Nigeria And Other African Nations Plan To Establish A Continental Credit Rating Agency

Nigeria And Other African Nations Plan To Establish A Continental Credit Rating Agency

Nigeria, along with several other African countries, is collaborating to set up a continental credit rating agency aimed at addressing perceived biases from Western credit rating entities…READ MORE…

This initiative was announced during the launch of the Debt Management Forum for Africa and the inaugural policy dialogue titled “Making Debt Work for Africa: Policies, Practices and Options,” organized by the African Development Bank (AfDB) in Abuja.

The top three global credit rating agencies—S&P Global Ratings, Fitch Ratings, and Moody’s—have been accused of favoring Western perspectives in their evaluations.

Prof. Kevin Urama, Vice President and Chief Economist of Economic Governance and Knowledge Management at the AfDB, highlighted that the planned African credit rating agency would serve as a counterbalance to the assessments from Western firms and rectify biases against the continent. He explained that these biases largely stem from unequal access to information, which leads to misperceptions about African economies.

Urama noted, “The credit ratings assigned to Africa often reflect an inherent bias due to asymmetric information. Rating agencies may lack the same quality and reliability of data for African countries as they do for others. Their methodologies consider both quantitative data and subjective perceptions, which can skew their assessments.”

He drew parallels to how crime patterns in specific neighborhoods can influence police perceptions in the U.S., suggesting that similar patterns of political instability and corruption in Africa can lead investors to feel apprehensive. Addressing these information discrepancies is a key reason behind the proposal for a new credit rating agency, which aims to foster a better understanding of Africa’s economic landscape.

“This agency can provide a counterfactual perspective,” Urama stated, explaining that if Western agencies denote a country as having a low rating (e.g., B-), the African agency might rank it higher (e.g., AAA). This discrepancy would necessitate a reconciliation of methodologies and data sources, ultimately enhancing engagement and comprehension of African economic realities.

Patience Oniha, Director-General of the Debt Management Office, echoed concerns about the biases of Western credit rating agencies. She pointed out that the timeframe granted for countries to respond to inquiries is frequently too brief, complicating the feedback process. Reflecting on the aftermath of the global financial crisis, she remarked on the lack of accountability from agencies that rated problematic financial institutions too highly, citing the example of Lehman Brothers.

“While these agencies may conduct thorough evaluations, the timeline for feedback is often constrained,” Oniha lamented. She noted that after agencies compile reports from numerous sources, including the IMF and World Bank, they allow only a limited timeframe—sometimes as short as 24 hours—for countries to respond, which is insufficient for thorough analysis.

Oniha advocated for increased flexibility and openness from credit rating agencies to accommodate additional information and analyses. Last year, the Nigerian government criticized Moody’s Investors Service after it downgraded nine banks in the country due to its negative review of Nigeria’s credit rating.

Former Finance Minister Zainab Ahmed expressed surprise at Moody’s decision, stating, “We had presented extensive work highlighting our efforts to stabilize the economy, but these external rating agencies often lack a comprehensive understanding of our local context.”

Additionally, Prof. Daniel Cash, an Associate Professor of Law at Aston University and Senior Fellow at the United Nations University’s Centre for Policy Research, emphasized that credit rating agencies are central to the current debt crisis affecting many developing countries. He explained that while historically rooted sovereign ratings trace back to the early 1900s, they have evolved to focus on critical macroeconomic and public finance indicators.

Cash elaborated on the subjective nature of ratings, noting, “Unlike corporate borrowers, sovereign entities cannot be compelled to repay debts, which necessitates an assessment of both their willingness and ability to repay. This subjectivity introduces complexities into how sovereign ratings are determined.”

In summary, the establishment of a continental credit rating agency reflects a proactive approach by African nations to assert their economic narrative and address longstanding biases from established Western rating firms.

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