The EU has laws that make it easier to sue ratings companies for wrong analysis that could impact a country’s credit worthiness, and the African Union should follow suit, writes William Gumede.
Many African governments are puzzled that in spite of their notching up exceptionally high growth levels, credit rating agencies are not giving them better sovereign ratings.
By contrast, crisis-ridden European countries such as Portugal and Greece have – throughout the euro zone crisis – often been given better credit ratings by global rating agencies than fast-growing African countries.
Yields on bonds issued by many African countries have often been better than those in developed markets.
However, African sovereign ratings, as assigned by the credit rating agencies, have been far bleaker than those for developed countries.
More often than not, rating agencies regard the creditworthiness of African countries as being low, lumping most of them in the speculative grade.
Many foreign investors base their views of the investment potential of a country on the analysis of credit rating agencies.
The truth is that global rating agencies most probably do not do Africa justice – they are not nuanced enough in their analysis. With exceptions, credit ratings agencies appear to make little distinction between African countries and their ability to repay their debts.
Botswana is one of those few exceptions. With almost $7 billion (R77bn) in foreign exchange reserves, Botswana has consistently had the highest sovereign credit rating in Africa, often at times equal to Japan’s.
The influential credit rating agencies are in industrial countries, with the three most powerful – Fitch Ratings, Moody’s Investors Service and Standard & Poor’s – in the US.
These agencies are so powerful that in Africa and developing countries they often act without accountability.
Lower credit ratings mean African countries have to borrow at higher costs because funders believe – based on the low ratings – that they are at greater risk of default.
Former finance minister Pravin Gordhan regularly criticised international rating agencies such as Moody’s and Fitch for their poor analysis. Jagdish Bhagwati, professor of economics at Columbia University, says he can’t see the point of rating agencies.
Their glaring inadequacies were shown up when they failed to foresee the EU’s 2007/08 financial crisis.
Credit rating firms gave financial institutions and products top ratings, only for these to go bust spectacularly during the eurozone and global financial crises.
Rating agencies’ African analyses are often superficial. Countries on the continent are often not seen as individual countries, with specific nuances.
Furthermore, the independence of many rating agencies is open to question.
Negative ratings at times benefit financial institutions that have shareholdings in rating agencies.
Often, rating agencies disclose information about imminent rating decisions to close third parties – who could exploit this information.
So influential are these rating agencies that African countries on their own are powerless to act.
The way in which the EU has begun to respond to credit ratings is an example to Africa of how to act collectively.
The EU has introduced laws that, among other things, discourage the automatic use of credit ratings by financial companies and institutions, make it easier to sue rating agencies for wrong analysis and block agencies from rating bonds issued by companies that have shareholdings in the agencies.
At the very least, the AU should co-ordinate its regulation of credit agencies, in tandem with the EU’s new regulations, and with actions by emerging powers such as China, India and Brazil, to circumscribe rating agencies.
But African countries themselves must introduce structural reforms to make their economies less vulnerable. Most African economies run fiscal deficits, with total expenditures exceeding revenues.
Falling levels of foreign aid following the global and eurozone crises have meant many African countries – although they have high growth levels – have to borrow abroad to finance infrastructure investments.
This creates the danger of African countries increasing their debt levels, despite their economies growing faster.
This would mean they would have to draw more from internal resources and negotiate not only better loan terms, but look for new sources of finance, such as from the Brics countries – Brazil, Russia, India, China and South Africa – rather than simply issuing bonds in industrial countries.
Most fast-growing African economies are dependent on exports of a single commodity – oil or a metal – for their growth and revenue. This makes them vulnerable to any changes in the price or production of, or demand for, the commodity.
A large number import many of their capital and consumer goods.
African countries need to trade more with each other, rather than importing from abroad.
They must manage their fiscal situations better, and borrow more prudently.
They must also deal more effectively with corruption, waste and tax repatriation – to free up African capital and reduce the need to borrow.
We need greater trade and barter within Africa, as well as integration.
Over the long term, African countries will have to diversify their economies, away from being dominated by a single commodity.
Africa needs its own credit rating agencies, possibly partnering efforts by Brics and other developing countries that are trying to set up credit rating agencies.
* Gumede is chairman of the Democracy Works Foundation. His latest book is South Africa in Brics: Salvation or Ruination, Tafelberg.
** The views expressed here are not necessarily those of Independent Media