Harsh ratings cost Africa $100bn in credit lines

The African Export-Import Bank’s decision to terminate its credit rating relationship with Fitch Ratings sends a signal that the continent is looking to re-engineer credit models for development in its favour.

This is according to Dr Misheck Mutize, the lead expert for country support on ratings agencies at the AU. He told Business Times this week a major point of difference exists between African institutions and the agencies over their methodologies.

“[Afreximbank] makes a strong statement to ratings agencies that they need to reconfigure their approach. They are not flexible about methodology… they classify Afreximbank as a baby multilateral institution. That is a very prejudicial description for a multilateral institution already.”

He said Fitch Ratings did not take into consideration the fact that Afreximbank is owned by sovereign African member states, and Fitch’s refusal to recognise Afreximbank as a multilateral bank is problematic.

“[We now have a situation where] Ghana has no option but to default on its loans to a bank that it owns. In that case, the issue of preferred creditor status, the bank has much stronger preferred creditor status than the IMF or World Bank, which enjoy that status as a matter of practice.”

Africa, its economies, institutions and investors who have an appetite to enter the region have lost billions of dollars in opportunity because of unfavourable credit ratings as a result of the current methodologies.

“I would estimate the opportunity cost and cost of unnecessary loss of investment as a result, to be more than $100bn a year,” he said. “Countries are paying an unnecessary interest rate, and sometimes they cannot pursue a certain funding option because of the risk perception. So the opportunity cost is huge.”

Establishing an alternative credit rating agency is at a “very advanced” stage and announcements will be made soon after the February AU summit. This would assist in balancing legitimacy and the private sector’s appetite for bankable investments in the Global South.

“We are not there to aimlessly attack the global financial architecture, in this case ratings agencies. But there is an important reason to pay attention. They have adjusted their approach to China and Mexico recently. Why can they not extend that to Africa to give relevant data to investors?”

Reserve Bank governor Lesetja Kganyago said a critical issue at the G20 Finance Track in 2025 was reform of credit ratings agencies in instances where incorrect projections undermine countries in the Global South.

“If you were to look at South Africa now and you look at the reports of the rating agencies when they downgraded South Africa in 2017 and 2020, their trajectory was that debt-to-GDP in South Africa would reach 94%. One agency said that we might actually reach 100%. Eight years later, we are at 76%. So they were wrong. So, you need to be able to engage with them on that basis.”

Business Times approached Afreximbank for comment, but the institution said it would not be commenting beyond the statement it released terminating its relationship with Fitch.

Fitch said it did not have any comment. In the latest ratings communication on Wednesday, Fitch said it downgraded Afreximbank to BB+ from BBB- with a stable outlook.

“Fitch has also downgraded Afreximbank’s Short-Term IDR to ‘B’ from ‘F3’ and the long-term ratings on the bank’s global medium-term note programme and debt issuance to ‘BB+’ from ‘BBB-’. Fitch has subsequently withdrawn Afreximbank’s ratings.”

The agency said the downgrade reflected its revision of Afreximbank’s policy importance risk to “medium” from “low” following the announcement of an agreement on Ghana’s debt to Afreximbank as part of Ghana’s broader restructuring.

In a statement, the AU’s African Peer Review Mechanism (APRM) said the broader credit rating exercise no longer reflects a good understanding of Afreximbank’s establishment agreement, its mission or its mandate.

“This [decision] is underscored by the fact that, at the time of the downgrade, Moody’s Ratings undertook a similar action, and both agencies continue to assign Afreximbank ratings that are broadly comparable and remain within investment-grade levels.”

In such circumstances, the APRM said, an issuer is fully within its rights to discontinue the rating relationship and any future ratings issued by Fitch would be unsolicited and nonparticipatory, and therefore risk misinforming investors.

Join BusinessDay whatsapp Channel, to stay up to date