A recent report by the UN Development Programme argues that Africa would save money if rating agencies were more “objective”. Many governments in Africa agree
African governments say no. “The perception of risk continues to be higher than the actual risk,” argued Senegal’s Presidentlast year. He pointed an accusing finger at the credit-rating agencies. So did Ghana’s finance minister, Ken Ofori-Atta, in the early months of the covid-19 pandemic, as funds dried up and downgrades loomed. “Are the rating agencies beginning to tip our world into the first circle of Dante’s Inferno?” he asked.
Credit-rating agencies prefer to declaim in spreadsheets. They combine economic data with their own subjective judgment to assess whether a borrower is likely to repay on time and in full. Countries with lower ratings face higher interest rates on international markets. A sovereign downgrade also raises the cost of borrowing for firms and deters foreign direct investment. Only two African countries, Botswana and Mauritius, are now rated better than junk.casts doubt on the rating agencies.
Rating agencies respond that they apply the same methods everywhere. African governments have low ratings because they collect little tax, borrow in foreign currencies and face other genuine obstacles. A credit rating assesses risk; it does not indict policy, says Matt Robinson, who manages the team that rates African sovereigns at Moody’s Investors Service. Without trusted information, investors would put even less capital into African markets.
The debate hinges on how to weigh factors that are not easily measured, like the strength of institutions, or political will. Rating agencies say that expert discretion is where they add value. But their African critics worry that too much space is given to gut feelings. Studies find that agencies tend to look more favourably on their home country and on places which are culturally similar. The big three rating agencies that dominate the global market are all headquartered in America.
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