The combination of the coronavirus pandemic, the war in Ukraine and climate change is hampering the efforts of African countries to achieve the Sustainable Development Goals (SDGs) and has created the need to find additional financing if the SDGs are to be rescued.
According to the IMF (2021), Africa’s additional financing needs amount to $285bn between 2021 and 2025. The continent also needs an additional $345bn annually for SDG implementation due to the pandemic.
Therefore, to rescue the SDGs and raise the necessary additional financing will require recourse to innovative finance and capital markets.
However, African countries have almost always experienced difficulties in accessing international markets. This is partially explained by Africa’s often negative risk perception, as conveyed by sovereign credit ratings. As it is, only two African countries have been able to issue Eurobonds in the first half of 2023.
Over the first half of 2023, the trend for negative ratings, including downgrades and negative outlooks has continued. From the credit rating agencies’ perspective, these downgrades or negative outlooks are based on their assessment of risk factors such as governments’ increasing financing needs, financial pressures related to the upcoming “2024 wall of Eurobond maturities”, the weakening of the external liquidity position, the high cost of debt service and finally, the high yields on the Eurobond financial markets.
All this adds up to a general tightening of the capital market for African countries. However, some African countries have challenged these rating downgrades, arguing that the credit agencies have misread their economies due to a lack of understanding of the local context.
They have a very valid point but in the meantime, sovereign rating is a prerequisite for issuing debt in international markets.
Sovereign ratings indicate the potential risk level of a loan to a sovereign issuer. They provide information on a sovereign issuer’s ability to meet its debt commitments. A better sovereign rating can increase investor confidence, leading to increased capital inflows and lower costs. This also mitigates dependence on bilateral donors and development partners.
Many are calling for the better regulation of the credit rating industry in Africa to ensure compliance with established rules, procedures and accountability. Efforts should also be made to improve the dissemination and transparency of data to enable a flawless assessment of risk profiles.
Technical and policy support
With this in mind and working in collaboration with its partners, the UN Economic Commission for Africa (ECA) produces a biannual report, the Africa Sovereign Credit Ratings Review, analysing the long-term foreign currency sovereign credit rating actions in Africa by the three dominant international credit rating agencies: Moody’s, Fitch and S&P Global (S&P).
The report also provides policy recommendations to both rating agencies and African governments on how to improve the credit rating process.
The ECA also organises webinars to discuss highlights of the report to better understand the drivers of sovereign ratings actions in Africa, the challenges and how they can be addressed.
In addition, the ECA provides technical support to member states wishing to be rated – an essential requirement for issuing debt in international markets. The technical support to member states consists in carrying out a feasibility study of a sovereign rating in order to:
- Explain the functioning of rating agencies in terms of commercial and analytical processes and products including rating scales (local / regional / global), rating in local currency or in foreign currencies
- Demonstrate how credit ratings can be used by issuers / sovereign counterparties, investors and other stakeholders
- Explain the requirements of rating agencies in terms of information and data so that member states can improve their preparation for credit rating in order to acquire and maintain the best possible sovereign rating.
In addition to this, the ECA assists some African countries willing to deepen their domestic debt or capital markets by developing strategic documents that inform policymakers on the roadmap to follow and difficulties that need to be addressed for a successful implementation.
In terms of innovative finance, the ECA has conducted case studies to assess the feasibility of inclusive bonds in Cameroon and Côte d’Ivoire.
This work is part of ECA’s support programme aimed at strengthening the ability of member states to deepen financial markets and mobilise long-term investments for sustainable development. The Inclusive Bond consists of a bond issuance specifically intended to finance Very Small Enterprises and the Informal Sector.
The development of capital markets as well as innovative finance on the continent is absolutely necessary to finance development and rescue the SDGs in Africa.
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