Africa is rich. Rich in people, resources, ideas, and potential. Yet many of its countries are trapped in a financial paradox: while global investors chase higher returns, African countries face some of the highest borrowing costs. Why does this imbalance persist? Because countries are still assessed by a credit ratings system that was not built with Africa in mind, and which continues to price the continent's future based on weak assumptions.
In today's world, credit ratings are no longer just technical signals for bond traders. They are gatekeepers of global finance. They determine the cost of borrowing in many countries, as well as who is willing to invest, and whether dreams of infrastructure, education and healthcare can be financed without sinking into debt. The high cost of borrowing in Africa can be linked to risk perceptions, which are shaped by a country's credit rating. Of the 34 African countries currently rated by the Big Three global ratings firms - Moody's, Fitch's and Standard Poor - only two are investment grade. This makes the vast majority of African countries susceptible to crippling interest rates that crowd out development spending.
The real issue is that the process is not always fair. Credit rating agencies apply both quantitative and subjective measures, ranging from governance 'scores" to analyst judgments, which penalise countries for perceived, but not always proven, risks. As a result, African countries lose out on billions in financing, not because they have mismanaged their economies, but because they are misjudged.
Credit ratings purport to be forward-leaning assessments of a country's creditworthiness. But recent experience suggests that an emphasis on historical perspectives and an unhelpful degree of subjectivity disadvantages African countries and downplays their economic potential. High-level global initiatives like FfD4 and South Africa's Presidency of the G20 are focusing on practical steps that can be taken to address these issues. A lot of emphasis is being paid to reforming debt sustainability analysis DSAs, including introducing natural capital, capping debt service levels to free up fiscal space, and revisiting loan classifications so that investments in critical infrastructure, energy and technology do not cast a pall on the prospects of African economies.
Guaranteeing socio-economic progress and societal stability is critical if African countries are to become less dependent and more self-sustaining. Their role in enhancing sovereign credit ratings is critical in lowering the cost of borrowing to fill the estimated 1.3 trillion financing gap of which 402bn is needed for fast-tracking structural transformation. Even if concessional financing were to return to pre-Covid levels, they would not be sufficient to fill this gap. African countries are recognizing the opportunity to turn the corner and invest in reforms and capacity enhancements that will improve their credit ratings. Recent upgrades include Nigeria from Caa1 to B3 by Moody's on May 30, Ghana from default to CCC by SP on May 19, and Togo from B to B by SP, April 18. While these developments are encouraging, we know that much more needs to be done.