Nigeria, Congo, Tunisia… The diktat of the rating agencies

Several African countries have seen their sovereign ratings deteriorate. But should we therefore trust the international rating agencies?

"The downgrading of Nigeria's rating by Moody's came as a surprise to us, as we had showcased all the work we have done to stabilize the economy." Nigerian Finance Minister Zainab Ahmed is furious. And considers the "surprise" degradation of his country's sovereign rating as unfair. Moody's has made its conclusions and they are terrible, just as much for Tunisia, which has also seen its rating drop. But it is not the only rating agency to single out an African country in recent weeks. The S&P Global Ratings agency, for example, downgraded Congo-Brazzaville's long and short-term sovereign credit ratings in foreign and local currencies to “CCC+/C”. What suggest that the Congo is close to default.

"These are external rating agencies that do not have the full understanding of what is happening in our domestic environment," laments the Nigerian Minister of Finance. What if Zainab Ahmed had hit the nail on the head? In 2011, three economists from the International Monetary Fund (IMF) published an interesting study on the influence of sovereign debt rating downgrades on the economic and financial environment. According to their conclusions, the rating agencies encourage… financial instability. Christine Lagarde, then boss of the IMF, also felt that it was perhaps better to supervise the rating agencies.

"The diktat of the rating agencies is a danger," said a specialist in African finance. And above all a vicious circle that leads countries whose sovereign rating is degraded to the bottom. Ghana had also recently criticized the downgrading of its rating. What revive, once again, the idea of ​​setting up an African rating agency?

perception vs. reality

“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 degraded ratings for African countries against a world average of 31% during the period”, recalls Macky Sall, outgoing president of the African Union and Senegal.

The facts, however, are stubborn. Because today, Africa is lagging behind and the rating agencies are taking advantage of their monopoly to make it rain or shine. Even if it means disguising reality and not taking local contexts into account, as the Nigerian minister asserts. Macky Sall thinks the same thing: "Studies have shown that at least 20% of the rating criteria for African countries are based on rather subjective cultural or linguistic factors, unrelated to the parameters that gauge the stability of an economy. “, he explains.

Enough to cause serious consequences at the macro-economic level, but not only. The ratings of the various international agencies provoke the mistrust of investors, for example. “The perception of investment risk in Africa is always higher than the real risk. We thus find ourselves paying more than necessary for insurance premiums, which increases the cost of the credit granted to our countries,” said the Senegalese president. One more reason to move quickly in the creation of a continental agency which could then offer more appropriate ratings...