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- [00:00]
Catherine Nzuki
Hi there, this is Catherine Nzuki. Before we get to our episode today on the new African credit rating agency, I just wanted to share the good news that the Afropolitan is now the Youth Bloom. I shared more about this on Tuesday, but long story short, I wanted a new title that better reflects the focus that this podcast has on Africa's youth and the choices that we can make today to secure healthy and prosperous lives for current and future generations. Thank you as always for your support and I hope you enjoy this episode. By the year 2050, one in four people on the planet will be African. The choices that we make now across Africa will shape the world's collective future. Welcome to the Youth Bloom, where we explore the stories, the trends and the issues we face in the present that will define the coming decades. I'm your host, Catherine Nzuki. The big three credit rating agencies have long been accused of bias against Africa. Critics argue that these cras are not accurately assessing risk factors. And in countries, they've been accused of lacking objectivity and barely having a physical presence in Africa. And so in this episode, we're unpacking what the issue with the big credit rating agencies are and how effective an African credit rating agency can be in filling in these gaps. And so my guest today is Dr. Daniel Cash and he specializes in the study of the international credit rating agencies.
- [01:54]
Dr. Daniel Cash
So My name is Dr. Daniel Cash. I'm an associate professor at Aston University in the UK and a senior fellow at the UN University Centre for Policy Research.
- [02:05]
Catherine Nzuki
Daniel, welcome.
- [02:06]
Dr. Daniel Cash
Thank you for having me.
- [02:08]
Catherine Nzuki
Of course. So please, let's start from the beginning, because the reason I'm doing this episode is I think I have a rough understanding of credit rating agencies and the impacts that their ratings have on, you know, your sort of day to day experience. But I really like to zoom out and just start from the basics. What is a credit rating agency and who are the big three agencies?
- [02:30]
Dr. Daniel Cash
So a credit rating agency has quite an easy to understand theoretical role. Quite simply, they exist to assess whether somebody who borrows money will pay it back on time and in full. So that's really their main focus. They have a number of different roles because of that, because of the growth of the concept of debt. But at its core, that's what a credit rating agency exists to do. The market in terms of international credit rating agencies is what we call an oligopoly, meaning there are just a few big players, and there are three in particular. So the largest is S and P Global, formerly known as Standard and Poor's. The second is Moody's. And the third is Fitch Ratings.
- [03:14]
Catherine Nzuki
Why is a sovereign credit rating so important? Why is it so important to know if a country can pay back its debts in full and on time?
- [03:23]
Dr. Daniel Cash
So a sovereign country needs a variety of financing to meet its obligations to its citizens. So maybe it'll get financed from maybe taxation or through trade. But one way that they do bring in financing is through sovereign debt. So they will borrow money from a variety of lenders. So traditionally, a lot of developing countries will borrow from foreign example, other countries or the World Bank. But more recently, they have started borrowing from what we call private creditors. So private creditors would be something like maybe a pension fund or a wealth manager or someone like that. Credit rating agencies are usually concerned mostly with private creditors. That's who they exist to serve. They don't exist to serve other countries. So, for example, if you were to restructure your debt with another country, you wouldn't get a downgrade, for example, but if you were to maybe potentially restructure with a private creditor, you would potentially be downgraded, because that's who a credit rating agency exists to serve. The reason why that is the case is because a country can borrow money and lend money quite freely, usually because they print or create the currency that they're lending, whereas a private creditor can't do that. And in the modern world, a private creditor is what we call an institutional investor, which means somebody, a manager is creating and controlling the money of others. So, for example, think of a pension fund. And what the aim is here is to provide a risk assessment for that manager when they take that option to maybe lend money to a particular country so that their principal can understand the move they've taken. And that's why credit ratings have become so important, quite literally, because of their simplicity. You don't have to be well trained or financially literate to understand that AAA is ranked higher than maybe cc. And the beauty and the genius of a credit rating is really its sliding scale. And it allows people within this system to signal to whoever they need to signal to about their risk tolerance, their risk appetite, and the decisions they take.
- [05:34]
Catherine Nzuki
So I'm curious to hear more about the sliding scale. But before we get there, I would love to know why the credit rating agency sector is dominated by these three firms. Why is it an oligopoly?
- [05:48]
Dr. Daniel Cash
So the credit rating agencies and the industry that came before them, the credit reference agencies, is a long, historical, traditional industry. So I think the first agency was opened in 1835 in New York. That tradition is really important. And it really boils down the industry. The reason why there are so few of them is because their users, the investors, they need their signal that is created by the agencies to be as strong as possible. And when you have multiple credit rating agencies, it dilutes the signal. So investors actually want less noise, not more. And a good example of where this is happening is in the current ESG rating market, which is brand new. There were 12, 13, 14 different providers, and the investors were not happy. They were very clear that they wanted fewer providers because they used their signals, and their signals have to be strong. So it's what we call in the field a natural oligopoly, which means it has to be an oligopoly in the way it provides its services, because if there were too many providers, it would be of much use to its users.
