Original article written in French The Conversation
The African Credit Rating Agency (Afcra), backed by the African Union, is set to become Africa's first financial rating agency in 2025. Could it be an alternative to major institutions such as Standard & Poor's, Moody's and Fitch?
The year 2025 marks a turning point for African finance with the expected launch of the African Credit Rating Agency (Afcra), supported by the African Union. Scheduled for the second half of the year, this continental credit rating agency aims to provide tailored credit analyses that are aligned with the continent's economic realities.
A credit rating is an assessment of the ability of an issuer - whether a company, financial institution or government - to repay its debts. It serves as a useful decision-making tool for capital providers. It acts as a passport for credit, offering the possibility of access to foreign capital. In the context of a globalised economy, this widening of market access is often accompanied by a reduction in financing costs, especially for issuers with high credit ratings.
However, the debate remains heated. For years, the ratings of international agencies such as Moody's, Standard & Poor's (S&P) and Fitch, which directly influence the cost of borrowing for African countries, have been at the centre of controversy. As the continent seeks to attract more investors, the question is: are these assessments, designed thousands of miles away, really suited to Africa's unique challenges and strengths?
Global oligopoly of credit ratings
In the 1990s, Africa's financial landscape was marked by a striking asymmetry: only South Africa had a sovereign credit rating. Fifteen years later, in 2006, almost half of the continent's 55 countries - 28 states - were still invisible on the rating agencies' map. Although these agencies present their analyses as mere opinions, their impact is tangible: their ratings directly influence investment decisions and the interest rates applied to African states.
Their oligopolistic dominance raises criticisms. The credit ratings, which are intended to reduce the information asymmetry between investors and governments, are seen as too generic. Many African experts and leaders criticise the rating methodologies as inadequate because they struggle to capture the specificities of local economies. Strongly focused on quantitative data, sometimes biased, they do not always reflect African realities. The lack of reliable local data exacerbates this limitation, leading to increased subjectivity and assessments by experts who are often far removed from the regional context.
African risk premium
There is growing frustration on the continent about an "African risk premium". Exaggerated and imposed by ratings that are considered too harsh, it does not reflect the economic and structural progress that has been made. A study by the United Nations Development Programme (UNDP) estimates that this overestimation of risk is costing African countries billions of dollars a year in extra borrowing costs.
According to this report, the underestimation of sovereign ratings by the agencies (S&P, Moody's, Fitch) results in an estimated annual cost to African countries of $74.5 billion, including $14.2 billion in additional interest costs on domestic debt, $30.9 billion in lost financing opportunities for the same debt, and $28.3 billion more for Eurobonds - bonds or debt securities issued by a country in a currency other than its own.
The criticisms focus on two aspects:
- Quantitative biases: Standardised models do not always reflect local realities, especially the impact of informal economies. They underestimate the essential role of diasporas in financing states. According to a World Bank report, in 2024 Africans living abroad will send $100 billion back to the continent, equivalent to 6% of Africa's GDP.
- Qualitative gaps: The lack of contextual data leads to subjective ratings. In 2023, Ghana rejected its Fitch rating, calling it "disconnected from ongoing reforms". Several African countries have publicly rejected the ratings assigned to them over the past decade.
The alternative: Africa Credit Rating Agency (Afcra)
In response to these limitations, a made-in-Africa solution has emerged: the creation of the Africa Credit Rating Agency (Afcra), a rating agency designed by Africans for Africans. Backed by the African Union, this initiative aims to rewrite the rules of the game.
The idea is to build an analytical framework that embraces the continent's realities, its challenges, but also its often invisible strengths. At the heart of the project are transparent methodologies based on local data and tailored indicators. These tailored indicators could include the valuation of natural assets, consideration of the informal sector, and measures of real rather than perceived African risk. The aim is to achieve more comprehensive ratings through this contextual sensitivity.
Information asymmetry
Credit Rating Agencies have traditionally presented themselves as key players in mitigating information asymmetries in markets. Their promise is to enlighten investors by assessing credit risk, thereby enabling them to make better-informed decisions. This legitimacy, built up over decades, rests on two pillars: constant innovation in their analytical methods and a reputation forged by their historical influence on markets.
A paradox remains. The dominant economic model - in which issuers finance their own ratings - has repeatedly fuelled suspicions of conflicts of interest.
Our research examines this tension by analysing the evolution of the credit rating agency sector, the theoretical foundations of its existence, and the risks associated with the concentration of power in the hands of a few actors.
One insight emerges: the opacity of methodological criteria and the technicality of the models used feed both market distrust and dependence. Agencies rely on quantitative indicators - GDP, public debt, inflation - and qualitative indicators - political risk, government transparency - whose weighting varies, leading to sometimes inconsistent assessments. To strengthen their credibility, there is a need to make the invisible visible by clarifying the assessment processes without sacrificing their necessary complexity.
AI and ESG methodologies
Recent research explores the potential of artificial intelligence (AI) and machine learning methods to integrate environmental, social and governance (ESG) factors into risk assessment. These advances aim to overcome the limitations of traditional models by capturing the complexity of the relationships between ESG indicators and financial risk, with the goal of improving the accuracy and reliability of risk assessments to promote more informed and sustainable capital allocation.
For Africa and Afcra, these approaches would highlight underappreciated strengths, such as the resilience of the informal sector or certain institutional specificities. They would also provide a better understanding of the complex linkages between ESG criteria and financial risk specific to the continent. Afcra's aim would be to produce more accurate and tailored ratings, thereby reducing the "African risk premium".
The emergence of regional agencies is an important step towards a more balanced system. To succeed, African governments need to coordinate their efforts, support local initiatives and engage in constructive dialogue with international agencies. Africa is moving towards greater financial sovereignty. Will Afcra rise to the challenge?
