Ladies and Gentlemen of the Press,
Good afternoon, and thank you for being here today. We deeply value your professionalism and dedication to these crucial issues, which are fundamentally aimed at fostering sustainable growth across Africa and improving the livelihoods of millions on the continent.
Credit ratings provide an essential measure of relative credit risk, facilitating the efficient issuance and purchase of bonds and other debt instruments.
For African governments and corporations, credit ratings are pivotal in determining borrowing costs. A higher credit rating translates to lower interest rates, reducing the cost of debt servicing and freeing up resources for critical investments in infrastructure, healthcare, and education.
The global speculative-grade ('BB+' or lower) default rate rose to 3.7% in 2023 from 1.9% in 2022 (S&P Global). In 2023, three African countries defaulted on their debt due to various economic challenges:
1- Ghana suspended payments on most of its $28.4 billion external debt in December 2022, leading to an effective default. The country faced a substantial balance of payments deficit and high debt servicing costs.
2- Zambia defaulted on its debt in 2020 and continued to face challenges in 2023. The country struggled with high debt levels, economic challenges and the impacts of the COVID-19 pandemic. Zambia's debt restructuring process has been slower, primarily due to complex negotiations involving multiple creditors, including China and private bondholders.
3- Ethiopia has been in debt distress and defaulted on its foreign debt payments. The country faced internal conflicts, economic challenges, and difficulties in managing its debt.
One of the main observations to emerge from these defaults is that countries have not been able to mobilize sufficient domestic resources to service their debt. This brings us to another key concern that calls for bold, innovative action: mobilizing domestic resources. In times of crisis, we have witnessed massive capital outflows from the continent, which have destabilized economies. While we encourage the strengthening of fiscal management for greater fiscal room to maneuver, the development of local capital markets holds an extraordinary potential that we have not yet exploited to any significant extent. The continent has vast untapped pockets of formal and informal capital. Thanks to attractive financial inclusion strategies and technology, informal money can flow into the formal economy. A strong correlation between economic growth and the development of capital markets has been established. This could significantly increase resilience to shocks, which, you have to agree, are becoming the new normal.
Nevertheless, improving creditworthiness is crucial for African nations to access international capital markets more effectively and at lower costs. I would like to share some strategies to consider:
1- Strengthening Economic Policies and Governance
- Fiscal Discipline is important. Maintaining sound fiscal policies and reducing budget deficits can enhance risk profile.
- Transparency and Accountability: Improving governance and reducing corruption can build investor confidence. Transparent financial reporting and adherence to international standards are key.
2- Enhancing Debt Management
- Debt Sustainability: Ensuring that debt levels are sustainable is critical. This involves prudent borrowing and effective debt management strategies.
- Diversifying Funding Sources: Reducing reliance on a single source of funding by exploring various financing options, including domestic bond markets and international capital markets.
3- Promoting Economic Growth and Diversification
- Economic Diversification: Reducing dependence on a single sector, such as commodities, can mitigate risks and improve credit ratings. Diversifying into sectors like manufacturing, services, and technology can create more stable economic growth.
- Investment in Infrastructure: Improving infrastructure can boost economic productivity and attract foreign investment.
4- Improving Data Quality and Availability
- Accurate Data and good governance of data: Providing accurate and timely economic data helps to make informed assessments. The governance around the data is equally important.
- Regular Reporting: Regularly updating and publishing economic data can enhance transparency and credibility.
5- Engaging with Credit Rating Agencies and investor community
- Proactive Communication: Engaging proactively with credit rating agencies and investors to provide them with comprehensive and accurate information about the country's economic policies and outlook.
- Challenging Misconceptions: Addressing any misconceptions or outdated views about the country's economic situation is equally important. the economic cycle has never been a smooth ride, and the important thing is to know how to manage turbulence.
ECA has been at the forefront of addressing the challenges and needs of sovereign credit ratings in Africa. Through expert group meetings and collaborative efforts with the African Peer Review Mechanism (APRM), we have facilitated critical exchanges on sovereign credit ratings. These initiatives have provided African countries with the tools and knowledge to understand rating methodologies, establish communication channels with rating agencies, and build regional networks for peer learning.
Recognizing the importance of capacity building, we have conducted extensive training programs on sovereign credit ratings. In October 2023, an online course for 254 experts from 40 countries was developed, focusing on the factors that credit rating agencies consider when assessing the creditworthiness of sovereign entities.
