African Union’s Bid for a Continental Credit Rating Agency

African Union’s Bid for a Continental Credit Rating Agency

The African Union (AU) has announced its plans to launch a continent-based credit rating agency in 2024. This initiative seeks to provide a more accurate risk assessment for lending to African countries, offering a fresh perspective to the global financial market. The AU and its member nations have contended that the three leading credit rating agencies globally, Moody’s, Fitch, and S&P Global Ratings, have shown a bias in their risk assessments, especially towards African nations. These agencies have continually denied these allegations, asserting that their ratings adhere to a consistent formula across all continents.

Redressing the Balance in Credit Ratings

The proposed AU credit rating agency aims to rectify the perceived imbalance in credit ratings and provide a more contextual and fair assessment of the risks involved in lending to African countries. Misheck Mutize, the lead expert for country support on rating agencies with the AU, emphasized that the objective isn’t to replace the three leading rating agencies but to diversify the opinions in the credit rating sector.

The new agency, which will be based within the continent, will be self-funded and driven by the private sector, with oversight from the AU. According to a study by the United Nations Development Programme published in April, African countries could save up to $74.5 billion if credit ratings were founded on less subjective assessments. This initiative has received support from the AU’s finance ministers, who have passed a resolution endorsing the plan. The full AU executive council is projected to adopt the same resolution in February.

Investors have reportedly responded positively to the AU’s initiative, showing a keen interest in the potential output of the proposed agency. The private sector has demonstrated substantial interest in contributing to the implementation of this initiative, reflecting the growing need for more balanced and contextual credit ratings in the financial market.

The Role of the African Peer Review Mechanism

The initiative to establish a new credit rating agency is led by the African Peer Review Mechanism (APRM), a branch of the AU that was formed to improve governance across the continent. The APRM is dedicated to fostering the adoption of policies, standards, and practices that lead to political stability, high economic growth, and sustainable development in Africa.

The APRM’s involvement in this initiative underscores the AU’s commitment to upholding good governance and delivering credible and unbiased credit ratings. By fostering a more balanced credit rating environment, the AU aims to enhance investor confidence and promote economic growth and stability across the continent.

The AU’s initiative to establish a new credit rating agency marks a significant step towards diversifying the global credit rating system and providing a more balanced representation for African countries. By offering an alternative perspective on the risks associated with lending to African countries, the AU aims to promote fair economic practices and encourage sustainable development across the continent.