- [06:56]
Catherine Nzuki
Oh, I see. And how do they make a profit?
- [06:58]
Dr. Daniel Cash
So traditionally, they make their profit from what we call an issuer pays system. So historically, they used to be investor pays. So when a subscriber would subscribe to the rating book, they would pay an annual fee or a monthly fee, and that would be their income. In the late 1960s and early 1970s, the agencies decided to shift that model and charge the issuers of debt instead. So if you wanted to issue debt and you needed a credit rating to signal to the marketplace your credit worthiness, you then had to pay the credit rating agency to conduct that rating, and that's where they derive still the majority of their income. The obvious issue with that, obviously, is if you are paying for your rating that you need, you have a conflict then to make sure that you don't give that entity a low rating. And that is one of the major conflicts of interest in terms of credit ratings at the moment. They also bring in their income through what we call ancillary services, which is also called consultancy services. So they provide a wide range of consultancy products that they sell to the marketplace. It's worth noting for this conversation that for sovereign ratings, credit rating agencies make very little money. That's not where their money comes from. It comes from rating what we call corporate bonds. So companies and also structured bonds. So, for example, particular financial products from sovereigns, they make very little money because the countries very rarely come to market or they very rarely have to pay for it. So that's where they get their funds.
- [08:33]
Catherine Nzuki
That's so interesting. And now, I guess zooming into Africa, I'm curious what inputs go into assessing sovereign credit ratings and why these big three firms have been accused of bias against Africa.
- [08:50]
Dr. Daniel Cash
So the sovereign credit rating differs slightly between the big three, but it's mostly the same. What they will use is economic data that is usually public but can be provided by the countries as well. But it's usually like one of the biggest one is GDP per capita, which is problematic because it's usually related to the size of your economy, which is problematic. They have other issues like fiscal data and then they'll use another strong element which is governance data. So it could be the strength of your political institutions, the dependability and stability of your political institutions. And then they will blend that with other qualitative data. So they have to usually go to the country, they will have an in country meeting once every year or once every two years and they will gather data from the government, they will gather data from central banks, from large private institutions in the country and track to build as better and as big a picture as possible with as much data so that they, when they apply their methodology, it's as data rich as possible. That's the theory you asked about bias. So bias has been quite a hot topic in our field recently. It's where the accusations come, particularly from a number of African commentators. The suggestion is that the big three don't take the same approach to African countries as they take to different countries. Some of the support for that take has been on, let's say the fact that after the pandemic or when the pandemic really hit, African countries were downgraded as a much greater speed than comparable countries in different regions around the world. Also on the continent, only standard and pause of Moody's have offices on the African continent. But those officers are largely administrative, they're not real credit rating officers and they're only in South Africa, they're not anywhere else on the continent. So they really don't have a presence on the ground on the African continent. To understand the complexities of the African landscape and the difference within different countries on a landscape. So for example, a lot of countries have informal revenues, have different types of economies. And the suggestion is that the credit rating agencies not being on the ground can't really understand that from flying in, spending a week and flying out. Interestingly, the research has not found any evidence of anti African bias. The only bias research has found is pro US bias because that's where their home is from my understanding, my personal take on it is it's very difficult to find bias anyway just in any form of life. So it's rare that research finds bias. And also there are different stages of the credit rating process where bias could exist, which a lot of people have overlooked. So very quickly, a credit rating journey has two stages. The first is that they will apply a methodology which is public, so anybody can go online now, go to Moody's or Standard and Poor's and download the methodology and see exactly how they rate. But an analyst will apply that methodology, apply all the data they find, take it into what's called the credit rating committee, which is the second stage. And that is behind closed doors. And the public never get to find out what happened in there, who was in there, what they discussed. And it's quite often the case that when people try to replicate the methodologies with the public information, the rating is off by two or three notches either way. And the suggestion is that the notch difference happens in the committee stage, which is behind closed doors. And that's why the committee stage has been called the black box. And my suggestion is if there is any anti African bias, and I'm on the fence of whether there is or there isn't, but if there is, it will likely be found in the committee stage because you have maybe natural bias in people's views or opinions on Africa or what have you. So it's very difficult to prove anti African bias, unfortunately. But the sentiment is there and even the sentiment being there is strong enough.
- [12:49]
Catherine Nzuki
First of all, that's so fascinating. I didn't know that there was this sort of conclave like hidden. So I just want to touch on something you mentioned earlier. Can you explain why GDP per capita is actually a problematic way of measuring economic productivity?
