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The African Union’s planned credit ratings agency could unlock the necessary capital to develop the digital infrastructure needed to transform countries across Africa, two of the continent’s top bankers told Semafor Africa.
The AU planned to launch the agency this year but confirmed in July that it would not be fully operational until 2025.
African Development Bank President Akinwumi Adesina, speaking at The Next 3 Billion summit, said the cost of raising capital in Africa is “three to four times” higher than in other parts of the world. “This is based on risk, but mainly in terms of perceived risk,” he said. “Well, I’m sorry, your perception is not my reality.”
Adesina said the AU’s agency would “actually provide a counterfactual to existing credit agencies so that Africa’s risk is properly addressed — whether it’s market risk, financial risk, political risk — is properly addressed.”
Standard Bank CEO Sim Tshabalala, agreed there was a risk perception premium but said the AU agency’s success would depend on transparency and the sophistication of the models used to determine ratings.
“If all that agency did was to replicate what current rating agencies do, it’s hard to see its competitive advantage,” he said.
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The African Credit Ratings Agency (AfCRA) was originally planned to launch this December but has been delayed until June 2025 because of “the hurdles in engaging a credible transaction advisory firm,” according the Misheck Mutize, lead expert on credit ratings at the African Peer Review Mechanism (APRM), a body set up by AU member states which is tasked with getting the agency off the ground.
Like other credit ratings agencies, AfCRA’s primary role will be to evaluate the financial health of African institutions, companies, and governments, and their ability to repay debt. The global ratings sector is currently dominated by Moody’s, Standard & Poor’s, and Fitch who have 95% of the market by some estimates.
AfCRA is being established by the African Union as “an independent, self-funded and self-sustaining entity” that is private sector-driven.
“No African government will be a shareholder to avoid political influence or conflict of interest,” said Mutize. It currently has an annual budget of $873,000 to cover staffing costs, though it is expected to grow as it becomes more established.
Yinka’s view
The vagaries of the global financial system and how it treats African institutions, corporations, and governments has been a hot topic of debate over the past half decade.
Almost every senior development finance institution leader, private equity investor, venture capitalist, and C-level executive who works on the continent brings the issue up privately. But their grievances are spilling being aired publicly more often. These are usually very considered industry players not known for hyperbole.
They sum it up as their efforts to invest in the continent being unfairly punished for an unreasonable ‘African risk premium.’ What they claim is that if you were to look dispassionately at the usual economic metrics of risk for an African government’s debt assessment versus say one with the exact same economic profile for a country in say Latin America, there’s often an additional 1-2 percentage points of interest costs which can only be explained by this nebulous risk premium.
This may all be accurate but it’s unclear if a homegrown ratings agency would make a huge amount of difference given most capital is coming from outside the continent and will still need to be assessed by one or more of the big three: Moody’s, S&P or Fitch.
But if applied strategically, AfCRA could be an influential counterweight to the limited opinions of a sub-sector of the New York-based financial system that has had an undue influence on the lives of millions of Africans.