Introduction
Credit Rating Agencies play an essential function in determining the chances of countries accessing financial resources by offering a solvency risk benchmark to investors for debt issuers and structured finance instruments which are traded on capital markets. However, following the 1998 Asian Crisis and the 2007-08 financial crisis, there have been calls to examine the influence of credit rating agencies (CRAs) in how African countries access private funding and their fiscal feasibility, including their behaviors and methodology.
Unfair Downgrades
In efforts to improve or maintain good credit ratings, African governments have endeared themselves to the fiscal and monetary recommendations of the three American CRAs namely, Moody’s Investors’ Service, Fitch Ratings, and Standard and Poor’s, ultimately influencing their policy decisions and eventually the regulation of their economies from state governments to the credit rating organizations, thereby undermining their ability to provide essential services and goods. The economic shocks caused by the Covid-19 pandemic, for example, saw many low-income countries, especially in Africa, lack the monetary and fiscal instrument, which was easily available to developed countries, to support their economies as they were downgraded by the leading CRAs as mentioned.
A report by the African Peer Review Mechanism (2021) showed that 11 African countries were downgraded to negative in the first half of 2020 and 2021. Countries such as Ethiopia and Cameroon were specifically downgraded after announcing their intentions to utilize the G20 Common Framework for Debt Treatment under the Debt Service Suspension Initiative (DSSI), with the rationale that the Framework imposes a risk of losses on private-sector creditors, despite multilateral debt being classified as official debt in rating criteria which does not lead to default. Although qualified for DSSI, up to 27 countries, did not participate in the initiative, due to the fear of being downgraded and alienated from international capital markets which left them with the difficult decision to choose between spending its already scarce financial resources to tackle Covid-19 and their economic needs or service their debts.
Fear-based fiscal responses
Conversely, credit rating agencies have been improperly used to constrain national governments, especially in emerging economies, to adhere to austerity policy philosophies. Research shows the absence of dependable economic logic supporting the decision by CRAs to discourage certain economic policies in emerging economies and instead are used to justify punitive measures against countries that contradict western interests (Barta & Johnson, 2017).
Often, policy recommendations by CRAs are constricting and hinder fiscal stimuli, denouncing intense forms of expansionary policies like government spending and tax relief that can lead to an increase in consumer demand, encourage private investment, create jobs, and stimulate economic growth in many African countries. Truly, many downgrades prompted by the onset of Covid-19 cautioned African countries against adopting coronavirus stimulus packages with the view that such policy directions would enlarge the fiscal debt burden to unsustainable levels and weaken the economy. In European countries and America, however, such expansionary policies are highly recommended under the guise of monetary easing and/or bailouts (Mutize & Nkhalamba, 2021).
Private Debt
CRAs have played and continue to play a role in the predatory nature in which African countries access private financing, fixing them in a dangerous cyclical nature of debt accumulation which is economically crippling them with increasing high-debt repayments. Sovereign debt accounts for 38% of the capital flow into Africa’s bond markets fueled by global investors seeking high yields compared to European markets. They are hugely influenced by the public authoritative approval of CRAs as issuers of “credible” and “reliable ratings” in the face of Africa’s need of capital to fund projects and infrastructure developments to finance their development deficits.
However, numerous African governments are in a weak position to build proper yield curves and are stuck paying higher premiums with damaging effects to their budgets. Zambia’s total external debt stock, for example, is nearly 50 percent of its total debt, the majority of which has been borrowed for infrastructural development and is owed to non-official creditors and bondholders at high-interest rates and beyond unrealistic expectations for growth and returns on investment. It currently holds a -10 year-Eurodollar bond, whose interest rose to 38% at the peak of the Covid-19 pandemic, representing 3billion dollars (Fofack, 2021) of interest to be repaid, as investors demanded high-interest rates on existing Eurobonds thus, slowing down its growth and preventing expansion of its public investments levels required to attract private capital sustainably in support of robust, economic growth more so, post Covid-19
It is worthy to note that African countries pay a substantial amount of money as part of rating costs to CRAs yet the information published is used by the investment public, exposing African countries to the exploitative nature of international investors who are only interested in profit rather than the well-being of the continent. In addition, the monopolistic nature in which CRAs sell their expertise in risk management while being free from any form of regulation is also a serious concern especially when their analyses seem to mirror Anglo-American versions of capitalism. This predatory nature comes close to how digital lenders, now rife in Africa, dictate the creditworthiness of borrowers. Their proliferation in response to demand for quick loans has burdened borrowers with high-interest rates leading to increasing defaults and the number of defaulters listed with credit reference bureaus (CRBs). In Kenya for example, digital lenders have been notorious for harassing borrowers who have defaulted by threatening to list them with the CRB which could affect a borrower’s credit reputation. The Central of Kenya, in efforts to protect credit consumers effectively banned unregulated digital lenders from submitting customer information.
Conclusion
Perhaps then, it is time for African countries to consider having an African rating agency that is properly regulated and would serve as a basis of comparison with international agencies especially now when their credibility is in question. A Pan-African CRA, molded from multi-stakeholder initiatives to design suitable methodologies, indicators, and rating processes can kick start the journey of African countries to access financing that not only promotes economic growth but the well-being of its citizens.
by Catherine Mithia, Policy & Partnership- AFRODAD