- [13:07]
Dr. Daniel Cash
Well, not to go too complex, but essentially GDP per capita tries to capture a picture of the strength of your economy. But obviously the larger your economy in terms of size and scale, the greater that number will be. So it's almost like it's a really good indicator for strength. But when you take a step back and try to see it conceptually, if you have a relatively small economy, you may have then a relatively small economic metric, but then there are other elements which may impact the creditworthiness of the country which GDP capital may not capture. So for example, the different types of economic income that the economy may take on. So a lot of African countries have what's called different types of economic strength. So a lot of African countries are SME reliant and it's very difficult to capture the strength of those SMEs in terms of data. And that's where those different understandings have an impact on how they're viewed. So there's some of the suggestions by commentators is that if you change the priority of looking at GDP per capita in your methodology, you could potentially get a better, more nuanced understanding of the economy you're rating. And that's one of the suggestions as we'll go on to, that the African credit rating agency, when it's formed, may take a different methodological approach to understanding Africa and maybe then have a different outcome.
- [14:33]
Catherine Nzuki
Yeah. And then my second follow up before we switch over to the African credit rating agency is I want to understand what all of this, the points difference, the potential bias would mean for your average, I don't know, 20 year old in Zambia. What does it mean to have these three firms, two of which have a presence in Africa and one doesn't decide, both publicly and in this black box, the credit worthiness of your country. What does that translate into for like your day to day person?
- [15:08]
Dr. Daniel Cash
Absolutely. And I think if anything from this podcast, I think this will be the greatest takeaway to understand the relativity of these agencies. So on a day to day basis, let's say one interesting statistic which makes for terrible reading really is that more than 50% of African countries pay more for their debt than they are investing in their health, infrastructure and education. Which is an alarming statistic because what's happening is because of this high cost of debt, which for many reasons is far too high than it should be, the countries when they have to repay that debt are funneling far too much money which could go into the benefiting of their citizens everyday life instead is being paid on interest on loans. And that pile is getting higher and higher by the day. With the obvious impact then being, you said the 20 year old in Zambia, their life expectation in terms of what the government provides for them, what on offer, the services are getting lower. And this is leading countries to make drastic decisions. Because one of the problems is usually if you, let's say you were a citizen and you had a personal loan, you were struggling to repay it, usually what would happen is you would try to restructure to bring down the cost of that borrowing to make it more manageable. When you're dealing with these private creditors, you can't restructure because if you ever threaten a restructure, the credit rating agencies will take you out of the market. That means you can't go back to lend more money and no country wants to go into what we call default. So they keep paying the money back, but the money is at such high extortionate rates that the money for everyday citizens is going less and less and less by the day. So it has a real world effect on everyday citizens, not only in Africa, but all around the world, because almost every country is borrowing money from the private markets. And if you borrow money from the private markets, the credit rating agencies are one component only, but they are a really important component of what determines the cost of capital, as we call it.
- [17:17]
Catherine Nzuki
Yeah, I'm starting to wrap my head around this. And I mean, again, before we go to the African credit rating agency, you know, this podcast is youth focused. And one of the stats that we talk about a lot is the fact that by 2050, one in four people in the world will be African, the working age population will largely be African, and so on. And so if we just extrapolate further right, we expected to add a billion people between now and 2050. At a time where roughly 50% of African countries are spending more on debt repayment than on healthcare and or education. What does this mean, like 25 years from now, like, if the system sort of roughly stays the same and this debt trap or this debt cycle continues, what does it mean for, you know, this coming generation, this population boom?
- [18:06]
Dr. Daniel Cash
Well, I think in asking that question, you probably know the answer, unfortunately, because if this system maintains itself, the future for those extra people who are going to be coming into the marketplace, who are going to be the backbone of the global economy, isn't going to be strong. It's going to be weak and fragmented and broken. Because the core fundamentals that the citizenry need, good education, good healthcare, good infrastructure, isn't necessarily going to be there. And what you're seeing is geopolitically, you have now different entities vying to take control, to provide Africa with those elements, but for a cost. So, for example, when China's providing infrastructure, healthcare and educational elements, they're taking something in return. It's not a gift. The United States, with the current corridor going through Angola, the reason why they're giving infrastructure projects is to take something out. And what we're trying to get to is trying to rebalance this system so that it's not necessarily you have to gain a little but lose a lot. And I think I'm often reminded, I'll paraphrase him badly probably, of Thomas Ankara who said, you have to create the world you want today. And it's about setting those structures now in order to cope as best as we possibly can with those people you mention. So, for example, I think the one thing to understand here is all of these structures I'm talking to you about they are Global north structures. They are not designed to, I'll say, care for, but it's not their job. But it's not even designed to help the Global south take part, for example. So, for example, as a pension holder in the United Kingdom, my rights are much more preserved in this system than the 20 year old in Zambia who you mentioned. That's because this is a Global north system. I think what's happening now is there's requests to make this more equitable and I presume that's what we'll speak about in a moment. But I think it's really critical that we understand the realities of this system and then when you apply it to the world as it will develop and evolve, understand that it needs to be tweaked, it needs to be evolved so that we have a more equitable system. Because at the moment, unfortunately it isn't.
