Africa’s Economic Outlook and Credit Rating Should Not Be Judged by Western-Interest Driven Agencies
On January 26, African-American rapper and entrepreneur, Mr. Sean John Combs, known by the stage names of Puff Daddy and P. Diddy, at the American Grammy Awards spoke up on discrimination against African American and African artistes. He says: `We must stop putting ourselves forward and allowing ourselves to be judged by institutions that do not have our best interest art heart.’
Very true, the institutions that have continuously rated Africa’s economies unfit for foreign investment have come from the West. Most from countries that have exploited Africa for centuries. It is not far-fetched to recognize that these institutions have ingrain subjective terms of reference for accessing Africa’s economies to ensure the continued dominance by the economies of their own countries in which they have vested interest.
More African countries are going to international financial markets to raise capital through sovereign bonds. To raise funds successfully, African governments need sovereign credit rating like a credit score which ‘dictate’ the interest rate at which a national government can borrow. These ratings are given by three international credit rating agencies all based in the West: Standard & Poor’s (S&P), Moody’s (located in the United States) and Fitch (located in the UK and United States),and are only accountable to the US, teh Uk and the EU countries.
There are no regulatory bodies or institutions in Africa that hold these three agencies accountable for what they say and do in Africa. So, in reference to P Diddy’s comments, it raises the question: `why does Africa submit itself to be judged by these Western-based and Western-interest driven agencies?’
The number of African countries seeking a sovereign credit rating has increased from one in 1994 to 31 in 2018. But the credit ratings for African countries have been so negative consequently sending the interest rates in the continent over the roof, and putting Western economies at an advantage. African governments are no longer having it and are calling out, rejecting and disputing these ‘subjective' ratings.
In 2015, the Zambian government urged investors to ignore unsolicited credit downgrade from the rating agencies. It challenged the correctness of its rating, which it said hadn’t been discussed with the country’s representatives. Two years later, in 2017, Namibia rejected Moody’s decision to downgrade the country’s credit rating to junk status. This rating was contrary Namibia’s stable economy.
The government of Nigeria in 2017 also strongly disagreed with its downgrading questioning both the general rating premises as well as the agency’s conclusions. In 2017, Nigeria’s economy had successfully emerged from a recession and recorded important improvements across a broad range of sectors. In 2018, Tanzania rejected Moody’s assigning of a low credit rating with a negative economic outlook to the country’s first international credit rating. The rating was done without consulting Tanzania. In June 2019 South Africa was downgraded from stable to negative or Junk status.
The three rating agencies have downgraded more countries in African than they have upgraded over the past 24 years. There have been 47 downgrades and 113 negative changes in outlooks; only nine positive changes have been recorded.
87% of African countries are rated “junk status”, only 19% in Western Europe, 27% in the Middle East, 38% in Central and Eastern Europe, 54% in Asia Pacific and 55% in Latin America and The Caribbean. The effect of this is that African countries must issue sovereign bonds at high discounts, and are subject to higher interest rates, which gives the United States and the EU unfair advantages in attracting foreign investment.
In fact, the three Western-based, funded and led rating agencies have only one small office in South Africa so often fly into for a day or two. Another issue with this discriminatory process is that outside the US and the European Union (EU), the agencies don’t subscribe to any international regime or governance body. This means that their misconduct remains largely unchecked. The international rating agencies have operated unregulated even though the need for them to be regulated is very apparent.
The only time the EU protested the Western-interest driven agencies was when Greece was rated negatively, so if it benefits Europe and North America then it is legitimate.
These bogus, unsubstantiated ratings, are deliberate ploys to undermine Africa’s competitiveness in the Global Economy, and to retain Western countries’ and economies’ competitive edge.
The credit rating methodologies consistently over-emphasize political risk in the rating criteria. Political components constitute approximately 50% of the composite rating. Other components such as financial and economic components each contribute to the remaining 50%. While the qualitative factors are judged purely based on the ideology of the credit analysts, their perception towards the political institutions in Africa is generally negative.
Negative economic outlooks are fed by narratives of disaster, crises and needs that fuels international appeals for aid. The narrative that drives humanitarian appeals for aid in Africa, feeds the rationalization and justification for poor and negative economic outlook and credit ratings in Africa. This is where Africans, must be careful with the narrative they accept and promote to rationalize and justify humanitarian assistance and funding.
In other words, the narrative that 14 countries submitted that will be used to justify and rationalize humanitarian aid appeals in 2020 will contribute to the negative economic outlook in the continent for at least the next 5 years. Announcing the need for humanitarian assistance from flood, drought, conflict etc., may justify humanitarian aid, and funding to some African countries, but it is at the expense of the economic outlook and rating for investments.
Negative economic outlook has compromised Africa’s competitiveness through high interest rates, but it does not stop Western countries from exploiting Africa. While legitimate investors are distracted by these negative ratings, it has not reduced rampant looting in resource rich African countries by Western firms.
It is time that African countries design a collective response mechanism to save the continent from rating abuse. What we need in Africa is a continental rating agency, possible to include other countries like Brazil, Russia, India and China that have also been discriminated against to give Western based economies an advantage.
There are no laws in Africa to hold the rating agencies’ operations on the continent to account. And there’s no central coordination of their activities within individual African countries. This is because no single institution is responsible for administering their regulations or managing them.
A solution would be for the African Union to establish a continental regulatory authority to govern the cross-border activities of international rating agencies, administer a prudential standard framework and evaluate the accuracy and fairness of ratings assigned to countries.