At the end of July, the credit rating agencies drew anger when a number of African sovereigns were either downgraded or placed under review for downgrade. While many countries in the West are being lauded for their unorthodox policies and breaking every rule in the book, African nations are being penalised. Credit Rating Agencies play a pivotal role within the financial sphere. They provide a solvency risk benchmark to investors for debt issuers and structured finance instruments which are traded on debt capital markets. In short, they have an outsize influence on the interest rates countries or corporates pay lenders. Last year, some 20 African sovereigns were owing more than $100bn through Eurobonds at any one time, displacing multilateral lenders as Africa’s main source of funding. So the difference of a few percentage points in what you pay your lenders starts to become quite material. A study in 2015 by Michigan University estimated that African sovereigns in sub-Saharan Africa (SSA) were paying a premium of 2.9% over the rest of the world. As such, downgrades (which raise the premium) are extremely costly for the continent. Following the economic shock caused by the Covid-19 pandemic, low-income countries lacked the monetary and fiscal instruments available to developed countries to support their economies. In response, a G20 initiative was put on the table to delay debt service payments for low-income countries.
SOURCE: AFRICAN BUSINESS MAGAZINE