Africa is experiencing reduced investment as a result of the “downward spiral” trajectory of credit ratings from the major rating agencies, a new report reveals.
The report claims Moody’s, Fitch and S&P Global have made significant financial errors in their assessments raising doubts about the agencies’ ability to accurately appraise Africa’s economy.
The agencies have made “Significant financial errors in their ratings, while influencing the global financial decisions and flow of capital,” the experts’ 2023 mid-year outlook, compiled by the Africa Peer Review Mechanism (APRM), and UN Economic Commission for Africa (UNECA), states.
Dubbed the “Africa Sovereign Credit Rating Review”, the report says downgrades paint an inaccurate picture of business conditions in the continent. This year alone, exasperated countries have protested ratings actions.
Abdulmenan Mohammaed (PhD), a London-based financial analyst, praised the report for its “valid criticism,” he said.
“Rating agencies’ reports significantly affect African countries’ ability to issue Eurobonds and secure international financing. However, for foreign direct investment, investors’ decisions rarely depend on rating agencies’ grades. Instead, investors consider many other factors when making investment decisions.”
The report points to Silicon Valley Bank – despite red flags prior to its March collapse.
“The ‘big three’ failed to correctly assess the intrinsic value of the US Silicon Valley Bank and its ability to meet obligations,” the report reads. “Rather than flagging the financial risks associated with the bank, the rating agencies maintained the bank’s A-rating until its collapse on March 10, 2023, despite signals showing a sharp increase in credit risk.”
The co-authors – five experts and agency staff members – insist African nations should not rely solely on these “credit rating opinions” and should implement regulatory mechanisms to maintain the “integrity and quality of the rating process.”
Regulators must develop rules overseeing how international credit rater’s work in their jurisdictions, experts say.
The AU-UN report recommend requiring agencies publish rating changes after market close on Fridays and publicly post a yearly ratings calendar a month before the year starts.
However, Abdulmenan argues it is difficult for African countries to regulate the rating agencies individually. “But the African Union, on behalf of the African economies, can demand reforms and regulatory power over the rating agencies.”
For the rating firms, experts call for self-reforms: conduct more in-depth analyses of African nations, widen consultations in scope and time.
The outlook sees Ethiopia’s economy recovering in the second half of 2023 as “a peace deal boosts prospects.”
After canceling bilateral debt, China’s move, according to the report, is seen as a “boost to Ethiopia’s recovering economy,” with growth projected at 6.1 percent.
