How might an African credit rating agency improve the continent's financing conditions?

Anja Berretta

Ladies and gentlemen, distinguished guests and experts on the panel, it’s a pleasure to open this conversation today at – on the topic of the African Credit ragency – and Credit Rating Agency, AfCRA. I always want to say AfCFTA, that’s another acronym. And I would, first of all, like to thank Chatham House for organising this event and inviting Konrad-Adenauer-Stiftung to take part in it. I’m heading our Economy Africa Programme from Konrad-Adenauer-Stiftung based in Nairobi. We cover a broad range of topics, such as AfCFTA, the African Continental Free Trade Agreement, value chains, localisation, the future of trades, or even the impact of CBAM, the Carbon Border Adjustment Mechanism on African Countries. However, we hardly have an event where the discussion will spare the aspect of financing and finance conditions in Africa.

And as you all know, Africa attracts relatively low FDI compared to its size and potential, due to a range of structural, institutional, economic and political constraints, and I was therefore, very interesting – interested in the debate around the establishment of the African Credit Rating Agency. I came across that topic two years ago, or so, even though I learned today that it has been on the table for a much longer time, actually, and I followed this conversation around rating closely. Why is it worth discussing? Quite simply, credit ratings shape the financial destiny of nations, they determine how countries are perceived, how much they pay to borrow and whether investors choose to enter or exit markets.

For Africa, these decisions are not abstract. They translate directly into the question if schools are built or not, if infrastructure projects are financed or delayed and opportunities are created or forgotten. Africa stands today at a pivotal moment. The continent is home to more than 1.4 billion people, a rapidly growing consumer base and some of the world’s most abandoned natural and human resources. Yet, despite this immense potential, African countries collectively receive only a very small share of the global investment flows and face some highest borrowing credit costs in the world.

However, we are not here to assume that the African Credit Rating Agency is the solution to all these challenges. Rather, we’re here to discuss some key topics around the new agency and some of them could be, for instance, can it build trust among investors? How can it maintain independence while serving public development goals, and which financing models will ensure credibility? Without going into too much details because there are people who are much more conversive and expert on the topic, who will discuss this, I would just like to use one quote from the African Union that considers the objective of the Credit Rating Agency, both technical by improving credit assessment, and strategic by reshaping Africa’s position in global finance.

I’m therefore, very much looking forward to discussing some of the objectives of the Credit Rating Agency today in more details and the condition under which it could add value and to ask what risks might need to be managed and of course, how it might look like in practice. And we, as Konrad-Adenauer-Stiftung, together with Professor Schmidt from the Leibniz Institute for Economic Research, have done a small study, that you’ll find here, which looks specifically in the so-called African bias and you’re all free to take a copy at the end. So, I’m looking forward to the discussion. Thank you very much.

David Lubin

Thank you very much, Anja, and a [applause] – and a very, very warm welcome to you all from me. My name is David Lubin. I’m a Senior Research Fellow in the Global Economy and Finance Programme here at Chatham House, and I’m honoured to be moderating this panel discussion, asking the question, ‘How might an African Credit Rating Agency improve the continent’s financing conditions?’ I should say that this meeting is not under the Chatham House Rule. It’s on the record, it’s being livestreamed and a video will be available later today, so be careful what you say, you can’t hide behind it.

Let me introduce my panellists. I’m going to introduce first Dr Raymond Gilpin, who’s joining us from New York online. Dr Gilpin is the Chief Economist at the UNDP’s Regional Bureau for Africa. To my far left is Dr Misheck Mutize, Lead Expert for the Country Support on Rating Agency at the African Peer Review Mechanism. To his right is Dr – Professor Torsten Schmidt. He is the Head of the Research Unit for Macroeconomics and Public Finance at the Leibniz Institute for Economic Research. To Professor Schmidt’s right is Hannah Wanjie Ryder, who is the CEO of Development Reimagined. And to Hannah’s right is Marie Diron, who is the Director of Sovereign Multinational and Sub-Sovereign Ratings at Moody’s.

