in Africa and will provide independent assessments of lending risks associated with African countries. It will also offer additional context to assist investors in making informed decisions about African bonds and private lending opportunities.
Credit ratings hold significant influence over investor decisions in allocating capital. In Africa, the credit rating industry is predominantly controlled by the “big three” international agencies, which control about 95% of the global credit rating market. However, the AU, along with leaders from its member nations, has expressed concerns that these agencies’ ratings do not accurately assess the risks of lending to African countries.
Critics have pointed to swift downgrades for African nations and delayed upgrades when warranted. Other concerns revolve around insufficient stakeholder consultation and perceived deficiencies in terms of independence and objectivity.
Despite these criticisms, major rating agencies like Moody’s, S&P, and Fitch maintain that their rating methodologies are consistently applied. They argue that they apply the same criteria globally, and a Fitch Ratings spokesperson stressed that sovereign rating decisions are based on globally consistent criteria with transparently identified rating factors.
A study by the United Nations Development Programme in April highlighted the potential for African countries to save up to $74.5 billion if credit ratings were based on less subjective assessments. It cited disparities in the frequency of rating actions for African nations as an example.
The AU’s finance ministers previously passed a resolution in support of establishing the agency over the summer. This effort was initiated by the African Peer Review Mechanism (APRM), an AU branch formed in the previous year to enhance governance across the continent. The full AU executive council is expected to endorse the resolution in February.
The new agency is envisioned as a self-funded, private-sector-driven entity with AU oversight. Investors have welcomed this development, as they seek alternative sources of information for their investment decisions.