Following persistent and determined efforts, Africa has achieved a breakthrough in advancing the establishment of an African credit rating agency (ACRA), with the proposed launch scheduled for December 2024.
More recently, the African Peer Review Mechanism (APRM) and the United Nations Economic Commission for Africa (ECA) gathered together for a two-day retreat in Lusaka, Zambia, to discuss details of getting ACRA up and running.
What makes it such a significant development? How much sway credit rating agencies have in the big picture of global finance?
A new analysis by ESCAP reveals that even a minor upgrade of one notch in a country’s credit rating can lead to a significant reduction in government’s borrowing costs. We are talking about a 0.42 per cent drop in government bond yields!
However, the global credit rating market is dominated by the Big Three agencies (Moody’s, S&P and Fitch Ratings). Together, these three United States-based firms hold a market share of around 95 per cent.
The Big Three frequently face criticism for their perceived bias toward developing countries while assigning credit ratings to their sovereign debt obligations.
These include heavier reliance on judgment, particularly considering political risks and a country’s “willingness to pay.” Several factors contribute to this perceived bias, including limited local expertise, shorter track records in emerging markets, less robust reporting standards and data infrastructure, and cultural and linguistic differences.
The APRM has been tasked to conduct a feasibility study and support the establishment of the ACRA. Despite acknowledging various challenges highlighted in the feasibility study, such as concerns about credibility, investor perceptions of ACRA’s independence, market confidence, and potential financial risks to shareholders, the study expresses confidence in ACRA’s potential for success given the huge appetite for an alternative credit rating agency in Africa.
This new pan-African CRA aims to provide more accurate assessments of African countries by considering regional dynamics and geopolitical factors. It is expected to contribute to make borrowing cheaper for African governments and it is set to be a part of a broader strategy to improve access to capital and integrate the continent with global financial markets.
A United Nations Development Programme study suggests that fairer ratings could save African countries up to $74.5 billion, aiding in managing debt and allocating resources for development.
In Asia and the Pacific, during the 15th meeting of the Finance Ministers and Central Bank Governors of ASEAN, China, Japan, and Korea (ASEAN+3) in 2012, the ASEAN+3 Research Group was tasked with studying the establishment of a new regional credit rating agency in the ASEAN+3 Region.
Their report was presented at the subsequent 16th meeting, highlighting benefits and challenges similar to what were outlined in the above-mentioned APRM feasibility study. While the findings were acknowledged by the Finance Ministers and Central Bank Governors of ASEAN+3, no further action has been taken thereafter.
Indeed, deciding on the establishment of a regional credit rating agency for Asia and the Pacific is not a simple matter and it requires strong political backing. ESCAP’s Economic and Social Survey of Asia and the Pacific 2024 highlights several factors that need to be examined thoroughly.
First, a detailed business and financial model, including projected cash flows, need to be explored to ensure both financial sustainability and independence of this new credit rating agency, be it a stand-alone entity owned by a regional intergovernmental body, a joint venture with an established rating agency or outsourcing the credit rating function to other rating agencies.
Second, an appropriate legal framework needs to be established. In the case of the proposed African credit rating agency, its legal framework is one critical precondition to ensure that it becomes an autonomous, self-funded, financially independent and globally credible agency.
Third, a shareholder and management structure with a clear description of the roles of all potential stakeholders to ensure independence and credibility.
Amidst rising government borrowing costs and escalating public debt distress, globally and in Asia and the Pacific, there is a need for a renewed momentum for creating a regional credit rating agency attuned to the distinctive dynamics of Asia-Pacific economies.
Ahead of the Fourth International Conference on Financing for Development (FfD4) to be held in Spain in 2025, a milestone to address financing challenges to accelerate the implementation of the 2030 Agenda for Sustainable Development and to reform the international financial architecture, it is perhaps time for countries in the region to discuss this issue.
ESCAP, in collaboration with ECA, can facilitate experience-sharing among member countries of the African Union and Asia-Pacific countries, including by co-organizing side events during major events and intergovernmental platforms, such as the forthcoming sessions of the Preparatory Committee for the FfD4 and annual Commission session of the ESCAP.
If the initiative triggers interest from the countries, ESCAP can work closely with its member and associate member States to advance the exploration of the idea of establishing a dedicated Asia-Pacific rating agency.
Lin Zhuo is Economic Affairs Officer ESCAP
