AfCRA aims to reshape Africa’s credit story

You can also listen to this podcast on iono.fm here.

JIMMY MOYAHA: Last week we spoke to the African peer-review mechanism on the launch of the Africa Credit Rating Agency [AfCRA] that was pioneered by the African Union.

Listen/read: Why Africa wants a bigger say over its credit ratings

Today I’m joined by the interim chief executive officer of that very ratings agency that was officially launched last week, Dr Sifiso Falala, to take a look at the agency and its purpose.

Dr Falala, lovely having you on the show. Thanks so much for taking the time. We have ratings agencies around the world; they have been in existence for quite some time. But as the African continent we have been discussing this particular initiative for quite some time.

What will the Africa Credit Rating Agency do differently from other rating agencies?

DR SIFISO FALALA: Thank you so much for giving us time on your registration and on your show.

The Africa Credit Rating Agency will do research to understand why African states are associated primarily with being credit unworthy, and why it is so expensive for African states to borrow – to the extent that money that should go into development is primarily used to fund the repayment of interest, not the principal debt itself. And that is seen as holding Africa’s development back.

The Africa Credit Rating Agency has been given a huge role to play in terms of understanding risk in Africa and understanding causality between the rating scores, as well as the possibility whether a sovereign state would repay or not repay its debt.

So the African Union has commissioned us to do a deeper dive and a deeper understanding of risk.

JIMMY MOYAHA: Dr Falala, speaking of that risk, the important point that you mention around the cost of capital – a lot of that sits within what we’ve come to know as a risk premium that gets priced into monies that are borrowed.

ADVERTISEMENT

CONTINUE READING BELOW

Why is it, from an African continent perspective, that the continent that has most – if not all – of the resources throughout the world, the continent that should be the most self-reliant, is considered the highest risk?

DR SIFISO FALALA: You have to look at the formula that is used to compute the risk propensity or the likelihood that a state would be unable to honour its debt obligations, and this is part of the investigation that we are doing.

Basically, the three major international agencies – Fitch, S&P and Moody’s – have between eight and nine pillars. The two critical ones for African states tend to be the solidity of institutions, such as independent judiciaries around the continent, as well as debt-to-GDP; in other words, how much money does the nation owe relative to how much money the country produces from goods and services that it renders?

That is basically what tends to undo African states, because we don’t do particularly well when it comes to institutions.

In other countries, such as the 23 that haven’t been rated in the most recent past, data isn’t even available.

But African economies typically are small, to the extent that the entire African continent has a total GDP of about $3.3 trillion, which is less than the market capitalisation, for instance, of a single company like Nvidia.

Now, if you look at some of the smaller states, their GDP figures and their populations tend to look very, very small – to such an extent that the perception from the formula point of view, that they will not be able to honour their obligations, becomes very high.

This is the research that we are doing, because what we have found thus far is that there isn’t direct causality between, for example, institutions and debt repayment, and that there isn’t direct causality, for example, between absolute GDP-to-debt ratios and debt repayment.

Hence the existence of AfCRA.

JIMMY MOYAHA: Dr Falala, can we talk credibility? The purpose of rating agencies is to provide a level of assurance that investors and investment institutions depend on when they review and assess the investment opportunities in front of them.

How are we going to ensure that the Africa Credit Rating Agency maintains not only its independence and its credibility, but also provides the global economies with reliable opinions?

DR SIFISO FALALA: If you look at what’s happening around the world, there is a wave of multi-plurality when it comes to the sources of investment – where the money is coming from.

ADVERTISEMENT:

CONTINUE READING BELOW

Ratings agencies typically would set out their measurement instruments to protect investor interests.

And of course, the further away the investment destinations are, the more careful the rating agencies would be when it comes to exposing their clients to investment risk.

So to that extent we are seeing, for instance, the emergence of the New Development Bank through the Brics countries as an alternative source of financing, and as South Africa has recently borrowed from the new Development Bank, or is in the process of borrowing $2 billion, to help develop local government and some municipalities in respect of infrastructure.

What we are seeing as well on the continent is a realisation that there is about $4 trillion worth of equity or liquid funding that could be accessed, for example through pension funds, and used for investment purposes rather than sitting idly or being invested elsewhere.

That increases credibility because, in our engagements with multiple stakeholders, we do not find that African nations, for example, do not believe what we are saying – or they do not believe our methodologies.

And we also do not find that local institutions – such as banks or multilateral institutions on the continent, development banks – do not believe what we’re saying. In fact, they are very eager to listen to us.

So the question around credibility relates directly to the source of funding.

Where is the funding coming from, and is somebody sitting 13/14 000 kilometres away willing to listen to a view that is coming out of Africa, regardless of the veracity and the numeric validity of that number?

That is something that we think is going to change, and we are happy to say that since we launched we’ve received incredible support from the African Union, and we are receiving incredible support from African states as well.

JIMMY MOYAHA: Hopefully that support will continue to grow. At least, from our perspective, this is an initiative we wholeheartedly support. I speak for myself, and something that I’ve always wanted to see come out of the African continent is our very own ratings agency that will better represent the African continent.

We’ll leave the conversation on that note. All the best to you, Dr Falala, and your team as you take on this momentous task.

Interim chief executive officer of the Africa Credit Rating Agency, Dr Sifiso Falala, joined us to take a look at the objectives of the agency and what it was established to hopefully achieve.

#AfCRA #aims #reshape #Africas #credit #story