Nigeria, other African countries plan continental credit rating agency

Nigeria and other African countries are teaming up to establish a continental credit rating agency to counterbalance Western credit rating agencies’ bias against Africa.

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.

S&P Global Ratings, Fitch Ratings and Moody’s are the top three global credit rating agencies.

The FAAS Vice President and Chief Economist, Economic Governance and Knowledge Management, Prof. Kevin Urama, African Development Bank Group, noted that the proposed African credit rating agency would counterbalance the ratings of Western rating agencies and address the bias against the continent.

“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 noted.

He added that Africa had a lot to do to address that information asymmetry, which was one of the reasons for mulling the floating of an African credit rating agency.

“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 stated.

Also, the Director-General of the Debt Management Office, Ms Patience Oniha, noted the Western credit rating agencies were biased against Africa.

She disclosed that the period given to countries to respond to queries was too short, noting that the rating agencies received some bashing after the last global financial crisis because many of the financial institutions they had rated triple AAAs went under, citing the example of the Lehman Brothers.

“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 expounded.

The DMO DG mentioned that there was a need for flexibility and openness to receive either additional information or analysis of new data by credit rating agencies.

Last year, the Federal Government faulted Moody’s Investors Service for downgrading nine Nigerian banks following its downward review of the country’s rating.

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.”

Meanwhile, Associate Professor in Law at Aston University and Senior Fellow at the United Nations University’s Centre for Policy Research, Prof. Daniel Cash, stated that the current debt crisis that was affecting a large part of the developing world had credit rating agencies at its centre.

“Sovereign ratings that they offer go back to the early 1900s, but they’ve really grown in recent times. Whilst we do have three agencies, they really do all centre around these critical issues.  So, they look at macroeconomic indicators, public finance indicators, monetary and external indicators. They look at your default history, and they also have qualitative indicators that bring in that subjectivity.

“The subjectivity they argue is necessary because, unlike a corporate creditor who you can compel to repay, a sovereign can’t be compelled to repay.  So, that’s why any agency would look at their willingness to repay, as well as their ability to repay.  And that’s why they have discretionary elements too. And this is a cause of some of the issues that we’re seeing in terms of this is how the subjectivity gets injected into sovereign credit ratings,” he explained.