So, I’m going to ask each of our panellists to make a set of opening remarks. Professor Schmidt, I’ll start with you, since you’ve published an important paper, and then I’ll work out who to go next to, but Professor Schmidt, the floor is yours. Thank you very much.

Professor Torsten Schmidt

Thank you very much. As Anja already mentioned, the Konrad-Adenauer Foundation ask us to perform a small study about the African rating bias and how – the question how to improve the financial conditions in African countries. And we used this empirical analysis about the rating bias as a starting point. It was clear that’s not the solution to the problem, but I think when you start thinking about financial conditions in Africa, it’s a – I think it’s a good starting point.

So, we built a small model in line with the rating models from the Big Three rating agencies and add an additional variable to measure this kind of rating bias, and we found one. It’s a significant downward bias of ratings. When you compare the quantitative measures and the weights are typically used, then you find that there is some room between the model prediction and the ratings by the big agencies, and this downward shift is often called the undone – the negative rating bias. So, it’s not big, but it’s statistically significant, so it’s there, so – and the range is between 0.5 and one notch. So, if you would remove this bias, you would improve the ratings of a typical African country by one notch. That’s not big, but that’s something.

But – and but we think the most important question is what leads to this rating bias and we focused on the elements of the rating model. So, I – there are a lot of possibilities, but we start with this quantitative measures and we’ve found most important for the ratings are the – is the institutional framework that often used variables from the World Bank about government structures, for example, the government efficiency, rule of law indicators, that are server based indicators that are collected from the – a lot of countries, in particular the African countries.

And these measures have a high weight. They are qualitative measures, so it’s hard to translate the qualitative findings that are based on surveys, that are based on perceptions within the countries, into quantitative measures in the – in these rating models. And we think that this is an important challenge for the bias, because people have to discuss the experts at the rating agencies, discuss how we – can we trust the measures? And then they decide to deviate from the measures, upwards or downwards, and in African cases, mainly downwards.

So, I think to improve ratings and to remove the rating bias, one possibility, an important possibility, I think, is to improve the institutional structure and the perception of institutions within Africa. We saw Zambia is an important example. They improved the fiscal structure a lot. They improved the rate – the reporting about debt. They included some institutions in the constitution to improve the reliability of the country and the debt management within the country and afterwards, ratings increased by some – to some extent. So, I think that’s a way to improve financial availability, as well as removing this rating bias in these African countries.

I think it’s more – much more complicated to improve other variables related, for example, to GDP. Another important variable is GDP per capita. We played around a little bit with these measures. So, you have to improve the capita – the GDP per capita for Congo, for example, by factor of ten to in – to raise the rating by one notch, everything else equal. So – but I think that’s a quite long way. So, you should not start by – to try raising GDP per capita. You could try to improve the measurement of the informal sector, for example. That’s also important, but clearly, GDP is not the way to start. Just start with the institutional framework. Maybe I should stop here and then we come later.

David Lubin

Thank you very much, thank you. Hannah, you’ve also just published an important paper on these issues. Do you want to go next?

Hannah Wanjie Ryder

Sure, that’s fine. Thank you very much for inviting me to be here on this platform and thanks to KAS and Chatham House for creating it. I think it is really important that we do have more understanding of what an African Credit Rating Agency will and won’t do, and I won’t, kind of, take words away from Misheck or Raymond in this area because they’ve been working on this for a very long time. But at the same time, I think what I want to say a little bit is around what we should be expecting from an African Credit Rating Agency and also, what it will and won’t do, but also respond to some of the points that were made in the paper around some of the recommendations going forwards. Because I think some of them are for an African Credit Rating Agency, but some of them are not necessarily just for the Rating Agency, they’re also for others to take account of.

