No Fitch, Moody's or S&P: Big 3's new challenge

The African Union has established the Africa Credit Rating Agency (AfCRA) in Mauritius to challenge the traditional dominance of global credit rating agencies such as Moody's, S&P Global and Fitch. The AU claims that the current rating agencies fail to accurately reflect Africa's economic conditions. Indian policymakers have been similarly critical of the agencies' failure to recognize improvements in economic fundamentals within the country.

Critics argue that these agencies rely too heavily on conventional indicators, disregarding local factors like informal economic activity, domestic savings and the ability to endure external shocks.

The consequences of inadequate ratings are economically significant, with the UN Development Programme estimating that rating-related disadvantages cost African countries $74.5 billion in excess interest payments and foregone borrowing. In 2024, Africa's annual external debt service rose to $163 billion from $61 billion in 2010, while average sovereign ratings remain in the B to B-minus range. This is in stark contrast to other emerging regions, which have BB ratings.

The main objective of AfCRA is to provide more comprehensive assessments of African nations' debt repayment capabilities, as less than a quarter of the continent's $4 trillion capital base is currently covered by credit ratings. By focusing on local-currency sovereign and corporate debt, AfCRA aims to deepen African capital markets and direct funds towards infrastructure, energy and manufacturing sectors.

However, AfCRA's success hinges on its ability to establish credibility and independence. Investors will scrutinize whether the agency accurately identifies strong and weak borrowers or merely adopts a more lenient standard. Moreover, the agency must ensure its analysts are protected from political pressure and maintain a transparent methodology. Demonstrating independence through decision-making processes, particularly when a government objects to a downgrade, will be crucial for the agency's credibility.