Economist and political risk analyst Theo Acheampong has highlighted a significant challenge faced by many Sub-Saharan African countries in their efforts to finance development projects and manage budget deficits.
According to Dr. Acheampong, access to international capital markets has become a crucial method for these nations to raise the necessary funds, primarily due to the low levels of domestic revenue mobilization.
“The issue of bias often comes up against the 3 big ratings agencies, Fitch, Moody’s, Standards, and Poor’s, which control almost about 95% of the market. And, it comes down to the fact that they are quick to downgrade African countries, and then they are slow to upgrade.”
Theo Acheampong, Economist and political risk analyst
According to Dr. Acheampong, this perceived bias results in African nations facing higher borrowing costs, sometimes ranging from 5% to 16%—significantly higher than the rates enjoyed by more developed economies, which can be close to 0%.
These elevated borrowing costs exacerbate the financial burden on African governments, where interest repayment is already one of the fastest-growing components of government expenditure.
Dr. Acheampong emphasized that the influence of these three major credit rating agencies cannot be overstated. Controlling approximately 95% of the market, these agencies play a pivotal role in determining the cost at which countries can borrow money from international markets.
Their ratings are considered a key indicator of a country’s creditworthiness, impacting not only the interest rates on loans but also the willingness of investors to engage with these economies.
Dr. Acheampong noted that this bias in the global financial architecture has become a major point of contention among African countries. Many argue that the system unfairly penalizes them, creating a cycle where high borrowing costs increase the likelihood of default, which in turn leads to further downgrades and even higher costs.
The consequences are severe, as these countries struggle to finance critical infrastructure and social programs, which are essential for their economic development.
“The evidence on this bias is quite mixed,” Acheampong remarked, referencing two recent studies from 2023 that have fueled the debate. A study by the United Nations Development Program (UNDP) suggested that there is indeed a bias against African countries in credit ratings.
In contrast, a study by the International Monetary Fund (IMF) argued that when factors such as the credibility of budget processes and government borrowing practices are considered, the bias claim weakens. Despite these differing perspectives, the impact of credit ratings on African economies remains a pressing issue.
Call for a Pan-African Credit Ratings Agency
In light of these challenges, there has been growing support for the establishment of a Pan-African credit ratings agency.
Dr. Acheampong expressed his support for this initiative, acknowledging that introducing more players into the credit rating market could foster competition and potentially lead to fairer assessments of African economies. However, he also cautioned that such an agency must build trust and credibility in the eyes of international investors.
“The business of ratings comes down to how you price risk. If a Pan-African agency can demonstrate that it can accurately and fairly price the risk associated with lending to African countries, then it would be a welcome addition to the global financial system. But if it is seen as consistently underpricing risk, it will struggle to gain traction.”
Theo Acheampong, Economist and political risk analyst
Acheampong also pointed out that the methodologies used by major rating agencies are often publicly available on their websites, challenging the notion that these ratings are determined in a “black box.” This transparency, he suggested, could be a standard for any new agency looking to enter the market.
The stakes are high for African nations, many of which are heavily reliant on external financing to drive development. The cost of borrowing is a critical factor in their ability to fund infrastructure projects, health care, education, and other essential services. As Acheampong noted, the current system, with its potential for bias, poses significant risks to the economic stability and growth prospects of these countries.
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