But just to kick off, I think we are in broad agreement and certainly, our paper, which was recently published, called ‘The Africa Disagreement Tax,’ this is an analysis of a specific set of ratings. Ratings of development fi – of multilateral development banks and specifically comparing the ratings of African multilaterals versus the ratings of non-African multilaterals and how those vary over time and whether they – is significant variance between them, of them. And it turns out, I’ll come straight to the punchline, African mul – there’s a lot more disagreement between the Big Three, including Moody’s, around what rating African multilaterals should have versus the disagreement – there’s a lot more convergence when it comes to non-African multilaterals.

We don’t quite understand why, but what’s interesting too is that one of the agencies that isn’t represented here, Fitch, tends to be the key rating agency that is most relevant to investors because it ends up being the rating agency that sets the bottom line, the lowest rating. And so, when you’re constant – the investors are meant to always use the lowest rating in terms of making decisions and so, that becomes the binding constraint. And so, there’s a question of this – in a sense, it’s not to say these are the specific reasons why, etc., we’re – you – we think that there’s – we have good ideas of where that’s coming from.

But at the same time, it points to the opportunity for both – for the Big Three to reform their methodologies, but also the opportunity for an African Credit Rating Agency. Because an African Credit Rating Agency can find some more consistency, can also be significantly more transparent when it comes to these methodologies and would be more – even more explicit about some of the assumptions that are going in there. And the fact that there is such disagreement between the rating agencies signifies that there’s a lot of room for transparency and improvement.

So, that’s just one example, but I think, you know, others are working on other examples. Your own paper points to one of those, and so, you know, this evidence – the question is, what can an African Rating Agency do to solve it? So, first of all, just by being there to provide an alternative rating is going to be very important, but it – but underneath that rating, whether it’s for sovereigns, whether it’s for multilateral development banks, whether it’s for corporates, because – and I think the vision is for an African Credit Rating Agency to be able to do all of those, and even potentially non-African sovereigns, corporates, there’s no reason why not. Just because it’s based in Africa doesn’t mean that it can’t also extend beyond, but of course, the priority must be African institutions.

Nevertheless, the key for – in terms of credibility is, as the paper points to, independence, but I would say also transparency is fundamental and more transparency than is provided by some of the – by the existing – the Big Three Credit Rating Agencies. We definitely welcome where there is transparency. Moody’s, I’m sure you’re going to be – Marie, I’m sure you’re going to be talking about your recent – in your efforts over time to be more transparent and to consult on different methodologies, this is really critical. The African Credit Rating Agency can, basically, do that and more, and I expect it will do.

And then, finally, in terms of the added value that an African Credit Rating Agency can provide, is to – is in terms of cost, I think that was a really important point. Especially being accessible to – and to whether it’s not just African sovereigns, a broad range of African sovereigns, as was pointed out in the paper, but also to corporates and so on. I think we all – we had some great examples of African Credit Rating Agencies that exist who do focus on corporates in particular, but there are significant opportunities beyond that and I think that will be really important for making sure this is a more inclusive organisation, as well.

David Lubin

Thank you very much.

Hannah Wanjie Ryder

Even though independent.

David Lubin

Thank you. Dr Gilpin from New York, let’s turn to you next.

Dr Raymond Gilpin

Thank you so much, David, and thanks to the Africa Programme at Chatham House for this very timely and relevant event, and congratulations to the Konrad-Adenauer Foundation for this new publication which casts a lot of light on, you know, the role – potential role of an African Credit Rating Agency.

I will very quickly try not to repeat what’s already been said, but just to highlight three things. First, how might an Africa Credit Rating Agency improve financing conditions on the continent? First of all, I think it’s all about lowering the cost of capital. Studies have shown that when you are able to improve credit ratings for African countries, you will see a drop in sovereign bond yields, which translates into reduced interest payments and the hope is that that would increase funding for development chat – for development purposes.

Secondly, it could also help unlock capital flows, because the thinking is that an African Credit Ratings Agency would help support African countries to enhance their ratings and therefore, enable global institutional investors who are usually precluded from investing in debt that falls below a certain credit threshold, to have access to the African market. And third major thing is to address – help address some of the information asymmetries that we see, and we are talking – Hannah mentioned the importance of capturing non-traditional data sources, particularly from the non-formal sector, but also to be able to access the sub-national entities that are not usually rated, because we do not have consistent information across the board as far as this is concerned.

