The African Union is set to launch its own credit ratings agency in the coming year as a direct response to concerns regarding what it perceives as biased credit assessments given to African nations. This move aims to provide a more balanced evaluation of lending risks associated with African countries and bolster investment in the continent.
Purpose and Operations
The African credit rating agency will primarily function within the African continent and will be financially self-sustaining. Its core objective is to offer a supplementary perspective for investors when making decisions regarding African bonds or extending private loans to African nations, according to the African Union.
Critique of Existing Agencies
The African Union, along with its member nations’ leaders, has long criticized the “big three” credit ratings agencies—Moody’s, Fitch, and S&P Global Ratings—for what they perceive as unfair assessments of lending risks related to African countries. They argue that these agencies are often too quick to downgrade African nations, particularly during crises such as the global health pandemic.
The Impact of Bias
A study conducted by the United Nations prior to this initiative revealed that subjective biases in credit ratings have cost African countries a staggering combined total of $74.5 billion. This significant financial loss resulted from missed funding opportunities and the payment of excess interest on public debt.
The Role of Credit Ratings
Credit ratings fundamentally assess the likelihood of a borrower defaulting on their obligations and significantly influence the terms under which banks and other financial entities provide loans. Despite mounting criticism, Moody’s, Fitch, and S&P Global Ratings maintain their stance, asserting that their rating methodologies remain consistent and unbiased across the globe.