The African Union (AU) is preparing to launch a continental credit rating agency in the second half of 2025 to address concerns that international credit rating firms unfairly disadvantage African nations.
The move, which was revealed in a report by the African Peer Review Mechanism (APRM) on February 11, is expected to challenge what many African leaders describe as arbitrary and biased assessments by dominant global rating agencies.
The APRM, which evaluates governance across AU member states and implements the New Partnership for Africa’s Development (NEPAD), has framed the creation of this new agency as a crucial step in reclaiming Africa’s financial autonomy. The report emphasized that the African rating agency would provide a more accurate and fair evaluation of sovereign credit risk, better reflecting the unique economic circumstances of African nations.
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For decades, African governments and financial experts have criticized the methodologies employed by Moody’s, Fitch, and S&P Global Ratings, arguing that they consistently undervalue African economies. These agencies’ ratings determine the interest rates at which countries can borrow money and, in many cases, have led to excessively high borrowing costs for African nations.
The push for an African alternative gained significant traction in 2022 when Macky Sall, then-chair of the AU and president of Senegal, called for a new credit rating model to counter what he described as systemic financial injustices against African economies. Sall highlighted that in 2020, when economies across the world were reeling from the effects of the COVID-19 pandemic, African nations were disproportionately penalized.
“In 2020, when economies worldwide were struggling with the effects of COVID-19, 18 out of the 32 African countries rated by at least one of the major agencies saw their ratings downgraded. That’s 56% of African ratings being cut, compared to a global average of just 31% during the same period,” he said at the time.
It is believed that the assessment criteria used by these rating agencies incorporate subjective, non-economic factors, such as political stability, language, and governance models, which often result in negative outlooks for African nations. Research has suggested that up to 20% of the rating components assigned to African countries are based on factors unrelated to economic fundamentals. These assessments, critics say, artificially inflate borrowing costs, discourage foreign investment, and weaken African nations’ ability to finance key infrastructure and development projects.
The United Nations Development Program (UNDP) reinforced these concerns in an April 2023 report, which estimated that African countries had collectively lost out on $74 billion in potential financing due to unfair credit rating methodologies. The report found that the Big Three agencies rely on algorithms designed for traditional Western macroeconomic models, which often fail to capture the unique characteristics of African markets. The UNDP report also highlighted that credit analysts frequently base their assessments on prevailing investor sentiment rather than conducting deeper, localized analyses of economic conditions in African nations.
The upcoming African credit rating agency is being designed to function independently of political influence, with leadership drawn from the private sector. The AU has emphasized that credibility and transparency will be key to ensuring that the agency is widely accepted both within the continent and on the global stage.
According to the Africa Sovereign Credit Rating Outlook – 2024 Year-End Review, the agency will leverage experts based in Africa who have better access to real-time economic data and a deeper understanding of the unique financial landscapes across the continent. The report noted that “the Agency’s niche will primarily derive from its context-sensitivity, which will allow it to generate more comprehensive credit insights using competent experts based in Africa.”
Despite the enthusiasm surrounding this initiative, financial analysts caution that the success of the AU’s new credit rating agency will hinge on its ability to gain global recognition. Investors, financial institutions, and development banks still rely heavily on assessments from Moody’s, Fitch, and S&P when determining risk exposure. If these global institutions fail to recognize the African agency’s ratings as credible, its impact on borrowing costs may be limited.
Another challenge will be ensuring that the new agency remains free from political interference. To be taken seriously, it must establish strict independence from governments that might attempt to manipulate ratings for political gain. A perception of bias or lack of rigor could undermine the agency’s legitimacy in international markets.
Nevertheless, many African finance ministers and central bank governors believe that an African-led rating system could play a crucial role in correcting systemic financial imbalances. With greater control over its own credit assessments, it is believed that the continent could unlock new investment opportunities, reduce dependence on foreign financial institutions, and attract capital on more favorable terms.