How can African countries improve their credit rating?

by MMC
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Mobilizing additional financing is essential if Africa’s SDGs are to remain on track. Jean-Marc Kilolo describes how the United Nations Economic Commission for Africa helps countries improve their credit ratings and seek innovative financing options.

The combination of the coronavirus pandemic, the war in Ukraine and climate change is hampering African countries’ efforts to achieve the Sustainable Development Goals (SDGs) and has created the need for additional financing if the sustainable development goals.

According to the IMF (2021), Africa’s additional financing needs amount to $285 billion between 2021 and 2025. The continent also needs an additional $345 billion per year for the implementation of the SDGs in due to the pandemic.

Therefore, saving the SDGs and raising the necessary additional financing will require recourse to innovative capital and financial markets.

However, African countries have almost always encountered difficulties in accessing international markets. This is partly explained by the often negative perception of risk in Africa, as conveyed by sovereign credit ratings. Currently, only two African countries have been able to issue Eurobonds in the first half of 2023.

During the first half of 2023, the trend of negative ratings, including downgrades and negative outlooks, continued. From the point of view of credit rating agencies, these downgrades or negative outlooks are based on their assessment of risk factors such as the growing financing needs of States, financial pressures linked to the next “2024 wall of Eurobond maturities” , the weakening of the external liquidity position. , the high cost of debt servicing and finally, the high yields on the Eurobond financial markets.

All this adds up to a general tightening of the capital market for African countries. However, some African countries have challenged these rating downgrades, arguing that credit agencies have misinterpreted their economies due to a lack of understanding of the local context.

Their argument is entirely valid, but in the meantime, sovereign rating is a prerequisite for issuing debt in international markets.

Sovereign ratings indicate the potential risk level of a loan to a sovereign issuer. They provide information about a sovereign issuer’s ability to honor its debt commitments. A better sovereign rating can increase investor confidence, leading to increased capital inflows and lower costs. It also alleviates dependence on bilateral donors and development partners.

Many are calling for better regulation of the credit rating sector in Africa to ensure compliance with established rules, procedures and responsibilities. Efforts should also be made to improve data dissemination and transparency to enable seamless assessment of risk profiles.

Technical and political support

With this in mind and in collaboration with its partners, the United Nations Economic Commission for Africa (ECA) produces a biannual report, the Africa Sovereign Credit Ratings Reviewanalyzing long-term foreign currency sovereign credit rating actions in Africa by the three major international credit rating agencies: Moody’s, Fitch and S&P Global (S&P).

The report also provides policy recommendations to rating agencies and African governments on how to improve the credit rating process.

ECA is also hosting webinars to discuss highlights of the report to better understand the drivers of sovereign rating actions in Africa, the challenges and how they can be addressed.

Furthermore, the ECA provides technical support to Member States wishing to be rated – an essential condition for issuing debt on international markets. Technical support to Member States consists of carrying out a feasibility study of a sovereign rating in order to:

  • Explain how rating agencies operate in terms of commercial and analytical processes and products including rating scales (local/regional/global), local currency or foreign currency rating
  • Demonstrate how credit ratings can be used by issuers/sovereign counterparties, investors and other stakeholders
  • Explain the information and data requirements of rating agencies so that Member States can improve their credit rating preparedness in order to acquire and maintain the best possible sovereign rating.

In addition to this, the ECA helps some African countries wishing to deepen their domestic debt or capital markets by developing strategic documents that inform policy makers on the road map to follow and the challenges to be resolved for implementation successful.

In terms of innovative financing, the ECA conducted case studies to assess the feasibility of inclusive bonds in Cameroon and Côte d’Ivoire.

This work is part of the ECA support program aimed at strengthening the capacity of Member States to deepen financial markets and mobilize long-term investments for sustainable development. The Inclusive Bond consists of a bond issue specifically intended for the financing of Very Small Businesses and the Informal Sector.

The development of capital markets as well as innovative financing on the continent is absolutely necessary to finance development and save the SDGs in Africa.

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