How could this happen? As the report rightly points out, first of all, is to ensure independence of the Africa – of an African Credit Ratings Agency in terms of its governance, in terms of its funding structure and also in terms of transparency. An African Credit Ratings Agency could also enhance the financing outlook by working on data, expanding partnerships and lastly, and I’ll speak a little bit about this, helping to catalyse investment in skills. Because we find that across the African continent, the availability of skills is a bit of a challenge and that’s why at UNDP, we launched the Africa Credit Ratings Initiative.

And I’ll just highlight four things we have done recently. One, we’ve launched an e-course for African Professionals, which is – wa – has been done in partnership with the UN System Staff College. We’ve just graduated our first cohort. Second, workshops, we do have regional and national workshops. Third, we’ve recently concluded an executive study tour to the Philippines for African professionals to learn how the Philippines’ strategy towards investment grade were successful, how it was crafted and why it succeeded. We are still very concerned that there are only three African countries that are investment grade on the continent. We want to work on that and also, the 40% of the continent that is yet to be rated. And then lastly, in a couple of weeks, we’ll be publishing a new handbook for African professionals to help them better navigate these waters.

So, in addition to what’s already been said, we do believe that an African Credit Re – Credit Ratings Agency can help improve Africa’s financing conditions, but there is a lot that needs to be done to make this happen. Over to you, Chair.

David Lubin

Thank you very much, Dr Gilpin, thank you. Misheck, Dr Mutize, you next. Over to you.

Dr Misheck Mutize

Oh, thank you, thank you very much. Now, for me, having been involved in this work since its beginning in 2018, it’s actually a very huge milestone that we are sitting here at one of the prestigious institution, Chatham House, to talk about the Africa Credit Rating Agency and that all of you, you are interested in this subject. Because it was very well misunderstood in Africa, especially, and thank God that the Professor, you’re not from Africa, who is talking about evidence of bias against a Africa in the ratings, because say if someone would have dismissed it to say it’s the usual African status.

But it’s very encouraging that if we had to talk an – about an impact of an Africa Rating Agency, the impact is already felt because we already discussing about it. And having witnessed the dynamics in the interest to talk – just to come to the table to talk about these issues, three, four, five years back, we were not able to sit on the same panel with the Moody’s representatives to talk about this, because they were just not interested to discuss the subject matter. So, to me, this is where the impact is starting.

And moving forward, we have consistently been raising objections, not on the rating plans, to say Africa is rated D- or in African countries rated C+. And this is a point that I need to make and all of you perhaps understand is one of the key drivers of this agenda in Africa, that we are not crying for a favourable rating in Africa. We are pushing for an accurate understanding and an aff – accurate reflection of an African assessment. That an investor sitting somewhere has to have both sides of any instruments that they want to invest it, be it in Africa or elsewhere.

I’ll point to you a few examples of some of the objections of the ratings that we have done. It’s not all the ratings that we have problems with, from Moody’s, S&P and Fitch. Like, for instance, last year, when Hannah has partly talked about it, when Fitch downgraded one of the most critical African Union allied bank, which is the Africa Export-Import Bank, and it’s the major engine driving the Africa Continental Free Trade Area. And they pointed a few very controversial risk factors, and this is where our objection is, not on the rating class, because for that institution, Moody’s also came and downgraded. We didn’t have a problem with the Moody’s rating.

The problem is on the rating reasons, or the rationale, as Analysts call it, what is the rationale for you to say this institution is young? And that’s what we read in the statement, and it’s different in Europe, here, in your regulations you have got a reference to say, ‘Investors should not rely on the rating itself.’ But for Africa, we don’t have that luxury because investors believe whatever the Big Three Rating Agencies say, including our own governments, because we’re objecting it recently that our own governments actually control, through their Sovereign Wealth Funds, close to over $200 billion. And the old Sovereign Wealth Funds are still requesting ratings from the Big Three. So, we were educating that they need to change this attitude to be able to keep financing in Africa.

