1. Perspectives on sovereign credit ratings in Africa

The first session analyzed views from global rating agencies and senior African policymakers on how risk is perceived on the continent. Rating agencies have one main mandate from investors – assessing the capacity to pay of borrowers. To this end, they use indicators such as GDP per capita, ratios of revenue to GDP, foreign exchange reserves and governance scores. In 25% of defaults, the cause was poor governance, and while governance indicators were not perfect, they are global and the best there is right now for use by the rating agencies.

However, given that ratings are supposed to be forward looking, governance indicators may actually reflect some of the differences between developed and developing countries rather than absolute institutional problems. There are also many data issues with commonly used governance indicators, for example the fact that they are based on perception surveys and are thus quite subjective. Furthermore, GDP per capita confuses the level of income with creditworthiness. Being poor does not automatically mean less willingness to pay. Looking at debt-service records of each country could improve the assessment of default risk. 

For their part, African countries need to provide more and better data to rating agencies. This would reduce the scope for subjectivity in the analysis of creditworthiness. Furthermore, the 20 Africa countries that have never been rated needed to be supported. Regulation of rating agencies was also highlighted as especially important. African credit rating agencies can also play a role in this process by providing more granular information not available to the global rating agencies.

It was pointed out that BRICS all developed domestic credit rating entities. This boded well for the future Africa Credit Ratings Agency, but the question remained how these regional ratings could inform the risk perception of the global agencies. 

Income or wealth is not to be conflated with creditworthiness e.g., Grameen Bank lent to the poorest, and they repaid. There is an opportunity to find creditworthiness where you do not expect it.

2. How do rating agencies consider governance issues in their methodologies and how can countries strengthen governance indicators to improve rating outcomes?

The second session featured senior managers from the big three global rating agencies and was moderated by a member of the UNDP Concilium of rating advisors. 

Governance is central to assessing creditworthiness. Rating agency methodologies measure this in various ways, including policy predictability, timely payments, track record of financial defaults or their absence, and the effectiveness of debt management. Arrears in payments indicate financial distress in both developing and developed countries. Independence of central banks was also considered. Ratings are supposed to be agnostic to political systems and look at two questions only:

1. Whether government has a record of supporting financial sustainability

2. How transparency and open the sovereign is

However, given the data issues and subjectivity of commonly used governance indicators, this is far from straightforward to measure. The World Governance Indicators, based on perception surveys and used by rating agencies, attempt to assess much broader issues such as voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption. 

3. Best practices to improve governance scores for African countries

The following best practices were shared by participants for improving the measurement of risk and governance in African countries:

1. Strong, organized and well-informed communication, in both directions (responding to CRA questions but also proactively engaging with them to optimize the government’s narrative).

2. Data can be improved in terms of timeliness and be more comprehensive, both for the macro and fiscal dimensions.

3. Governments should provide CRAs with examples of multinational corporations in the country that have some compliments to make about their interactions with the government.

4. Rating agencies should be notified of any reforms undertaken by the government, whether they ask about these or not.

Another factor mentioned as positively affecting governance was the strength of civil society and the judiciary, and the quality of legislative and executive institutions. Protection for creditors, fiscal policy effectiveness, and macroeconomic policy effectiveness were also crucial.

It was pointed out that the more indicators available, the more CRAs use them. While agencies cannot prescribe what to do about this, they do publish research about what other countries have done to improve governance, transparency, and public financial management. Several African countries have recently been upgraded or given a positive outlook based on these improvements. 

It was stressed that ratings were just one input into investment decision processes. Ratings were also not static, as shown by an upward momentum in Africa in the past few years. Policy predictability is key to that, as shown in Morocco being upgraded to investment grade, and further upgrades in Egypt and Togo. 

Conclusion

The discussions from this event highlighted the importance of governance to credit risk assessments and global sovereign ratings in particular. On the one hand, governance and institutional quality were critical to credit ratings, and in fact predicted default 25% of the time. They also reflect the strength of the social contract and the ability of governments to manage their economies.

On the other hand, available indicators are subjective, and data issues persist. Commonly used measures of governance also go beyond the rating agencies mandate of assessing financial sustainability and sovereign transparency and thus include unrelated information. 

African governments, global rating agencies, development partners, and African credit rating agencies can all work together to improve communication between sovereigns and rating agencies in terms of data, policies and reforms; improve the timeliness and scope of macroeconomic and fiscal data; and strengthen civil society, the judiciary, and the quality of legislative and executive institutions.