Developing Africa’s risk rating capacity

The African Union is moving forward with its plans to create an African rating agency to complement the dominance of international agencies such as Moody's, S&P, and Fitch. With the majority of the global credit ratings business controlled by these three giants, there is a growing need for diverse opinions and alternative views in the market. The emergence of new players like Sovereign Africa Ratings in South Africa, and the interest in supporting emerging rating agencies, signals a shift towards establishing a more balanced and impartial credit rating landscape in Africa. One key point highlighted in the discussion is the need to address the biases and over-exaggeration of risk perceptions of the continent by the current big three agencies. Dr. Misheck Mutize, the Head of Credit Ratings Advisory at the African Peer Review Mechanism, emphasized the importance of having a local presence and understanding of the African business environment to provide accurate and reliable ratings. The lack of on-ground analysis and the limited time spent in African countries by analysts from international agencies undermine the credibility of their assessments. Another critical aspect discussed is the establishment of the African rating agency within the framework of the African Union. The agency aims to be autonomous and independent, with a diverse shareholding structure that includes collaboration with emerging rating agencies and pan-African institutions. This model is designed to ensure credibility and trust in the new agency, essential for gaining acceptance and recognition in the investment community. Furthermore, the revenue model of the new agency is intended to align with industry standards while addressing concerns of conflict of interest. By providing ratings that are more accessible to smaller companies and incorporating a comprehensive methodology that considers economic growth, human development, and mineral wealth, the agency seeks to offer a more balanced and holistic approach to credit assessments. The road ahead for the African rating agency involves finalizing the structural, legal, and financial models, with a projected operationalization by the end of the following year. The upcoming meeting of finance ministers in July will play a crucial role in advancing the establishment of the agency, as political will and collaboration are essential for realizing this vision. The potential headquarters of the agency will be determined by the African Union, emphasizing the need for a neutral and strategic location. In conclusion, the journey towards creating an African rating agency signifies a significant step towards credit rating independence and credibility on the continent. By challenging the status quo dominated by a few players, Africa aims to provide a platform for alternative perspectives and a more nuanced evaluation of creditworthiness. The commitment to transparency, independence, and comprehensive analysis will be key in building trust and fostering the growth of a thriving credit rating ecosystem in Africa.