So, in the case of Afreximbank, the Analysts come and raise to say that there’s high-risk management profiles in the bank, there’s a – the bank is no longer – or is not classified as a multilateral bank. And they raised, also, an issue to do with the non-performing loans and we say, ‘No, this is not a correct interpretation of this bank, given its structure and its founding agreement,’ and they completely rejected that. Fast forward two weeks ago, S&P came and did a rating, which is completely aligned to the issues that we’re raising against Fitch. So, what does that tell you? That if we didn’t have S&P to bring the alternative rating, an investor would be trading on the last bad story that they’d – they have had from Fitch.

And this has been a cycle that we have witnessed over the course of the time. Like, for instance, last year, we’re contending against Moody’s. An Analyst for Kenya issued their report and made a pronouncement against the bond buyback that had not been – that the government was planning to do. And this we call it speculative because it’s clear that you can’t make a judgment on a situation that government has not clearly pronounced, that how is the bond buyback going to be administered? And immediately after the Analyst made a pronouncement then, the market spiked and derailed that government plan.

We have done the same, I think, these are just few recent examples that I’m pointing out to show the practicality of some of the objections that we’ll make, that it’s not all accurate that the Big Three do. Like Senegal, for instance, last year, we’re talking about the Moody’s report. They issued – you know, Senegal has been having issues about their IMF programme, which they have been trying to secure after they had some difference about data disclosures. We acknowledge that part, but in the whole report, there was one critical element that Moody’s failed to acknowledge, and which is that Senegal managed to raise 5.3 billion from the West African financial market and there is – the report completely characterised such an event as credit negative.

If you are an investor and you want to invest in this country and you see such a report, three/four pages writing about all the negative elements of the risk factors in Senegal, how would you respond? Immediately, you will not want to invest more. So, we are not saying that the Big Three, they are getting it wrong in the rating class, but the rating analytics, that’s where they need to pay attention to, because that’s when an investor who is interested in an instruments pays more attention, rather than just the rating class.

So, I can point many, many examples that we have been raising, and part of what my colleague here has mentioned on the rating split, that they don’t – the three big rating agencies don’t need to completely align with their rating, or in their ratings or observation. There has to be diversity of thoughts, but at least in the bigger scream – scheme of things, you can find, like, one interesting example that Afreximbank managed to, or has been moving more to raising money in the Asian markets, and then S&P subsidiary in China assigns a rating that is five notch different from its – an S&P in New York. What does that tell you? And still, the rating agency in New York, or the subsidiary of S&P, still in their report, characterise the bank as lacking diversity in funding, but this is completely different from what you are witnessing in – on the ground.

And we are saying that in the observations that investors need to do, they need to have a – both sides of the story. We are not contending that Africa is not risky, but Africa is not more risky than anywhere else, because if it was very risky, we wouldn’t be finding almost all the Eurobonds issued in Africa being oversubscribed four/five times. Which actually, I have contended again is that you can’t keep on overselling your Eurobonds and celebrate that they are oversubscribed is a positive thing. It’s actually a bad thing, because it means we are not pricing them correctly.

So, we are saying that the pr – who is propagating this negative perception? It’s part of the institutions that we need to reconfigure, and we need to discuss that this perception of conservatism needs to change to – based on facts that are on the ground. Let me pause here.

David Lubin

Thank you very much. Last, but not least, Marie.

Marie Diron

Thank you very much. Thank you for inviting me to be here. That question of an African Credit Rating Agency has come in a much broader exchange, debate. Misheck and I have been on a number of panels together, so…

Dr Misheck Mutize

Uh-huh.

