Is AfCRA — the African credit rating agency — a necessary initiative?

The Role and Challenges of Credit Rating Agencies: Between Critique and African Innovation.

Credit Rating Agencies (CRAs) play a central role in global financial markets. By assessing the creditworthiness of borrowers — states, companies, or specific debt instruments — they assign ratings (from "AAA" to "D" for S&P and Fitch, or "Aaa" to "C" for Moody's) that synthesize default risk. By reducing information asymmetry between market participants, they provide investors with a standardized, independent benchmark for comparing risk across different issuers, without requiring investors to conduct their own complex analyses.

1. Main Roles and Objectives.

Their influence operates on two levels. On one hand, they shape the cost of debt: a higher rating generally translates into lower interest rates, as investors demand a smaller risk premium. On the other hand, they structure markets by defining thresholds — such as the "investment grade" category — which serve as eligibility criteria for many institutional investors (pension funds, insurers), thereby determining which assets they are permitted to hold.

2. Criticisms and Limitations of Current Models.

Despite their importance, these agencies face recurring criticism, particularly since the 2008 financial crisis. The main grievances include:

● Structural conflicts of interest: issuers pay to be rated, which can bias assessments.

● Insufficient responsiveness: their adjustments are often seen as too slow to reflect rapidly deteriorating credit conditions.

● Excessive optimism: they rated complex products such as mortgage-backed securities too favorably, contributing to the underestimation of systemic risk.

These failures have not only exposed their limitations but have also undermined confidence in their own reliability.

3. The African Response: The Creation of AfCRA.

Faced with this dependence on external agencies, African institutions have taken the initiative. The African Union and Afreximbank have developed an African Credit Rating Agency (AfCRA), with a launch planned for October 2026.

The arguments in favor of an Africa-based agency are numerous:

1. Correcting a perceived bias: many African leaders and economists believe the "Big Three" apply overly conservative risk models to the continent's economies, relying on incomplete or outdated data — penalizing countries below their actual fundamentals.

2. Reducing the cost of capital: this bias is estimated to cost African nations several billion dollars annually in additional interest on sovereign debt.

3. Valuing local expertise: a regional agency would be better positioned to account for factors such as the informal economy, regional trade dynamics, and other key considerations that global models tend to underestimate.

4. Strengthening sovereignty: this would diversify sources of assessment and reduce dependence on foreign private firms whose interests are not always aligned with the continent's development goals.

However, skeptical arguments persist:

• Credibility: established agencies benefit from decades of reputation and trust. A newcomer would need to patiently build its reputation through consistent methodologies and demonstrated accuracy.

• Funding and independence: if AfCRA is funded by, or perceived as influenced by, African governments, its objectivity could be called into question — reproducing the very conflict-of-interest problem it seeks to solve.

• Technical capacity: competing with global leaders requires massive investment in data, analytical expertise, and infrastructure.

• Limited impact in isolation: for some economists, the core issue lies in macroeconomic fundamentals (debt sustainability, governance, currency risk) rather than in ratings methodology itself. A new agency would not mechanically lower borrowing rates.

Despite these challenges, the project carries strong institutional momentum. Its success will depend on its ability to build solid independence, resources, and international trust.

A Complementary and More Ambitious Approach: Sovereign Borrowing as a Development Lever.

The ultimate purpose of credit ratings is to provide reliable information to guide investment decisions and build confidence. Yet Africa faces some of the highest risk premiums in the world, which hampers its development. Rather than focusing solely on correcting rating biases — a long and uncertain process — an alternative and complementary approach involves rethinking the role of the state.

1. The Proposed Mechanism.

A government with a relatively strong sovereign rating (such as Côte d'Ivoire) could act as a strategic intermediary for the private sector. Unlike traditional guarantee mechanisms (where the institution stays in the background), this approach is more direct:

● Step 1: The state identifies priority sectors and companies aligned with its national development plan.

● Step 2: It borrows on international markets at the lowest possible rate, enabled by its own credit rating — a rate structurally out of reach for individual companies.

● Step 3: It on-lends these funds to selected companies on preferential terms, in line with its economic policy objectives.

● Step 4: A local entity (a development bank or dedicated structure) oversees monitoring, risk assessment, and recovery — creating domestic expertise and jobs in the process.

The trade-off to accept: this approach places a heavier burden on the state's balance sheet than a simple guarantee mechanism. It therefore requires rigorous fiscal discipline and strict selection of the companies financed, to prevent private-sector risk from flowing back onto the sovereign rating itself.

2. Why This Approach Is Effective.

● It allows the state to direct capital toward the strategic sectors of its choosing, rather than leaving the decision to the market alone.

● It builds local expertise and creates jobs by relying on domestic entities for risk management.

● It aligns the financial ecosystem with medium- and long-term economic policy objectives.

Embracing an Enlightened State Interventionism.

This approach is not a theoretical improvisation. It draws on successful industrial catch-up trajectories:

• The China Development Bank long directed credit toward the sectors targeted by the country's five-year plans.

• The Korea Development Bank channeled international financing toward South Korea's emerging chaebols in the 1960s–1980s.

• In developed economies, the same principle exists in less visible forms: massive repayable loans to Airbus, or defense contracts sustaining Boeing and Lockheed Martin.

The approach proposed here consists of embracing this role more openly, adapting it to a context in which international agencies often apply poorly calibrated frameworks to African economies. This is not a way around market rules, but a strategic use of the legitimate instruments available to the state in service of its development plan.

Reframing the Debate: The Ecosystem Before the Agency.

A more accurate rating does not, on its own, attract more investment. What the continent lacks most is not simply a better external assessment, but concrete mechanisms to energize and sustain investment between African states themselves.

The sovereign-borrowing approach takes on its full significance here. Rather than concentrating energy on establishing the legitimacy of a new agency in the eyes of international markets, African states would be better served by directing their resources toward financing instruments that circulate capital within the continent.

The central issue, then, is not convincing S&P, Moody's, or even AfCRA of a country's or a company's soundness. It is about giving African companies the means to expand beyond their national borders, to finance their regional growth, and to spark a movement of intra-African investment driven by the continent's own actors.

An Endogenous Dynamic of Trust.

The creation of an agency like AfCRA should not be an end in itself. A technically flawless AfCRA, without a robust economic and financial ecosystem to support it, would have only limited impact — as its critics themselves point out.

The real challenge lies elsewhere: directing the resources, institutional attention, and political will mobilized by the creation of such an agency toward building an intra-African investment ecosystem. A continent that finances and supports its own companies — through strengthened development banks, deeper regional capital markets, and mechanisms such as strategic sovereign borrowing — has less need to convince outside agencies. It builds its own dynamic of trust, from within.

The goal is not simply to secure a better rating for Africa in the eyes of international markets, but to make Africans themselves invest more in one another. A rating, however accurate, does not build an ecosystem — at best, it merely reflects one.

Marius C. Oula