The Africa Credit Rating Agency is on its way

Africa’s financing landscape presents a striking paradox. The continent is home to some of the world’s fastest-growing economies, abundant natural resources, and a young, entrepreneurial population. Yet, when African governments tap international capital markets, they are perceived as highly risky propositions and charged some of the world’s highest borrowing costs – often hundreds of basis points above peers in Asia or Latin America. 

This so-called ‘Africa premium’ has become one of the continent’s most costly penalties. Even before the Covid-19 pandemic, African Eurobond spreads exceeded those from similarly rated emerging markets by 200 to 400 basis points. 

In 2022, Ghana’s 10-year Eurobond yields climbed above 12% before its default, while Latin American peers with comparable debt metrics borrowed at under 8%. Nigeria’s 10-year bonds continue to trade roughly 300 basis points above Brazil’s, despite comparable fiscal indicators.

The result is stark. African governments are spending more on debt service and less on infrastructure, education and healthcare.

By 2024, more than 20 African countries were either in or at high risk of debt distress. The problem is not just weak fundamentals. Often, even when these improve, yields do not respond. This disconnect reflects how global investors and rating agencies perceive and price African risk.

Power and pitfalls of global rating agencies

At the heart of this issue lies the dominance of three global credit rating agencies – Moody’s, S&P Global and Fitch Ratings. Controlling over 95% of the world’s rating market, their assessments shape investors’ sentiment, benchmark indices and eligibility for all forms of financing. 

Yet their assessment of African issuers has long been criticised as pro-cyclical and insufficiently attuned to regional realities. Empirical research shows African sovereigns are often rated more conservatively than peers with similar macroeconomic indicators. Downgrades frequently precede and even trigger market selloffs, amplifying risk rather than merely reflecting it.

Unsolicited ratings, issued without sovereign participation, remain common and typically punitive. Two countries with identical debt and growth profiles may receive different ratings, with the African sovereign penalised on subjective factors such as institutional weakness and policy uncertainty.

This creates a vicious cycle; inflated risk perceptions lead to higher borrowing costs, which worsen fiscal pressures and reinforce the very pessimism that caused the mispricing in the first place.

The birth of AfCRA

African leaders have acted to correct these structural imbalances. In 2023, the African Union’s Specialised Technical Committee of Ministers of Finance, Monetary Affairs, Economic Planning and Integration endorsed the establishment of the Africa Credit Rating Agency (AfCRA). 

The mission of the AfCRA, currently in the final stages of being launched, is both symbolic and practical. Symbolically, it is set to affirm Africa’s financial sovereignty, and the continent’s determination to reclaim its narrative on how it is perceived and priced. Practically, AfCRA will deliver Africa-informed, context-intelligent credit assessments that complement, rather than replace, the global agencies. 

By leveraging local data, regional expertise and contextual analysis, AfCRA will offer investors a more complete, evidence-based view of African risk – one that is grounded in realities rather than conservative assumptions.

How AfCRA could lower borrowing costs

AfCRA’s contribution to reducing Africa’s cost of capital will operate through four main channels:

Because investors penalise Africa for non-materialising uncertainty, AfCRA will access more granular and real-time local data to close information gaps that inflate the ‘risk premium’ African issuers face. 

Dominance of the three global rating agencies has stifled innovation. The introduction of the AfCRA will bring a new benchmark that can either
pressure or persuade the global agencies to improve their methodologies, assumptions and engagements in Africa.

Beyond sovereign ratings, AfCRA will rate sub-sovereigns, corporates and infrastructure projects, deepening domestic capital markets and broadening investor participation. 

An independent, private sector-driven AfCRA signals institutional maturity and strengthens investor confidence. Even if its ratings match those of global agencies, its methodology and data sources can enhance investor confidence and reduce perceived risk.

A simple illustrative model underscores this potential. Taking Africa’s $155bn bond stock and a conservative 1% yield reduction resulting from the AfCRA’s credibility effect, the continent could collectively save an estimated $7bn in interest over five years. These savings could fund development, education, healthcare and climate resilience.

Challenges ahead

AfCRA’s promise will depend on its credibility, independence and ability to build trust among investors. The African Union has recognised the importance of ensuring that AfCRA operates free from political interference to serve its purpose. Its governance, funding and analytical framework will demonstrate transparency and professionalism. 

The biggest task is market integration, embedding AfCRA into investor practice. Its impact will be realised when multilateral institutions, asset managers and index providers begin referencing AfCRA ratings in their decisions. 

Its legitimacy will rest on technical rigour, not political and sentimental rhetoric. AfCRA will not issue artificially favourable ratings, it will issue accurate ones, even if that means some African issuers receive lower grades than they already have.

AfCRA is not a silver bullet. Lowering Africa’s borrowing costs also requires stronger fiscal discipline, debt transparency and deeper domestic capital markets. 

Still, AfCRA addresses a critical missing link – information asymmetry. It complements global initiatives such as the IMF’s Debt Sustainability Framework and the G20 Common Framework, while reinforcing Africa’s call for a fairer global financial architecture.

For AfCRA to become a credible and sustainable institution, it must be owned, supported and utilised by Africa’s financial community. Banks, insurers, pension funds and development finance institutions hold the key to its legitimacy. 

Here is how the financial sector should support AfCRA. First, Africa’s leading financial institutions should not remain spectators. Banks, regional development banks and pension funds must invest in AfCRA’s equity and governance structures. Market participation will ensure that AfCRA remains commercially disciplined and technically credible. Second, accurate ratings depend on reliable data. Banks, credit bureaus and regulators will help AfCRA to overcome data scarcity by sharing anonymised market data, default histories and sectoral insights.

Third, nothing will strengthen AfCRA’s reputation more than adoption. African banks, pension funds and asset managers should integrate AfCRA ratings into their internal credit assessments and portfolio decisions. Market use is the ultimate test of credibility. Lastly, central banks, securities commissions and regional blocs should formally recognise AfCRA’s ratings in prudential frameworks, capital adequacy rules, investment guidelines and bond- listing requirements.

While AfCRA is a private-sector-driven initiative, it is also a public good, a cornerstone of Africa’s financial sovereignty. Supporting it is an investment in fairer perception, lower borrowing costs and more informed global engagement. 

By rallying behind AfCRA, Africa’s financial institutions will be playing their part in closing the information and trust gap that has long inflated the continent’s cost of capital.