Marie Diron

…we know each other, and really, the reason to be here is to exchange on perceptions, on evidence and find solutions. But that broader context brings up typically, two points and I’d like to address both. The first is a point of bias in ratings, and I’ll come back to that. The second point, which I think Dr Gilpin was emphasising, is the question of cost of capital. So, on bias, it is a question that we at Moody’s are taking very seriously and understandably so. The value of our ratings is in being independent objective opinions on credit risks. If investors think that there is bias in our ratings, then the value of these ratings diminish – diminishes substantially.

So, in that paper, which was very useful to read, what I notice is that first, the importance of where a sovereign is located and the importance of a sovereign being located in Africa, for instance, is not significant for Moody’s ratings. So, I was pleased to see that, but I also noticed that there seemed to be some statistical significance for other regions, in Asia, in Latin America. I think what that tells me is that it’s clearly a complex question that needs to be looked at through different means, different methods, and hence, really, the relevance of your research.

What we’ve done is look at the evidence we can see based on 40 years of default history for sovereigns globally. So, if our ratings for African sovereigns are biased, then you would expect to see that for a given rating level, the probability of default for a sovereign in Africa is lower than that for a sovereign elsewhere in the world. That is not what we find. We find perfect alignment. If you take a B rated sovereign, probability of default within one year is about 5%. If you take a Caa rated sovereign, within one year you would expect a probability of default of about 15% and then as times goes by, then that probability of default increases. But again, perfect alignment between whether the sovereign is located in Africa or whether it’s located elsewhere in the world.

So, that is important. We’re not taking that for granted. We are really actively working on making sure that the objectivity in our ratings is maintained. That’s why we bring Analysts with experience from around the world in all our decisions. That’s why we really look at the data. That’s what we engage with governments around the world. And when you look at the rating movements in the last couple of years, you will see that in Africa and for emerging markets in general, but including Africa, we have actually taken more positive than negative actions. So, recent examples will be positive outlooks for South Africa, for Morocco, as well as then, rating upgrades and meaningful rating upgrades for other sovereigns, like Ghana, Zambia, Tanzania and others.

The context is important. I mentioned this is in the last couple of years, they – this hasn’t been short of headlines that could have suggested that ooh, better be safe and really emphasise the risks rather than the progress. But we have seen, in a number of cases, we’ve seen sovereigns able to shore up their revenue base, to improve their institutions. This is very important. To diversify their economy, to increase their – improve their balance payment, their external position.

So, let me go quickly to the question of cost of capital, which is also very important, and there, when you look at the data and we’ve – again, we’ve done that, you do see that African sovereigns do tend to – their cost of debt tends to be higher than for emerging markets elsewhere, in Asia or in Latin America. When you look at the – you look at, really, the structure of the debt and how much sovereigns pay on what kind of debt, well, obviously, the concessional debt tends to be concessional, cheaper and that’s for good reasons. The debt rates on international financial markets tends to be on the expensive side for African sovereigns, but again, not systematically so. So, what you see there is that – I mentioned South Africa earlier rate Ba2, same rating as Georgia. They actually experience similar spreads, and you can, kind of, go down the rating scale and see a similar thing.

Where there is a noticeable difference is in the cost of domestic debt and there, it’s not rare for African sovereigns to pay double digit interest rates on their domestic debt, while an Asian sovereign, low/middle-income levels, would tend to pay 5%, 6% or so. So, that’s a very significant difference and that we attribute to some of the factors that some of my co-panellists have mentioned, the institutions, the savings availability, the strength of the revenue base for the sovereign, as well as engagement, maybe engagement with investors across different markets.

So, I think there’s a – my point here is there’s certainly a number of factors at play. We are very much in line with the transparency need. I think these opinions, again, are useful to the extent that they are understood and with that, comes transparency of the communication of what is really behind the opinions, what is behind the ratings. I really look forward to continuing to exchange on these topics to see how we can do more on that. Thank you.

