African Nations Confront Investment Financing Challenges Amid Low Trade Earnings and Credit Ratings

African countries confront investment obstacles due to low trade earnings and credit ratings, emphasizing the need for transparency and informed decision-making. Experts stress the importance of recognizing Africa's challenges as global issues and improving the business climate on the continent.

September 11, 2023
Photo: UNDP Regional Bureau for Africa

The UN Economic Commission for Africa's analysis reveals a significant challenge in meeting the Sustainable Development Goals (SDGs) by 2030. Africa needs an annual investment of USD 1.3 trillion, but the continent falls short with trade and grant aid revenue, resulting in a substantial annual deficit of USD 200 billion. Many African nations are transitioning to middle-income status, making it harder to secure concessional loans with low interest rates. Credit ratings by major agencies further impact interest rates and funds flowing into African economies.

The new report, "Lowering the Cost of Borrowing in Africa," by the United Nations Development Programme (UNDP) and the Brookings Institution, sheds light on credit rating peculiarities in African countries, affecting their borrowing costs and access to financing. It conducts a comparative analysis, pitting credit ratings from three global agencies against an independent and more objective algorithm developed by Trading Economics.

The report's findings are striking. African countries pay a steep price due to credit rating specificity—estimated at USD 28 billion in excess interest payments. Coupled with an estimated USD 46 billion loss in potential financing, this total exceeds double the cost of reducing malaria cases by 90%. These findings underscore the pressing need for a fairer and more transparent credit rating system that aligns with African nations' development objectives.

During this summer in Tokyo, the UNDP achieved a significant milestone with the Japanese release of "Lowering the Cost of Borrowing in Africa," coinciding with the visit of Dr. Raymond Gilpin, the Chief Economist and Head of the Strategy, Analysis, and Research Team at the UNDP Regional Bureau for Africa, who also supervised the report.

"One significant revelation from the report related to disparities in credit ratings assigned to African countries by global rating agencies compared to those generated by the Trading Economics algorithm," highlighted Ms. Hideko Hadzialic, Director of the UNDP Representation Office in Tokyo, at the onset of the session.

"Addressing African countries' investment challenges due to low trade earnings and strict credit ratings, the report recommended transparent rating methods, standardized alternatives, support during ratings, a new data platform, and a strategic advisors' Concilium," Gilpin stressed informed decision-making's role in boosting investment.

"Regarding the challenges of African countries' debt from global inflation and debt-to-GDP ratio perspectives, the report's focus on fundamentals over the common emphasis on bankruptcy risk in rating systems," said Mr. Suguru Miyazaki, Director General of Credit Analysis and Environment Risk Assessment at JICA.

"Private equity investors, at least, tend to pay little attention to credit ratings and instead prioritize the business models and management teams of individual companies. Additionally, there is a lack of knowledge among investors about Africa," added Mr. Susumu Tsubaki, Managing Partner of AAIC (Asia Africa Investment & Consulting).

Regional accrediting agencies and their credibility were one of the topics discussed. Gilpin stated, "Accrediting agencies have the potential to complement major rating agencies by providing meaningful data, but there is a need for increased creativity in data collection and collaboration between regional authorities and rating agencies." Miyazaki added, "There is a need for improved data collection efficiency through digital technology."

Concerning the attraction of Japanese investors to Africa, Tsubaki mentioned, "Kenya's M-PESA mobile money transfer system has great potential as a source of valuable civic data." Gilpin also proposed Japan's role in supporting African countries in accessing affordable credit.

"It is critical to recognize Africa's issues as global challenges and to focus on improving the business climate on the continent. The importance of creating a business environment with fewer and more predictable risks cannot be overstated. Such an environment would not only attract more investment but also assist African countries in building credit histories," concluded Gilpin at the end of the discussion.

With over 100 participants, both in-person and online, the event paves the way for ongoing dialogue and collaboration to drive positive change for Africa's future.

Group photo: left to right – Mr. Suguru Miyazaki, Dr. Raymond Gilpin, Ms. Hideko Hadzialic, Mr. Shin Nimura

Photo: UNDP Regional Bureau for Africa