- [20:29]
Catherine Nzuki
Yeah, well, I mean, what a great segue to an attempt, an effort to tweak these systems, which is, you know, given this discontent, the African Union Peer Mechanism came together to form the African Credit Rating Agency. Can you tell us a bit more about this emerging institution?
- [20:49]
Dr. Daniel Cash
Yes. So I'm fortunate enough to know the Africa Peer Review Mechanism really well. They've been working for at least well before the pandemic. Specifically, they have a subdivision of focus on credit ratings, even though they do a lot more. And for a number of years they were really looking at capacity building. They were helping countries with how they negotiate and navigate credit rating agencies. But over the past few years they turned their attention to this concept of what's known as a public credit rating agency. So what they've designed is called the African Credit Rating Agency, or AFCRA for short. And as it's been designed, what it will do is provide not a competition to the Big Three, but an alternative view. So a more Afrocentric understanding, with the suggestion being as it's being designed, that it will be closer to the ground, we'll have a better understanding of African fundamentals. It will be African owned, which is very different to what we currently have. Even though we have a lot of African credit rating agencies, this will have the institutional heft of the African Union behind it. So that in a nutshell is what the agency exists to be. As far as I have it on good authority they're hoping to launch it this year. How it will look when it comes to fruition is still being designed as far as I understand it. So its ownership structure, its revenue structure, where it will be hosted and who will regulate it are still being designed, as far as I know.
- [22:16]
Catherine Nzuki
You alluded to this earlier, the inputs that they're considering to build out their methodology. Could you elaborate more? I know we talked about GDP per capita, but are there other different data inputs and so on that they're thinking about using?
- [22:32]
Dr. Daniel Cash
Well, it's difficult to say because they're still designing how that would look. And also I think one thing that will determine how it methodologically approaches this issue is who will be its partners. So for example, if they work closely, as I think they will, with African credit rating agencies. African credit rating agencies have quite different methodological approaches, so different aspects. They will still use GDP per capita because it's a really strong economic metric, but they hopefully will use other things. So they will take a greater look at the informal sectors. They will create a different look at maybe the diaspora and how they work with the countries they send money to and things like this. There's also suggestion that they will look more closely at like mineral wealth and things like that. So the value and the wealth that each country has in Africa is off the charts, but it's usually not counted. So for example, a country has lithium deposits or diamonds or gold or what have you. So there's a question of whether that could be factored in more particularly as countries can maybe increase their output of that mineral deposit, which would then bring in extra money, which would then allow them to pay their debts off. So it's about maybe taking a different approach. How it will work in practice, we don't know yet. And this is one of the key issues. So I was in Washington last week in New York with the aprm. They are the talk of the town. Everybody wants to hear from them, everybody wants to be in the sessions that they're in because everybody is interested in how this will develop for a number of reasons. One, it's new and this is a very, as I said, a very traditional sector. So a new element is quite a buzz for the sector. It's also attempting something that's never been done before. A public rating agency has never been done for a very simple reason. A credit rating agency in theory has to be independent because then if you're judging or opining on the credit worth of someone, if you have a connection to them technically, you may be encouraged or incentivized to give them a higher rating. So the question here is how will an African based rating agency rate the same countries who they represent? And how Africa will try to get around this, I believe is to have an independent body governing it. A very clear, transparent structure to show that, for example, even though Kenya, as an example country, is a member of the African Union, they can't exert any pressure through the governance system to get a higher credit rating for Kenya. There's got to be very clear separation between these routes in order for the African credit rating agencies to get the reputation it needs from the market. So that's really at the core of whether this will be a success or not.
- [25:23]
Catherine Nzuki
That was actually going to be my next question for you. The sort of risk of corruption or the risk of bias. I wonder, when you were all in D.C. and New York, is there like one question that you kept getting asked in all these meetings?
