Experts seek African regulators to supervise credit rating agencies – ECA

Africa should develop regulatory mechanisms to supervise international credit rating agencies (CRAs) to avoid erroneous assessments that discourage investment on the continent.

A statement issued on the Economic Commission for Africa’s (ECA) website said these were parts of the recommendations of “the African Sovereign Credit Review Mid-Year Outlook”.

“African regulators need to develop regulatory mechanisms to supervise the work of international CRAs operating within their respective jurisdictions to ensure proper conduct of business and enforcement.

“It is imperative for regulators to ensure accountability for inaccurate rating opinions issued in Africa,” the report said.

It said a joint report by ECA and the African Peer Review Mechanism (APRM) said that in spite of positive economic projections, sovereign credit ratings in Africa were getting worse.

A sovereign credit rating is an independent assessment of the creditworthiness of a country.

It gives investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.

The review report further recommended that African countries should regulate the publication of ratings and a rating calendar to curb impromptu rating announcements that disrupt financial markets.

“The recent downgrading of five African countries by the top three CRAs has reversed the optimism amongst investors on the international financial markets that African countries are recovering from the devastating Covid-19 economic shocks.

“ In 2023, Standard and Poor’s, Moody’s Investors Service and the Fitch Group downgraded Ghana, Nigeria, Kenya, Egypt and Morocco.

It cited increasing government financing needs and pressures from the upcoming ‘wall of Eurobond maturities combined with poorly structured terms of international bonds.

“Besides, the global credit rating agencies based their downgrades on a weakening external liquidity position,” it said.

It said Nigeria and Kenya rejected Moody’s rating downgrades, citing a lack of understanding of the domestic environment by the rating agencies.

The statement said both countries argued that their fiscal situation and debt were not as bad as estimated in Moody’s review.

“Moody’s and Fitch also downgraded Egypt in a move that has pushed up its borrowing costs to issue a sovereign bond by over 10 percent.

“Egypt currently has the highest sovereign bond value outstanding in Africa at 37.5 billion dollars,” it said.

The report stated that challenges were noted during the review period, and they included errors in publishing ratings and commentaries, among others.

It said all those resulted in failures to adhere to applicable surveillance policies and procedures.

It called on CRAs to acknowledge weaknesses in their institutional structures and have more analysts in Africa to address challenges stemming from foreign-based assessments.

“The solution to these challenges lies in effective regulation and eliminating reliance on credit rating opinions.

“Effective regulation should ensure that rating agencies stay independent, maintaining the integrity and quality of the rating process,” it added.