The African Export-Import Bank's decision to end its credit rating relationship with Fitch Ratings sends a signal that the continent wants to rework the credit model to favor growth in its favor.
This is according to Dr. Mishek Mutiz, the AU's lead expert on country advocacy on rating agencies. He told the Business Times this week that there is a great deal of disagreement among African institutions and agencies over their functioning.
“[Afreximbank] Makes a strong statement to the rating agencies that they need to reconfigure their approach. They are not flexible about methodology… They classify Afreximbank as an infant multilateral institution. This is already a very prejudicial description of a multilateral institution.
He said Fitch Ratings did not take into account the fact that Afreximbank is owned by sovereign African member states, and Fitch's refusal to recognize Afreximbank as a multilateral bank is problematic.
“[We now have a situation where] Ghana has no choice but to default on its owned bank loans. In that case, on the issue of preferred lender status, the Bank has a stronger preferred lender status than the IMF or the World Bank, which enjoy that status as a matter of practice.
Africa, its economies, institutions and investors who wish to enter the region have lost billions of dollars of opportunities due to adverse credit ratings as a result of current practices.
He said, “I estimate that the opportunity cost and resulting unnecessary loss of investment will exceed $100 billion per year.” “Countries are paying unnecessary interest rates, and sometimes they may not pursue a certain funding option because of risk perception. So the opportunity cost is huge.”
The establishment of an alternative credit rating agency is at a “very advanced” stage and announcements will be made shortly after the February AU summit. This will help balance legitimacy and private sector appetite for bankable investment in the Global South.
“We are not here to aimlessly attack the ratings agencies, the global financial architecture in this case. But there is an important reason to pay attention. They have recently adjusted their approach to China and Mexico. Why can't they extend this to Africa to give investors relevant data?”
Reserve Bank Governor Lesatja Kganyago said a key issue on the G20 finance track to 2025 was the reform of credit rating agencies, where miscalculations undermine countries in the Global South.
“If you look at South Africa right now and look at the reports from the ratings 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 we could actually get to 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.”
The Business Times contacted Afreximbank for comment, but the institution said it would not comment beyond the statement that it ended its relationship with Fitch.
Fitch said it had no comment. In the latest ratings communication on Wednesday, Fitch said it downgraded Afreximbank to BB+ from BBB- with a stable outlook.
“Fitch has downgraded Afreximbank's short-term IDR to 'B' from 'F3' and downgraded the long-term rating on the bank's global medium-term note program and debt issuances to 'BB+' from 'BBB-'. Fitch has subsequently withdrawn Afreximbank's ratings.”
The agency said the downgrade revised Afreximbank's policy significance risk to “medium” from “low” after it announced an agreement on Afreximbank's debt as part of Ghana's broader restructuring.
In a statement, the AU's African Peer Review Mechanism (APRM) said the widespread credit rating exercise no longer reflects a good understanding of Afreximbank's founding agreement, its mission or its mandate.
“it [decision] This is underlined by the fact that, at the time of the downgrade, Moody's Ratings took 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 entirely within its rights to discontinue the rating relationship and any future ratings issued by Fitch will be unsolicited and non-participatory, and therefore at risk of misinforming investors.