- [25:38]
Dr. Daniel Cash
So interestingly, they don't usually ask about will it work or not, because the sentiment around the field is that it will not work. The reason why, as I've just told you, traditionally these things don't work. I think one of the things that the questions were being asked is really about what was the emphasis for this? To try to understand why it's being created. And also a lot of focus was on when it will be created, what it will look like, what are the details. And that's natural when you're building something like this for me personally, so I remember being in Lusaka last year and I did take a bit of flack when I was on the stage and I spoke about this, Public credit rating agency cannot try to just give better ratings. It cannot see what the big three are doing and try to just uplift the ratings because it will not get the reputation. Instead, its aim really has to be on producing fairer ratings. So, for example, the aim is not to compete with the Big three, but the aim is to show that there is maybe a different approach. So that would be maybe in different methodological approaches. And one thing that I think, and this is not me saying what the agency will do, this is just my personal opinion, there could be crucial points of difference that the African credit rating agency could do that which could change the whole game. So, for example, I mentioned to you earlier about the committee being a black box. What the agency could do is open the black box up so they could start being more transparent about how the decisions were discussed, who was in the room, who had what voting structure, how it was then developed, so that then when people see the end product, they know better how it was created. And that doesn't happen in our field. So this is one element that the African credit rating agency could really make giant strides early on in its development by having that crucial point of difference that would separate it from its peers.
- [27:34]
Catherine Nzuki
And I want to understand better the choice to make it complementary to the Big Three rather than a competitor. I assume one of it is just like institutional capacity, right? And that this field seems to enjoy having few signals rather than more. But I suppose I just want to understand that distinction better because I've also seen that in pieces that have come up. What's the best case scenario when you have this Afghan credit rating agency acting as a complementary source of information to the Big Three is the assumption that they will step it up and like, you know, open more offices in Africa. Like, what's the best case scenario here?
- [28:13]
Dr. Daniel Cash
Well, the reality of why it's being called a compliment and not a challenger is because you have to be very careful in the early stages because it's a natural oligopoly. You can't just come in and promise to change the world because you won't be believed. And also, the Big Three are multi billion dollar industries. A good example is you all know who Warren Buffett is. Warren Buffett is one of the lead investors of Moody's. He is not there because it's a charity. He's there because it's big business and he knows that. He's owned it since the year 2000, I believe, so he knows how much money it's worth. This is big business. And the African agency will not be able to compete in terms of resources, in terms of investment, in terms of early startup growth. So it's important to frame it correct. Hopefully that contextualizes people's understandings and hopes about what it will do and what are its hopes for development. Its first hurdle that it has to breach is that it has to gain respect. Without respect from the private capital markets, it simply won't grow. That's simple, because the private creditors will have to use this. And when you use it, you're using their signal. The question becomes, is that signal worthy of being used in the eyes of who it's being used for? So I'll give you a very quick analogy. Let's say, for example, I'm a pension holder in the UK and my asset manager is investing my money in Zambia or let's say, Kenya, for example. If my asset manager was say, to me, the only risk analysis I've done is to use the African credit ratings rating. And I say, well, that could be a big conflict of interest because couldn't Kenya potentially impact that rating? If they don't have a good answer for me, they can't use that rating in their system. Whereas if I say that about Moody's, they could point to Moody's tradition, Moody's history, Moody's governance, what have you. Even though they're full of conflicts of interest, their tradition usually trumps it. So that's why the African credit rating agency needs to be really careful at the beginning. Unfortunately, they'll likely have to be really conservative, which means they have to balance the wants and requirements of African populations or who want change with the realities of the marketplace. And it's a very delicate tightrope. But growth looks like multiple offices across Africa, which would be a real. Another point of difference if we had an African credit rating office in Nairobi, in Lusaka, in South Africa, but also in Dakar or all around the continent. It'd be a much stronger message, I believe, to the market that we are on the ground. We are seeking to understand the intricate realities of the different African economies, because, as you know, it's not an African economy, there's not one economy, there's many, many different, varying economies, and they're very different. So I think that could be another point of difference to try to almost step into the place that the Big Three have left unattached, because the Big Three have not deemed worthy enough for their resources to have multiple African officers. And I think that's where the African credit rating agency can really speed up and accelerate their growth and development in the early stages by having a breadth and depth of access to African data. But also, while I'm on my little soapbox, I will say this. For me personally, they would be best advised not to just focus on credit ratings. One of the issues within sovereign ratings, what we're finding at the minute, and I'll give you an example, capital markets as we know them started in the 1950s. As I said, the credit rating agency started in 1835. The first African Eurobond issuance in terms of lending from the capital markets was only 20, 30 years ago. So there's a massive lag in terms of institutional capacity within a lot of African countries and the entities they're dealing with, with credit rating agencies, capital markets. And what we really need is what me and the APRM have spoken about a lot, is what we call raising the floor so that all these African countries then have the capabilities to navigate these different spheres and realms as best as possible. And at the moment, that floor is very uneven. So one thing, there are a number of initiatives. I'm building initiatives, aprm, UNDP at the minute. But one thing that the African credit rating agency could really do is have a capacity building approach to what they do. So it's not just providing ratings, it's also providing skill sets in understanding ratings, how to get the best rating, how to work with agents, how to form your data so it's accessible and amenable to credit rating methodologies. So the credit rating agency for Africa has quite a job on its hand. It has a lot of tasks and I feel it's quite unfair to put all of this on one initiative because it puts the pressure on that initiative. But regrettably, that's the reality we're in. And a lot of people are putting a lot of eggs in the AFCRA basket because Africa, unfortunately is desperate and they need help. And this is a really important initiative to maybe give that help. So I have all my fingers and toes crossed. Believe me, that Even if it's 50% successful, that's 50% more than where we are.
