Low credit ratings cause high borrowing costs, liquidity challenges in Africa

Low credit ratings for African countries are leading to high borrowing costs and liquidity challenges, according to experts.

The experts spoke during a plenary session on harnessing sovereign credit ratings power for Africa’s economic transformation, organised by the Economic Commission for Africa at the 2024 African Economic Conference (AEC) in Gaborone, Botswana.

Zuzana Schwidrowski, director of ECA’s macroeconomic, finance and governance division, said low credit ratings contributed to high borrowing costs and more broadly to a vicious spiral of liquidity challenges as well as debt accumulation for African countries.

Despite the overall challenges in credit ratings, she emphasised some positive developments and turnarounds in selected credit rating trajectories of African sovereigns, such as Moody’s upgrade of Tanzania or S&Ps positive outlook on South Africa.

However, the overall double-digit inflation prevents African Central Banks to reduce policy rates, which is another factor behind high borrowing costs and overall subdued growth, especially among resource (and fuel)-intensive exporters.

In her presentation on credit ratings in Africa, Sonia Essobmadje, Chief of ECA’s innovative finance and capital markets section, said, “Improving Africa’s fundamentals and implementing a structural reform program would certainly over time contribute to better ratings, but more importantly to sustainable, inclusive growth and the well-being of the population. The development of African national and regional financial markets should be a priority, as this would reduce excessive dependence on external debt and improve the transmission of monetary policy.”

Misheck Mutize, Lead Expect on Credit Ratings, African Union cautioned that excessive reliance on credit ratings could amplify market instability and lead to pro-cyclicality.

“Interestingly, it is a rule under the EU regulation 1060 of 2009, adopted following the crisis, that sovereign credit ratings should only be published on a Friday after the close of business to avoid market disruptions and overreactions as well as reduce asymmetric information, as different markets are open at different times. This practice gives the investors a chance to digest the information and undertake their analysis over the weekend”, he said.

For his part, Marcus Courage, CEO of Africa Practice, said recent analysis and data collected by Africa Practice and Africa No Filter indicated that stereotypical media narratives about Africa are costing African nations $4.2 billion a year in inflated interest on sovereign debt due to poor international media coverage, often underpinned by conflict and war.

Daniel Cash, a non-resident Fellow at UNU-CPR, said, “To overcome the current ‘credit rating impasse’, large-scale architectural reform is needed. African countries need support and investment from partners to inject knowledge, skills, and nuance into their capacity to navigate the credit rating process.

“Now is the time for partners to come together and offer a unified service to African Countries, and the rest of the Global South, so that the new environment that surrounds them need not be so punitive and regressive.”