African Regulators Urged to Supervise Credit Rating Agencies Amid Poor Ratings

In a joint report by the Economic Commission for Africa (ECA) and the African Peer Review Mechanism (APRM), experts have called on African regulators to closely supervise the operations of international Credit Rating Agencies (CRAs) within their jurisdictions. The report emphasizes the need for regulatory mechanisms to ensure proper business conduct and accountability for inaccurate rating opinions issued in Africa.

The report, titled “African Sovereign Credit Review Mid-Year Outlook Report,” highlights the worsening state of Sovereign Credit ratings in Africa, despite positive economic projections. Sovereign credit ratings provide investors with insights into the creditworthiness of a country and the associated risks of investing in its debt, including political risk.

To address the challenges posed by poor ratings, the report recommends that African countries regulate the publication of ratings and implement a rating calendar to prevent disruptive impromptu rating announcements in financial markets.

The review points out that the recent downgrading of five African countries by the top three CRAs has negatively impacted investor optimism in the recovery from the economic shocks of the Covid-19 pandemic. Ghana, Nigeria, Kenya, Egypt, and Morocco were downgraded in 2023 by international credit rating agencies Standard and Poor’s, Moody’s Investors Service, and the Fitch Group.

The downgrades were attributed to increasing government financing needs, pressures from upcoming Eurobond maturities, and poorly structured terms of international bonds. Additionally, some African countries, including Nigeria and Kenya, rejected Moody’s rating downgrades, arguing that their fiscal situations and debt were not as dire as estimated by the rating agencies.

The report points out challenges during the review period, including errors in publishing ratings and commentaries, non-compliance by analysts located outside Africa to avoid regulatory obligations, and herding behavior among rating agencies following each other’s actions.

To improve Africa’s poor ratings, the experts suggest that CRAs acknowledge weaknesses in their institutional structures and involve more African analysts to address challenges stemming from foreign-based assessments. They emphasize that effective regulation should ensure the independence and integrity of the rating process.

By implementing robust regulatory mechanisms, African regulators aim to hold credit rating agencies accountable and safeguard the region’s financial stability and credibility in the global financial market.