Podcast Summary: "Understanding the Case for the Africa Credit Rating Agency"

Podcast Information:

• Title: Into Africa
• Host/Author: CSIS | Center for Strategic and International Studies
• Episode: Understanding the Case for the Africa Credit Rating Agency
• Release Date: May 15, 2025
• Host: Catherine Nzuki
• Guest: Dr. Daniel Cash, Associate Professor at Aston University and Senior Fellow at the UN University Centre for Policy Research

Introduction

In this enlightening episode of "Into Africa," host Catherine Nzuki engages with Dr. Daniel Cash to explore the intricate landscape of credit rating agencies and the emerging initiative of establishing an African Credit Rating Agency (AFCRA). The discussion delves into the biases of the existing "Big Three" credit rating firms and examines how a continent-specific agency could reshape financial narratives and outcomes for African nations.

Understanding Credit Rating Agencies

Catherine Nzuki initiates the conversation by seeking a foundational understanding of credit rating agencies (CRAs) and introduces the guest, Dr. Daniel Cash, an expert in the field.

Dr. Daniel Cash explains, "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" (02:29).

The Big Three: S&P Global, Moody’s, and Fitch Ratings

The global credit rating market is dominated by three major players:

1. S&P Global (Standard & Poor's)
2. Moody’s
3. Fitch Ratings

These agencies form an oligopoly, meaning their dominance stems from historical establishment and the demand for strong, reliable signals in the market.

Dr. Cash notes, "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... it's a natural oligopoly" (05:48).

Importance of Sovereign Credit Ratings

Sovereign credit ratings are pivotal for countries seeking financing. They influence the cost and accessibility of borrowing from private creditors such as pension funds and institutional investors.

Dr. Cash emphasizes, "Credit rating agencies are usually concerned mostly with private creditors. That's who they exist to serve" (03:23).

Profit Models and Conflicts of Interest

The Big Three predominantly operate on an issuer-pays model, where countries pay for their own debt ratings. This model introduces inherent conflicts of interest, as agencies might be incentivized to provide favorable ratings to retain business.

Dr. Cash explains, "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" (06:58).

Bias Against African Countries

African nations have long criticized the Big Three for perceived biases, arguing that these agencies lack a nuanced understanding of the continent's diverse economic landscapes. Key concerns include:

• Inadequate On-the-Ground Presence: Only selective offices exist in Africa, limiting deep, contextual analysis.

• Rapid Downgrades: Post-pandemic, African countries experienced faster downgrades compared to similar nations elsewhere.

• Methodological Limitations: Reliance on metrics like GDP per capita may not capture the informal economies prevalent in many African nations.

Dr. Cash acknowledges the sentiment but points out that research has not conclusively proven anti-African bias. He suggests that any potential bias might be embedded in the "black box" committee stage of rating decisions, which remains opaque to the public (12:49).

The African Credit Rating Agency Initiative

In response to the perceived shortcomings of the Big Three, the African Union's Peer Review Mechanism (APRM) is spearheading the creation of the African Credit Rating Agency (AFCRA).

Dr. Cash describes AFCRA as "not a competition to the Big Three, but an alternative view. A more Afrocentric understanding" (20:48).

Methodological Innovations

AFCRA aims to incorporate:

• Informal Sector Analysis: Recognizing the significant role of SMEs and informal economies.

• Diaspora Contributions: Accounting for remittances and their impact on national economies.

• Natural Resource Valuation: Including mineral wealth like lithium, diamonds, and gold as part of economic assessments.

Dr. Cash highlights, "It's about maybe taking a different approach... how it will work in practice, we don't know yet" (22:31).

Challenges and Potential Outcomes

Risks of Corruption and Bias

AFCRA faces the critical challenge of maintaining independence to avoid conflicts of interest, especially since it will be African-owned and closely tied to the continent's institutions.

Dr. Cash suggests transparency as a potential differentiator: "What the agency could do is open the black box up so they could start being more transparent about how the decisions were discussed" (27:34).

Balancing Complementary Roles

Instead of positioning AFCRA as a direct competitor, the strategy is to complement the Big Three by providing additional, region-specific insights.

Dr. Cash explains, "The reality of why it's being called a complement and not a challenger is because you have to be very careful in the early stages" (28:13).

Capacity Building and Support

For AFCRA to succeed, extensive support from African governments, the African Development Bank, and other regional bodies is essential. This includes not only financial backing but also narrative building to establish credibility.

Dr. Cash emphasizes, "It's 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" (20:29).

Potential Impacts on African Populations

High debt repayment costs have dire implications for public services. Over 50% of African countries allocate more to debt repayment than to essential sectors like healthcare, education, and infrastructure.

Dr. Cash warns, "The money is at such high extortionate rates that the money for everyday citizens is going less and less and less by the day" (15:07).

Without a more equitable credit rating system, the future expectations for Africa’s burgeoning population could be bleak, with insufficient investment in critical public services.

Conclusion: The Path Forward

The establishment of AFCRA represents a bold step toward rectifying longstanding biases in global credit assessments. While challenges abound—including potential conflicts of interest and the need for widespread institutional support—the initiative holds promise for fostering more accurate and contextually relevant credit evaluations for African nations.

Dr. Cash remains cautiously optimistic: "Even if it's 50% successful, that's 50% more than where we are" (33:44).

The success of AFCRA could empower African countries to better navigate the global financial system, ultimately driving sustainable development and improving the lives of millions across the continent.

Notable Quotes:

• Dr. Daniel Cash (02:29): "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."

• Dr. Daniel Cash (12:49): "The sentiment is there and even the sentiment being there is strong enough."

• Dr. Daniel Cash (20:48): "It will be 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."

• Dr. Daniel Cash (27:34): "What the agency could do is open the black box up so they could start being more transparent about how the decisions were discussed."

• Dr. Daniel Cash (33:44): "Even if it's 50% successful, that's 50% more than where we are."

This summary captures the essence of the podcast episode, highlighting the critical discussions around credit rating agencies and the transformative potential of an Africa-specific rating institution.