ECA's commitment to providing relevant analysis and policy recommendations is exemplified by the launch of the African Sovereign Credit Rating Review Report twice a year in collaboration with APRM. This comprehensive report offers insights into the trends, determining factors, and interpretations of sovereign credit ratings in Africa. It serves as a valuable resource for both African countries and investors, promoting a deeper understanding of the credit rating landscape.
The ECA and APRM have also advocated for the development of harmonized regulatory mechanisms to oversee the credit rating industry. To this end, the two institutions have launched a network of African regulators to work towards this goal.
In conclusion, addressing the concerns surrounding credit ratings in Africa is of paramount importance. Accurate and fair credit ratings are essential for reducing borrowing costs, attracting investment, and fostering economic growth. By ensuring that credit ratings reflect economic realities and dynamics of African nations, we can enhance financial stability and build investor confidence.
Moreover, the development of domestic capital markets is crucial for the continent's economic future. Robust capital markets provide diversified funding sources, improve access to financing, and support sustainable development. They also play a vital role in integrating informal money into the formal financial system, promoting financial inclusion, and driving economic growth.
As we move forward, it is imperative that we continue to advocate for more transparent and contextually relevant credit rating methodologies. At the same time, we must invest in the development of our domestic capital markets, leveraging digital financial services, improving financial literacy, and creating supportive regulatory environments.
Together, these efforts will pave the way for a more resilient and inclusive financial ecosystem in Africa, enabling us to achieve our development goals and build a prosperous future for all.
Thank you
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Potential topics to be discussed with media
1. Debt sustainability
Debt sustainability refers to a country's ability to meet its debt obligations without requiring debt relief or accumulating arrears. It involves maintaining a balance between debt levels and the capacity to service that debt through economic growth and revenue generation.
Key Factors Influencing Debt Sustainability:
- Economic Growth: Strong and sustained economic growth enhances a country's ability to service its debt. For example, countries like Ethiopia and Rwanda have experienced robust growth rates, which have positively impacted their debt sustainability.
- Fiscal Policies: Sound fiscal policies, including prudent budgeting and expenditure management, are crucial. Countries that maintain fiscal discipline are better positioned to manage their debt sustainably.
- Debt Composition: The mix of domestic and external debt affects sustainability. External debt, often denominated in foreign currencies, can be riskier due to exchange rate fluctuations. Conversely, domestic debt, while reducing currency risk, can crowd out private investment if not managed carefully.
Strategies for Improving Debt Sustainability
- Diversifying the Economy; Enhancing Revenue Mobilization; Effective Debt Management; Accessing Concessional Financing; Addressing External Shocks and Promoting Good Governance
2. G20 +1
The South African Presidency of the Group 20 (G20) in 2025 marks a pivotal moment in Africa's history, amplifying the continent's developmental aspirations and asserting its rightful position in the global economic and geopolitical landscape. This presidency underscores Africa's vision of fostering global cooperation and collaboration, poised to influence the trajectory of the future. With a focus on projecting Africa as a hub of vast opportunities for global businesses, market expansion, and bolstering global security.
Priority issues that South Africa will put on the G20 agenda are as follows:
- Strengthen economic resilience (including social and environmental resilience) through sustainable industrialization;
- Accelerate Just Energy Transition (JET) as an urgent climate action; and
- Reform of the global economic governance systems, including the global financial architecture, enhancing Multilateral Development Banks (MDBs), provision of global safety nets , access to new sources of development finance and increasing the voice and representation of the Global South in multilateral institutions.
3. Global financial architecture
The global financial architecture (GFA), established in 1945, needs to be reformed to deliver on its initial goal of “creation of dynamic world community in which the peoples of every nation will be able to realize their potentialities in peace”. Recurring debt crises, as well as the limited development and climate finance in developing countries demonstrate that the GFA is not fulfilling its global intermediary role. Not only has the SDG progress been slowed by financing gap, but the global economic community has also been operating within a protracted mismatch in financial and other resources and their limited utilization, leading to major inefficiencies.
A comprehensive global financial safety net protecting poor nations and groups is needed. The current system perpetuates and even exacerbates long entrenched inequalities. For example, of the US$650 billion in SDRs allocated by the IMF in 2021 for COVID-19 relief, G7 countries, with a population of 772 million, received USD280 billion, while the African continent, with 1.3 billion people, received only USD34 billion, about 5 percent. The fact that this allocation was all done under the prevailing IMF rules means that African countries were left out of the much-needed financing resources stemming from this multilateral mechanism.