- [33:45]
Catherine Nzuki
Yeah, I mean, I'm sold, I'm sold, I'm in. But I also want to ground this. And so I'm curious what the sort of worst case scenario would be. I know that there have been instances in China and India where they've tried having national credit rating agencies that collapse for different reasons. There's the Financial Times editorial board piece from last year where they sort of dismiss the idea of having an African credit rating agency. I don't want to be too pessimistic because I'm sold. But what would be the worst case scenario here and what would be some of the things that you're looking out for in this first year? The sort of signals that things are going well or things aren't going so well?
- [34:27]
Dr. Daniel Cash
I think the worst case scenario is not that it fails because things can fail. And as I said, there's never been a public credit rating agency. China's invested in this, Russia's invested in this, the eu, India, and it's always failed. And quite interestingly, those different entities who've tried have ended up going back to the Big Three and bringing the Big Three in in a big way. China's a good example. For years, the Big three were not allowed to operate in China unless they were accompanied by a Chinese entity because they were not trusted to act independently. When China tried to do a public entity and failed, they changed their rules and brought the Big three in unaccompanied because they understood we need this signaling process and we can't make it. So African credit rating agency can fail. I don't think that's the worst case scenario. I think the worst case scenario is if it does fail and it takes any sort of momentum with it. So there's a lot of momentum on the continent at the moment of capacity building of what I'm calling credit rating literacy, so that even the public like podcasts like this. I was on South African radio last week doing the same thing, just trying to explain that this is important, that we have to consider it and keeping it on the agenda. The worst case scenario is that this fails and takes it off the agenda and we really. That can't happen. So I think it won't happen because there's quite a lot of investment. So for example, we were in the un, as I said last week, we were in the IMF spring meetings, it was on the agenda there. I'll be in Hamburg next month, it's on the agenda there. I'll be in Seville for the big annual meeting for the Financing for Development conference. It's on the agenda there. So I'm not too worried about that. But in terms of the impact it may have, it could be considerable if it takes a lot of resources down with it. So what am I looking for? I'm looking for continued investment. When things get rough, which they likely will do with any startup, you have to keep going. You can't just crumble at the first sign of issue. And I think what it does is I think it needs a lot of African support. Because as you mentioned there, the Financial Times editorial, which I'm very familiar with, there are a lot of people in this credit rating field who have allegiances to the big three. And whether they currently work for them or they used to work for them, their views don't change. And that's. If you work for a company for 20 years and you leave, you're very unlikely to turn against that company unless something went wrong. And what we're seeing is that there's quite a push in the media to either keep the system as it is and whenever something pops up to hit it on its head, like if you know the whack a mole game, it's just hitting them down wherever they come up to counteract that. What we need is African support. So for example, the African Development bank needs to be a champion of this. The governments need to champion this. The African Union, which I presume it will because it's an initiative, but they really need to champion this. It's not about bringing it to the table and then moving on. This has to be a long term investment and it's not just money. It has to be in narrative building, for example, so whenever the African Development bank is at an international conference, it needs to be championed. Whenever the African unions are at a conference, it needs to be championed. Whenever they have an opportunity to sing its praises or show its utility, they need to champion it. And it's really critical that anybody associated with Africa or who has any sense of promoting African development, this has to be part of the narrative now. So it becomes almost second nature that if you want an understanding of creditworthiness on the African continent, you consider what Africa is giving, you may not be the only source of information you take, and it really shouldn't be. You should always seek a balanced source of information. But if we can get to a point where it's almost a given that if you want to understand African credit worthiness, you take it partially from the African credit rating agency, that is the success that we're looking for.
- [38:35]
Catherine Nzuki
Yeah. I almost wonder also if, you know, when I think of, like, intra Africa diplomacy, we tend to be very polite and very sort of not eager to criticize. But I almost wonder if we need to be really strict with this African credit rating agency and like, as soon as we see anything that hints at a lack of transparency, like, resolve it immediately and have constructive criticism. You know what I mean? I don't know what you think about that. Almost we gotta be strict, right?
