Ghana: are rating agencies still credible?

While Ghana has seen its rating downgraded by the rating agencies, the role of the latter raises questions. Are Moody's, Fitch and S&P too tough on African countries?

Rating agencies have not spared Ghana. At the time of seeing its sovereign debt qualified, by three rating agencies, as "speculative", the government fears the worst. The Ghanaian Finance Minister also said he was "disappointed by the decision of S&P (one of these three agencies, along with Moody's and Fitch Ratings, editor's note) to downgrade Ghana's rating despite the bold policies implemented in 2022 to address macroeconomic challenges and ensure debt sustainability, significantly exacerbated by the impact of these global external shocks on the economy”.

Without siding with the Ghanaian government, the severity of the rating agencies raises questions. We have had the impression, for several years, that these same agencies have been hounding African countries. "Very few issuing countries in the region have defaulted on their repayment obligation, but they are still considered speculative by the rating agencies, which makes their access to international capital markets more difficult and above all more expensive", sums up the Ecofin agency, this Thursday, which does not fail to deplore the “strange severity” of the rating agencies.

Agencies firing on ambulances?

Is it just an impression or a reality? Rating agencies are not really popular. But they may have looked for it a bit… In 2011, three economists from the International Monetary Fund (IMF) studied the influence of sovereign debt rating downgrades on the economic and financial environment. They concluded that the agencies encouraged financial instability. Christine Lagarde, the boss of the IMF at the time, also mentioned the possibility of supervising the rating agencies a little more.

Especially since, whether voluntarily or not, rating downgrades by agencies lead countries to seek assistance… from the IMF. While Ghana hoped to be less dependent on the Bretton Woods institution, it will now have to negotiate with it. This necessarily implies interference in national policy on the part of the IMF, which will have its say on the weight of the civil service in Ghana's finances.

For finance specialist Michel Gabrysiak, Moody's, S&P and Fitch do not hesitate to "shoot on ambulances", as when they downgraded the Greek debt. “It seems that the agencies not only accept but feel a kind of enjoyment in being criticized by everyone. After all, it's a form of advertising like any other,” he summarizes.

Beyond the agencies themselves, the specialist raises the question of the complacency of financial institutions with these agencies. For decades, he recalls, "governments, banks, credit organizations, surveillance agencies, have easily adopted the classification criteria of rating agencies, so as not to have to take final responsibility for their actions themselves. of investment with regard to their citizens or their customers".

Towards the creation of an African agency?

In Africa, the end of the diktat of rating agencies could go through the creation of a continental agency. Macky Sall, chairperson of the African Union, believes that the exaggeration of assessments of investment risk in Africa by existing agencies justifies this. “In 2020, while all economies were feeling the effects of Covid-19, 18 of the 32 African countries rated by at least one of the major rating agencies saw their rating downgraded. This represents 56% of downgraded ratings for African countries against a global average of 31% during the period,” laments the Senegalese.

It is now up to African governments to do the job. Because the rating agencies certainly have more power than they should have… “Studies have shown that at least 20% of the rating criteria for African countries are based on rather subjective factors of a cultural or linguistic nature, unrelated with the parameters that gauge the stability of an economy”, sums up Macky Sall.

And the most serious thing, says the head of the AU, is that “the perception of investment risk in Africa is always higher than the real risk. We thus find ourselves paying more than necessary in insurance premiums, which increases the cost of the credit granted to our countries”.