The MDB reforms have posted some important positive steps, but much more needs to be done. These include recent IMF Board’s approval of the rechanneling of SDRs to MDBs through hybrid capital instruments, significant increase in callable capital of the African Development Bank and commitment by the leaders of 10 MDBs to deepen collaboration to deliver as a system. The MDBs need to be more flexible and responsive to the unique challenges faced by member countries and adapt to emerging issues such as climate change, extreme poverty, and digital transformation to ensure that they remain relevant in the coming years. MDB’s lending criteria should broaden to include varied dimensions of vulnerability that affect developing countries, and not be based on income alone.
4. Key insights from the 9th ed. Sovereign Credit Ratings Outlook Report:
1. Negative Rating Trends: The report highlighted a continued trend of negative sovereign credit ratings in the second half of 2023. This was primarily due to growing fiscal pressures in several African countries and concerns over the upcoming 'wall of Eurobond maturities' in 2024.
2. Eurobond Maturities: African nations face significant principal maturities, peaking in 2024 and 2025, with investors expecting to redeem a combined estimate of $11.3 billion in outstanding Eurobonds. This poses a substantial refinancing risk for many countries.
3. Recommendations for Improvement: The report provided recommendations to both credit rating agencies and African governments on how to improve credit ratings. These include enhancing fiscal discipline, improving governance, and adopting more transparent and consistent rating methodologies.
4. Impact of Fiscal Pressure: The growing fiscal pressure in some African countries has been a significant factor in the negative rating actions. The report emphasized the need for better fiscal management and economic diversification to mitigate these pressures.
5. Update on the African Credit Rating Agency (ACRA)
The African Credit Rating Agency (ACRA) was proposed to provide a localized and contextually relevant credit rating service for African nations. The goal is to address the unique economic, social, and political contexts of African countries, offering more accurate and fair assessments of creditworthiness.
Key milestones:
- Feasibility Studies: The African Peer Review Mechanism (APRM) conducted a study on the financial, structural, and legal feasibility of establishing ACRA. The outcomes were presented to the African Union's Specialized Technical Committee (STC) on Finance, Monetary Affairs, Economic Planning, and Integration.
- Endorsement: In July 2023, the 6th Ordinary Session of the STC endorsed the establishment of a private sector-driven African Credit Rating Agency based on self-funding and sustainability.
-Stakeholder engagement and consultation: ongoing discussion with key stakeholders to finetune the business model and the structure.
6. Are credit rating agencies biaised against African countries?
this is a two-faceted question: 1) Understanding the concerns raised by African countries; 2) understanding the challenges that impact the ability of African nations to improve their sovereign credit ratings:
Concerns raised
1. Perceived Bias and Subjectivity
- Lack of Contextual Understanding: African policymakers argue that the major credit rating agencies often lack a deep understanding of the local economic and political contexts. This can lead to ratings that do not accurately reflect the true creditworthiness of African nations.
- Subjective Assessments: There are concerns that the methodologies used by these agencies are sometimes subjective and not fully transparent, leading to ratings that may unfairly penalize African countries.
2. Impact on Borrowing Costs
- Higher Borrowing Costs: Lower credit ratings result in higher borrowing costs for African countries. This makes it more expensive for them to access international capital markets, which can hinder their ability to finance development projects and manage debt sustainably.
- Liquidity to Solvency Crises: Unwarranted downgrades can exacerbate fiscal challenges, turning liquidity crises into solvency crises by shutting governments out of capital markets.
Challenges that impact the ability of African nations to improve their sovereign credit ratings:
1. Economic and Fiscal Challenges
- High Debt Levels: Many African countries have high levels of public debt, which can strain their fiscal positions and increase the risk of default. This is a significant factor in credit rating assessments.
- Economic Volatility: African economies often face volatility due to factors such as fluctuating commodity prices, political instability, and external shocks. This economic instability can negatively impact credit ratings.
2. Governance and Institutional Strength
- Governance Issues: Weak governance and institutional frameworks can affect the stability and predictability of economic policies. Credit rating agencies consider strong governance as a key factor in their assessments.
3. External Vulnerabilities
- Dependence on Commodities: Many African economies are heavily dependent on commodities, making them vulnerable to price fluctuations. This dependence can lead to economic instability and affect credit ratings.
- External Debt: The reliance on external debt, often denominated in foreign currencies, can expose countries to exchange rate risks and increase the cost of debt servicing.
4. Integration of ESG Factors
- Environmental and Social Risks: The integration of environmental, social, and governance (ESG) factors into credit rating methodologies is becoming increasingly important. African countries need to address these risks to improve their credit ratings.
- Climate Change: The impact of climate change and the need for sustainable development are critical considerations for credit rating agencies. Countries that effectively manage these risks are likely to see improvements in their ratings.