- [39:03]
Dr. Daniel Cash
Well, I think to put it into perspective, we have to hold this African credit rating agency accountable. And the reason why is because if we don't, the rest of the world will. And they will be on top of it immediately. If it makes a mistake, they will let them know about it and it will feed into this narrative that it is failing. I don't agree with that. I think you can develop through, as you say, critique, but critique that's honest and transparent and open and seeking to develop. So, for example, if one of the processes wanted designed is not as transparent as it should be, we need to tell them we need to give structured criticism. Not only criticizing what they're doing, but they will need help from the field in how to make it better. And one thing as I, forgive me, I am absolutely in love with a. I always love a tagline. And my current tagline at the moment is from critique to construction. Because at the moment in this field, there's been a lot of criticism, a lot of critique. This is why this is wrong. This is why this is not working. But we're not moving to a point where, okay, so let's try this. Let's test this out. Let's see if this works. Let's see how this folds. And I think that's where we need to move to with this particular mechanism, because it will need that support. If you think about. If you take a step back and think about what it's going up against, it's technically going up against the global financial architecture. That is a task and a half. It's also going against. This book is free to read for anybody who would like to read it. It's open access. This book is called Sovereign Debt Sustainability, Multilateral Debt Treatment and the Credit Rating Impasse. And in this book, what I try to do is show this issue as not being over the past 10 years or the past 20 years. This is historical. And a lot of these issues do go back to colonialism, go back to all of these core human aspects that have shaped human development over the past four, five, six hundred years and beyond. What we're in now is a structure that has roots all around our society. So when you were asking earlier about how is this relatable, this essentially governs everyday life for every single human being on the planet, whether you know it or not. And what the African credit rating agency is trying to do, and I give it credit for this, whether it fails or succeeds, it's trying to make a positive difference. And that is something that has to be championed and celebrated. So I think my request of the field, and it's a very pessimistic, static field, believe me, and usually I'm one of the pessimists, but my request would be to try to make it work rather than to see when it can't, and to try to utilize all of the innovative thinking and the research and the investment to try to give it as much support as possible. Because if it does work, it could have a humongous impact for all of those people you mentioned that are coming in the future who will be the backbone of the global economy. They will need this to better represent themselves on the global marketplace. So, yes, I am. I did mention I have my toes crossed.
- [42:13]
Catherine Nzuki
Yeah. Well, it's ambitious and that makes me really happy. And I think I understood broadly how ambitious this is. But now that I sort of understand the place of this African credit rating agency in the context of, like, global financial institutions and global financial flows, it makes me so happy. Right. It's like we are trying something big, and if we get it right, that's exciting. And even if we get 50% there, the fact that I now understand that there's an African credit rating agency that's being formed. Da da. I think that's a credit to the work to make this more visible that you and everybody else involved in this has been doing. So, I mean, props to you. It's not something that.
- [42:54]
Dr. Daniel Cash
Well, not props to me. I'm just. I'm just a champion, believe me. So it's props to the team who are doing it, I think, for me personally. So my heritage is half African and I am a Pan Africanist, a heart. And I think when you said that, it's the ambition that I am supporting, I am not pinning my flag to whether it'll succeed or not, because I'm no fortune teller, but I think it's the ambition that is something we should get behind. And the ambition against the challenge is just monumental. And I think it's such a healthy response to the challenge that was faced. Because if you look at what happened during the pandemic and continues to happen today, I remember quite clearly, I've read this word for word. Early in the 2000s, the American secretary of State spoke to a number of African states leaders and said, if you join the capital markets, if you bring a credit rating, it is your ticket to prosperity. And they believed him. So they went and got credit ratings. And what it's done is it's changed the system massively for African credit ratings. And that's why, to go back to the book, it's the credit rating impasse, because now you're stuck. You can't restructure where you used to be able to restructure with, let's say if you borrowed money from United Kingdom, you would restructure. If you borrow money from the World bank, you can't do that with private creditors. And that's what's happening. So that's why all the money is being dragged out of the system and being given to private creditors rather than education, healthcare and infrastructure. And I think this attempt to go against that structure when nobody else is, and it's got to be said, everybody has opinions, I'm one of them. Everybody has a viewpoint. This should happen, that should happen. Very few people actually doing something, actually creating a structure. So that's why I'm championing it and that's why I sing it from the rooftops. And that's why I know the team very well are working day in and day out to put the meat on the bones to protect it. Because I was sharing a taxi back from the UN recently with one of its leaders and we were speaking in a taxi boat. A lot of people want this to fail. And imagine that pressure when you're building something and everybody around you seemingly wanted to fail. And what I'm trying to do with podcasts like this is to show the leadership who are building it that not everybody wanted to fail. That's not true. We need to promote the narrative as much as possible that actually it does have champions. People are starting to understand it's important.
- [45:19]
Catherine Nzuki
I agree. I have a question that I wish I'd asked at the top. Who are the major private creditors lending to Africa?
