BANGKOK, Thailand, Aug 8 (IPS) – After sustained and determined efforts, Africa has achieved a breakthrough in establishing an African Credit Rating Agency (ACRA). The proposed launch is scheduled for December 2024.
Recently, the African Peer Review Mechanism (APRM) and the United Nations Economic Commission for Africa (ECA) met for a two-day retreat in Lusaka, Zambia, to discuss the details of launching ACRA.
What makes it such a significant development? How much influence do credit rating agencies have on the big picture of global finance?
A new analysis by ESCAPE reveals that even a small one-notch upgrade in a country’s credit rating can lead to a significant reduction in the government’s borrowing costs. We’re talking about a 0.42 percent drop in government bond yields!
However, the global credit rating market is dominated by the Big Three agencies (Moody’s, S&P and Fitch Ratings). Together, these three US-based firms have a market share of approximately 95 percent.
The Big Three are often criticised for their perceived bias towards developing countries when assigning credit ratings to their sovereign debt.
This places greater reliance on judgement, particularly when considering political risk and a country’s ‘willingness to pay’. Several factors contribute to this perceived bias, including limited local expertise, shorter track records in emerging markets, less robust reporting standards and data infrastructure, and cultural and linguistic differences.
APRM has been mandated to conduct a feasibility study and support the establishment of ACRA. While acknowledging several challenges highlighted in the feasibility study, such as credibility concerns, investor perceptions of ACRA’s independence, market confidence and potential financial risks to shareholders, the study expresses confidence in ACRA’s potential for success given the huge demand for an alternative credit rating agency in Africa.
This new Pan-African CRA aims to provide more accurate assessments of African countries by taking into account regional dynamics and geopolitical factors. It is expected to help make borrowing cheaper for African governments and will be part of a broader strategy to improve access to capital and integrate the continent with global financial markets.
a United Nations Development Programme research suggests that fairer assessments could save African countries up to $74.5 billion, helping manage debt and allocate resources for development.
In Asia and the Pacific, the ASEAN+3 Research Group was mandated at the 15th Meeting of Finance Ministers and Central Bank Governors of ASEAN, China, Japan and Korea (ASEAN+3) in 2012 to study the establishment of a new regional credit rating agency in the ASEAN+3 region.
Their report was presented at the subsequent 16th meeting, highlighting benefits and challenges similar to those outlined in the APRM feasibility study mentioned above. Although the findings were acknowledged by finance ministers and central bank governors of ASEAN+3, no further action has been taken since then.
Indeed, deciding on the establishment of a regional credit rating agency for Asia and the Pacific is not an easy task and requires strong political support. Asia and the Pacific Economic and Social Survey 2024 highlights a number of factors that need to be thoroughly investigated.
First, a detailed business and financial model, including expected cash flows, should be examined to ensure both the financial sustainability and independence of this new credit rating agency. This could involve a stand-alone entity owned by a regional intergovernmental body, a joint venture with an established credit rating agency, or an outsourcing of the credit rating function to other credit rating agencies.
Secondly, an appropriate legal framework must be established. In the case of the proposed African Credit Rating Agency, the legal framework is a crucial prerequisite to ensure that it becomes an autonomous, self-financed, financially independent and globally credible agency.
Third, a shareholder and management structure is needed with a clear definition of the roles of all potential stakeholders, to ensure independence and credibility.
With rising government borrowing costs and increasing sovereign debt problems globally and in Asia and the Pacific, there is a need for renewed momentum for the establishment of a regional credit rating agency tailored to the specific dynamics of the economies in the Asia-Pacific region.
Beyond the Fourth International Conference on Financing for Development (FfD4) will take place in Spain in 2025. This is a milestone to address the financing challenges and accelerate the implementation of the 2030 Agenda for Sustainable Development and reform the international financial architecture. It may be time for countries in the region to discuss this topic.
ESCAP, in collaboration with ECA, can facilitate the exchange of experiences between African Union Member States and countries in the Asia-Pacific region, including through co-organising side events during major events and intergovernmental platforms, such as the upcoming sessions of the Preparatory Committee for FfD4 and the ESCAP Annual Committee Session.
If the initiative attracts interest from countries, ESCAP can work closely with its Member States and Associated Member States to promote the exploration of the idea of establishing a dedicated rating agency for the Asia-Pacific region.
Lin Zhuo is Economic Affairs Officer ESCAP
IPS UN Office
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© Inter Press Service (2024) — All rights reservedOriginal source: Inter Press Service