David Lubin

Thank you very much, very, very interesting. Let me start – I mean, we’re here asking the question, ‘How might an African credit rating agency improve the continent’s financing conditions?’ In the spirit of Devil’s advocacy, let me ask a prior question, which is whether an African credit rating agency can improve the continent’s financing conditions. And the Devil’s advocate position, I think, well, has a number of elements, but one is this, that African borrowers are trying to access a global capital market and Portfolio Managers, the allocators of capital, are comparing default risk among African borrowers with default risk among borrowers with whom Africa is competing for capital.

And so, my hunch is to ask this question that, you know, if you could imagine that there was a pool of global capital that was specifically allocated to Africa, then an African credit rating, it seemed, might make sense, because in that case, the rating agency is just, kind of, making default comparison, or default risk comparisons, among African borrowers within an Af – you know, all accessing one Africa-dedicated pool of capital, but that’s not the world we live in. And so, I worry a bit that an African Credit Rating Agency may be, at best, partially effective because it would be awarding ratings to Africa without any global context.

And therefore, from the point of view of Portfolio Managers who are allocating – you know, making decisions, you know, of, ‘Should I lend money to the Democratic Republic of Congo, or should I lend money to the Philippines?’ or whatever it happens to be, that the African Credit Rating Agency does nothing to help Portfolio Managers answer that question, in other words putting African default risk in a global context. And I wonder how any – whether any of you want to, kind of, pick that up, or whether it’s a criticism that has been, kind of, levied at the idea of the African Credit Rating Agency, or whether it’s something that’s worth taking seriously. Okay, yeah, go ahead.

Hannah Wanjie Ryder

Well…

Dr Misheck Mutize

Right, okay. I will take that one because we have been asked this question several times, including, you know, when the resolution to establish the agency was being passed, there was a Ministers who were actually sceptical, that ‘We don’t need this agency because international investors will not believe it.’ And my response to the Minister at that time was that ‘Minister, I think you need to formulate your context there differently.’

Our problems with the rating agency has been magnified because of the Eurobond in the international market. I mentioned in my remarks initially that there is something that I’ve been writing about over the past few years, something called African capital. That Africa – let me just give you the numbers in snapshot. That Africa Central Banks, Central Banks themselves, in reserves combined, they have US$508 billion that they control, and this money is kept offshore. In other words, it’s here in Europe and in the US. Adding to that, Africa’s own Sovereign Wealth Funds, as few as they are, I think we have, what, about 20 now, they have a combined US$208 billion, and this money is also being invested in the US Treasuries, earning 3.5% we are now.

Adding to that the pension funds, the majority of which are linked to governments, the pension funds, the total combined, including Central Banks, it goes up to US$1.2 trillion. The recent Africa Finance Corporation Report, which was launched at the Annual Meeting of the Africa Finance Corporation, identified that African capital alone is close to US$4 trillion. We are only talking about African capital. That our governments, they have got a direct or an indirect way of trying to motivate this capital to become capital, to stay long-term in Africa. Part of which they, themselves, have mentioned that they aid this process of this capital to be offshore, through investment process – policies and legislation, which they can influence for this to change.

And we have been saying this capital is seeping in investment firms here in Europe and it comes back to Africa purchasing in Eurobonds, that they are selling themselves, paying over 12% in costs, and then they come to complain to say we are borrowing very costly. Isn’t that a conundrum that you have placed on yourself, and you can be able to alter it? So, we are saying let’s study this. We can’t blame international investors for investing or – at a higher cost, because an investor is looking for a return. Before you go to an international investor, why can’t we do something about our own African capital and our own financial markets to create the environment to be able to issue these instruments in Africa and for this money to stay in Africa?

So, if we are talking about domestic financial markets, which I think it’s obvious that this is where the Africa Credit Rating Agency has to come in play, ‘cause you can’t talk about convincing internat – an international investor, we need African capital to be invested in Africa first before an international investor has confidence in African financial market. And the reason why Africa’s capital markets for long has been classified as illiquid and having fin trading is because of the dynamics that I have just mentioned.

