- This year, credit rating agencies have downgraded Kenya, Ghana, Nigeria, Egypt and Morocco.
- The report wants Africa to develop mechanisms to supervise ratings by international agencies to avoid erroneous assessments that discourage investment.
Africa should develop regulatory mechanisms to supervise international credit rating agencies (CRAs) to avoid erroneous assessments that discourage investment, an expert report has recommended.
The joint report by the UN Economic Commission for Africa (UNECA) and the African Peer Review Mechanism (APRM) says despite positive economic projections, Sovereign Credit ratings in Africa are getting worse.
“African regulators need to develop regulatory mechanisms to supervise the work of international CRAs operating within their respective jurisdictions to ensure proper conduct of business and enforcement,'' the report says.
Dubbed 'African Sovereign Credit Review Mid-Year Outlook', the report says it is imperative for regulators to ensure accountability on inaccurate rating opinions issued in Africa.
A sovereign credit rating is an independent assessment of the creditworthiness of a country.
It gives investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
The report further recommends that African countries should regulate the publication of ratings and a rating calendar so as to curb impromptu rating announcements that disrupt financial markets.
“The recent downgrading of five African countries by the top three CRAs has reversed the optimism amongst investors on the international financial markets that African countries are recovering from the devastating Covid-19 economic shocks, " the report says.
In 2023, Standard & Poor's, Moody's Investors Service and the Fitch Group downgraded Ghana, Nigeria, Kenya, Egypt and Morocco, citing increasing government financing needs and pressures from the upcoming ‘wall of Eurobond maturities combined with poorly structured terms of international bonds.
Besides, the global credit rating agencies based their downgrades on ‘weakening external liquidity position due to an unfavourable foreign exchange trajectory, the growth of debt service cost and the high yields on the Eurobond financial markets.’
However, Nigeria and Kenya have rejected Moody’s rating downgrades, citing a lack of understanding of the domestic environment by the rating agencies and that their fiscal situation and debt were not as bad as estimated in Moody’s review.
Global credit rating agencies based their downgrades on weakening external liquidity position due to an unfavourable foreign exchange trajectory, the growth of debt service cost and the high yields on the Eurobond financial markets.
In May, Moody's dealt a blow on Kenya’s quest to tap into the international markets for financing after it downgraded the country’s foreign currency issuer ratings from B2 to B3.
This means that Kenya is now classified as “high credit risk” and just one level above “very high credit risk”.
Earlier in February, global ratings agency Standard and Poor (S&P) cut Kenya’s ratings outlook from stable to negative on concerns about the country’s debt servicing capacity due to constrained international market access and underperforming domestic bond issuances.
In July, Fitch Rating revised Kenya’s long-term foreign currency issuer default rating to negative from stable and affirmed it at ‘B’ meaning the country stands at a high risk of loan defaults.
According to the agency, the rating affirmation balances Kenya's relatively high government debt and external indebtedness and its narrow revenue base.
Disputing those ratings, the latest report says challenges were noted during the review period and these included errors in publishing ratings and commentaries and that analysts were located outside the African continent to avoid regulatory compliance, fees and tax obligations.
Besides, the experts found that there were impromptu ratings and announcements that did not follow a rating calendar and there was herding behaviour amongst the rating agencies to follow other rating agencies’ actions, and there was increased rating analysts’ workload.
"All these result in failures to adhere to applicable surveillance policies and procedures'', the report said.
It is now calling on CRAs to acknowledge weaknesses in their institutional structures and to have more analysts in Africa to address challenges stemming from foreign-based assessments.
“Solution to these challenges lies in effective regulation and eliminating reliance on credit rating opinions," the report reads in part.
Experts insist that effective regulation should ensure that rating agencies stay independent, keeping up the integrity and quality of the rating process.