Nigeria and other African countries are working to create a continental credit rating agency to address the perceived bias of Western agencies like Moody’s, Fitch, and S&P.
The initiative aims to provide fairer assessments of African economies, taking into account their unique contexts and growth potential.
This was disclosed on Tuesday at the Launch of the Debt Management Forum for Africa and Inaugural Policy Dialogue on Making Debt Work for Africa: Policies, Practices and options”, organised by the African Development Bank in Abuja.
According to The FAAS Vice President and Chief Economist, Economic Governance and Knowledge Management, Prof. Kevin Urama, the proposed African credit rating agency would serve to counterbalance the ratings issued by these Western agencies.
“Now, as you have already heard here, the credit ratings of Africa, not credit rating agencies, but the credit ratings of Africa seem to have some bias. And that bias, when you try to dig deeper, is because of asymmetric information. So, they don’t have equal amounts of information and the same type of quality of information, or reliability of data, as they do from other countries. And because rating agencies use a methodology that also looks at the physical data, but in addition, perceptions of data in terms of the discretionary way of human beings.
“So, if you have a committee to rate Mr. A, B, C, or D, it is going to look at historical path dependence. It’s like if you go to the US and there’s a crime that happens in a black neighbourhood, who do you think the police are going to look for? People commit crimes frequently because there is a pattern. So, if there’s a pattern of political upheavals in Africa, when there’s an election coming, investors will get jittery.
“If there’s a pattern of corruption, then investors get jittery. If I’m going to invest and there is no guarantee of exit, when I want to take my money out, of course, people are going to get jittery. So, some of those information asymmetries are founded on the continent,” he stated.
Prof. Urama further stated that Africa must work to address the information asymmetry that contributes to the perceived bias of Western credit rating agencies.
“The credit rating agency will now start making Africans begin to understand that there’s no point just blaming the big three because if they come up with the same ratings, this is Africa. So, why complain? So, look back in and see what you are doing.
“But perchance, they can provide what I call a counterfactual. So, if the rating agencies come up with a rating and put you as B-, and then that African Credit Rating Agency puts you as AAA, then, that’s a problem. So, both of them will have to reconcile their methodology and the data sources.
“And by doing that alone, you are engaging; you are improving the engagement of the rating agencies and their understanding of Africa. So that’s another point for me that the credit rating agency will do to provide the counterfactual. Above all, better transparency in building capacity of African countries on what is important,” the AfDB chief economist noted.
Meanwhile, the Director-General of the Debt Management Office, Ms Patience Oniha, highlighted the bias of Western credit rating agencies against Africa.
Oniha revealed that the timeframe given to countries to respond to queries from Western credit rating agencies was often too short.
She also pointed out that these agencies faced criticism after the last global financial crisis, as several financial institutions they had rated AAA, such as Lehman Brothers, collapsed.
“So, what is the challenge with the rating agencies? So, I think they do a very thorough job. But my first point from working with them is that the feedback mechanism after they’ve written that report, after the wise men have gone into the dark room and sat well to prepare that report, the feedback mechanism from the institution or country being rated is very short and limited. And I’m speaking to specific examples that we find.
“So, when they prepare their reports, meaning they put together everything they received from God knows maybe 100 institutions, including the IMF and the World Bank, and something they speak to them as well. If you are very lucky, they give you a maximum of 24 hours to respond. First, they have figures; some of them, you don’t know how they derive them. So, it takes a bit to analyse that report and give feedback. But you have only one hour to do it.
“The second one, so that’s an area I think there should be a change. I raised it with them at the World Bank and other places in October, and they said that was the regulation. There was a regulation. So, maybe that is something to push for a change in regulation,” she explained.
Oniha, emphasized the need for credit rating agencies to demonstrate greater flexibility and openness in accepting additional information or analyzing new data.
The former Minister of Finance, Budget and National Planning, Zainab Ahmed, declared, “It came as a surprise to us because we have presented all of the works that we’ve been doing to stabilise the economy. But these are external rating agencies that don’t have the full understanding of what is happening in our domestic environment.”
Last year, the Federal Government criticized Moody’s Investors Service for downgrading nine Nigerian banks after it lowered the country’s credit rating. The government argued that the downgrades were unwarranted and did not accurately reflect the financial stability of the banks or the broader economy.
