AU opens new ratings era

by MARIA MACHARIA
NAIROBI – THE African Union has launched the continent’s first home-grown credit rating agency, in a move intended to challenge international perceptions of African sovereign risk and potentially reduce borrowing costs for governments.

The Africa Credit Rating Agency (AfCRA) was launched on Wednesday, with the institution based in Mauritius. The initiative has been driven by the AU as African governments seek greater influence over how their economies and financial risks are assessed.

The agency is expected to provide credit assessments of African countries and companies while incorporating factors that African policymakers believe are insufficiently reflected in the methodologies of international ratings agencies.

The AU has appointed South African Sifiso Falala as interim chief executive officer, according to CNBC Africa.

African governments have long argued that international ratings can contribute to disproportionately high borrowing costs by placing excessive emphasis on political, economic and external risks while failing to adequately account for domestic strengths.

Reuters reported that the AU sees the new agency as a way of providing additional information to investors and improving Africa’s access to capital.

The initiative comes as African governments face substantial financing requirements for infrastructure, energy, healthcare and industrial development.

Higher borrowing costs have become a major constraint for many countries, particularly those that have suffered currency depreciation, elevated debt-service payments and restricted access to international capital markets.

The new agency is not intended to replace established global ratings companies, but rather to provide an additional assessment of creditworthiness.

That distinction could prove important because international investors and financial institutions continue to rely heavily on ratings from major global agencies.

Supporters argue that an African institution operating closer to the markets it assesses could develop a deeper understanding of local economic conditions.

Critics, however, are likely to question whether a ratings agency backed by governments can maintain sufficient independence to command international investor confidence.

The credibility of AfCRA will therefore depend heavily on the transparency of its methodology, governance arrangements and willingness to issue ratings that may be politically unpopular.

The launch nevertheless represents an important institutional development for African financial markets.

It also forms part of a broader push by the AU and African governments to strengthen continental financial institutions and reduce dependence on structures largely developed outside Africa.

For countries seeking investment, the potential benefit is considerable if AfCRA can establish a reputation for rigorous and independent analysis.

For investors, the new agency could provide another source of information when assessing African sovereign and corporate risk.

The institution therefore begins operations at a significant moment, with Africa seeking to mobilise more domestic and international capital to finance development.

– CAJ News