Fixing Africa’s credit rating conundrum

A growing consensus and chorus are emerging on the flawed nature of the current system of rating credit and sovereign risk in Africa, according to Declan Galvin, Managing Director of Exigent Risk Advisory. During a recent interview with CNBC Africa, Galvin highlighted the critical need for a reevaluation of how credit rating agencies assess African countries. The mounting debts faced by African nations have led heads of state to question the efficacy of the current credit rating system, calling for a rethink in the assessment process. This issue is not only impacting access to capital for these countries but also hindering investment opportunities and human development growth. Galvin pointed out that the over-reliance on macroeconomic indicators by credit rating agencies is painting an incomplete picture of African economies. These economies are diverse, innovative, and emerging, requiring a more holistic approach to evaluation. He emphasized the importance of incorporating political and social indicators alongside macroeconomic factors to provide a more accurate assessment of country stability and readiness for investment. While discussing the political will to implement these changes, Galvin expressed optimism about the interest in ensuring accurate credit ratings. He stressed the need to find a middle ground between those calling for a complete overhaul of the credit rating systems and those advocating for systematic use globally. Finding this balance, according to Galvin, is crucial for making the system fair and inclusive. In terms of potential reforms, Galvin highlighted the importance of collaboration between multilateral institutions, commercial banks, and African countries. He emphasized the need for increased engagement to identify gaps in trade and development finance and provide affordable capital to support economic growth. Furthermore, Galvin underscored the significance of considering the dynamic nature of emerging markets in Africa, particularly in evaluating political and social indicators. Reflecting on the recently released Africa Economic Outlook report, Galvin identified two key priorities for the continent. Firstly, the focus on credit ratings and the need for a more nuanced assessment process. Secondly, the promotion of trading in local currencies to reduce barriers and foster economic development. Emphasizing the importance of supporting intra-African trade and currency value, Galvin highlighted the role of the international financial system in facilitating these objectives. In conclusion, the call for reevaluation and reform of Africa's credit rating system is gaining momentum as stakeholders recognize the limitations of the current approach. By incorporating a more comprehensive set of indicators and promoting collaboration among key financial institutions, African countries can work towards a more equitable and conducive environment for investment and growth.