Tackling the 'African Premium' Issue
African countries under the African Union (AU) plan to create the Africa Credit Rating Agency (AfCRA), facilitated by the African Peer Review Mechanism (APRM).
A Credit Rating Problem
The continent faces an 'African Premium' issue in the international credit market, which is dominated by the big three credit agencies: S&P, Fitch Ratings, and Moodys. These agencies collectively control 95% of the financial market credit rating sector.
The assessments made by these credit rating agencies are influenced by factors such as political risk and economic instability, resulting in significantly higher borrowing costs that investors associate with the risks of African countries. As a result, nearly all African nations struggle with this high cost of borrowing.
A growing sense of perceived bias has led to a vocal response from African nations, highlighting the urgent need for a well-informed credit rating assessment system that accurately reflects the economic, social, and political realities of Africa. This system should be based on real-time, on-the-ground data and analysis.
The Quest for Credit
African nations have a strong demand for Eurobonds and will continue to seek access to international markets to address ongoing budget deficits and fund social and infrastructure projects. The winds of change across Africa, driven by economic reforms, infrastructure investments, and improvements in currency stability, require a more refined evaluation from credit agencies.
The creation of the Africa Credit Rating Agency( AfCRA) follows recent development by the African Development Bank, Prosper Africa (a U.S. presidential initiative), and the United States Department of the Treasury who have agreed to create an African online credit rating data platform.
While political will is essential for the success of these agencies, it should not hinder their effectiveness. It is crucial to establish the necessary operational and regulatory structures, ensuring their independence to achieve overall benefits for African economies.
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