- [45:28]
Dr. Daniel Cash
So the private creditors we're talking about differ. The majority, the predominant private creditor is actually what's called a non banking institutional investor. So it's not investment banks like Goldman Sachs and what have you. It's almost like Vanguard, State street, blackrock. They are the major protagonist here because they essentially pool large amounts of money so they own what we call assets under management. They have more assets under management than most countries have in their books. We're talking trillions. And also then you have large pension fund holders. So I know, for example, I'm an academic in the United Kingdom, my pension fund is one of the largest pension funds in the country. I know that they invest in sovereign debt around the world, not just in Africa, around the world, Global north and Global south. Because a lot of private creditors actually flocked to Africa. Because around the 2000s, there were a number of debt treatment programs. One is called hipic, the High Indebted Program for Countries. And what that was essentially doing is it took a lot of the debt off the books for African countries to give them space to breathe. What happened was the private creditors rushed into that void and the countries took the debt because they had all of this space to take it and they were encouraged to take it, as I mentioned about the US Secretary of State. But in reality, the debt was very different and they were not really ready for the difference in debt. The difference in debt is that now it's very difficult to restructure. Whereas pre 2000s it was easy to restructure because you were dealing with countries. So in a nutshell, that's what's changed. And now you have these private creditors who will say they will give lip service to we want to restructure, we want to help you get a more sustainable debt profile. But not one of them has actually entered into restructuring. And the G20, as part of the pandemic response, created something called the Common Framework, which is a system that is supposed to make restructuring easier and more predictable. Only four countries have entered that system. All four have no ratings. Three of them were defaulted and one of them didn't have a rating. That was Chad. What that tells you is you can't restructure and maintain a rating. You want to keep your rating to access private capital in the future, so you have to keep paying it back. And that is in a nutshell, the credit rating impasse. What a lot of people have suggested, and that's where the Financial Times editorial was alluding to, was that what you should do is just default, essentially go bankrupt, clear your debts and then come back to the market in the future. The suggestion being is that you can do that quite readily. So they always often use example of Argentina. Argentina defaulted multiple times. My suggestion is Africa is not Argentina. Africa is not the south of America. Africa has a very different history with the international markets. It's not a given that if you default you come back quickly. Zambia has taken nearly four years to come back to the market. That's a long time. So it's not just as easy as you should default and come back. Also, the way the credit rating methodologies work, they have a rear view mirror and if you default, it stays in your rear view mirror for a number of years so that you're not trusted with future payments because you've defaulted in the past. So it's not just as easy as default and come back to the market. And the countries know this. So it's a very delicate balance about what countries should do. And the private creditors throughout all of this have been paid every single month without pause because nobody can prevent them from taking their money unless you risk a downgrade from the credit rating agency.
- [49:19]
Catherine Nzuki
Jeez. I guess I'm wrapping my head around how insidious. You know, you can understand why countries obviously go to private lenders, but I can also see how the interests of global north states is to maintain the income flow of their blackrocks and Vanguards and stuff. Right. They're not. Whether it's whichever administration, I don't see them.
- [49:45]
Dr. Daniel Cash
And the scary thing to add to that is that if you look at any prediction about meeting the SDGs or meeting Africa's future needs, the only way you can get us is through private capital because it's so high the amount you need. So essentially you're stuck. Sometimes I feel really guilty thinking like this because I feel like it's victim blaming, saying that Africa needs to do better. But regrettably, Africa needs to do better. And what we need to do is help African countries be better with how they approach things. And that's not Believe me, it's not victim blaming. It's a case of the system isn't going to change anytime soon. And unfortunately, African countries need that system to meet its objectives. So my approach is to try to upskill and better prepare African countries as much as we humanly can so that they can better navigate the system they're in. Then, if they're better able to, they may want to change the system from a position of strength. And that will be the African country's prerogative, or the BRICS prerogative, or whoever it may be. But you will not change the system from a position of weakness. And at the moment, regrettably, if I remember correctly, there's only two African countries who have rated what we call investment grade, which is above the middle part of the scale. And above almost every African country is non investment grade, which is not good. And it doesn't give you a power to try to implement changes within the system when you're fighting from that lowly position. So our aim is to try to build up that internal capacity so that African countries can better navigate the rough waters that they are currently in.
- [51:25]
Catherine Nzuki
What a great place to leave it. Daniel, thank you so much. Thanks for walking us through what felt extremely complex and obviously still very complex. But I think I understand the necessity of this, the reason why it's become such a big conversation and why naturally some groupings would be against an African credit rating agency, which makes me really excited for it. It's like, yeah, cool, we're doing something. We are doing something ambitious and that's amazing. So thank you.
- [51:51]
Dr. Daniel Cash
Thank you for having me. It's been really good.
- [51:53]
Catherine Nzuki
Thanks for tuning in. This podcast is produced by Gina Kim and our music is by Wonder Child. If you have any suggestions for future topics, you can find me on X and Instagram at catherinezuki.