David Lubin

And can I ask, Misheck, is your view that the principal benefit of the African Credit Rating Agency is exactly as you were just describing, that it’s…

Dr Misheck Mutize

Absolutely.

David Lubin

…about allocating intra-African capital within Africa?

Dr Misheck Mutize

Absolutely. I think…

David Lubin

Okay.

Dr Misheck Mutize

…that’s where its thrust has to be, because you can’t go and convince an international investor when they already have information that they need and they’re already benefiting from the status quo. They will obvious not want to reduce their return.

David Lubin

No, that – I mean, that’s completely coherent. In a way, that’s my point, that an – you know, if an African Credit Rating Agency is dedicated to providing a service that allows investors to assess relative risk within Africa, or within a pool of Africa-specific capital, domestic capital markets, then I think it works. But Hannah, you were…

Hannah Wanjie Ryder

Well…

David Lubin

…suggesting that…

Hannah Wanjie Ryder

…I think we’ve got to wait…

David Lubin

…something else, I think.

Hannah Wanjie Ryder

…for a CEO to give the business – full business plan for the African Credit Rating Agency. My own view is that diversity is important. So, where I’d add something to what Misheck is saying is that I don’t think the African Credit Rating Agency should only be focused on providing ratings that are relevant to Eurobond issuance. I think it should also be providing ratings that are relevant to a wide range of markets, and that includes markets like Panda bonds, Maharaja bo – all sorts of different bonds that African countries might be interested in, including diaspora bonds as well and of course, domestic. So, I think those ratings should be available from the African Credit Rating Agency, but as I said, it depends on the business plan of the African Credit Rating Agency once it is actually launched and whoever’s going to be at the helm of it, who will make those decisions as to what it’s going to focus on.

With regards to your question, I think it is also, in terms of the methodology for the African Credit Rating Agency, to put that context out there. I don’t – I would really, fundamentally, disagree that it is just about African capital. The re – the entire set of capital, and this is why we argue that the cost of capital on the African continent is problematic, is because it isn’t priced properly by anybody. And so, you do need a number of different actors in all – to be able to shift that, including an African Credit Rating Agency, but it’s not going to be the be all and end all. But where we are – where we have an issue is that there is an oligopoly that exists with the Big Three and especially with regards to African sovereigns and even African multilaterals, not necessarily corporates. An oligopoly is a problem and so, any attempt to provide something new in the market, provide something more interesting to investors to understand, should be something which is good for the market.

David Lubin

Thank you. Torsten.

Professor Torsten Schmidt

Yes, I’m – I also don’t know the business plan of this new agency, as well, but I hope that they will use the presence in Africa to improve the information availability of the countries and of the sovereigns. So, the coverage of ratings is quite low there. More than 20 countries are not rated at all and in other countries, the governments are rated but not the sub-sovereigns and so on. So, you can improve that and you can communicate more intensively with the providers of information within the governments, for example, and this data is then available for the Big Three, as well. So, you improve the…

Hannah Wanjie Ryder

Public good.

Professor Torsten Schmidt

Yeah, it’s a, kind of, public good…

Hannah Wanjie Ryder

Hmmm.

Professor Torsten Schmidt

…exactly. So, you improve the…

David Lubin

The sovereign rating is a public good, is that – sorry, is that where you’re…?

Professor Torsten Schmidt

Not the sov – the…

Marie Diron

The…

Professor Torsten Schmidt

…information…

David Lubin

The information.

Marie Diron

…enquiry about it.

Professor Torsten Schmidt

…provided by the…

Marie Diron

Yes.

Professor Torsten Schmidt

…government. For example, the debt plans from the – for the governments, and all these kind of information that’s there and that it can be used by the Big Three, as well. So, you improve the information on the international level, as well, and I think that’s good for all investors.

David Lubin

Very interesting, thank you. I guess – I mean, the other criticism that…

Dr Raymond Gilpin

Sorry…

David Lubin

Oh, sorry, Raymond, sorry.

Dr Raymond Gilpin

I’m here.

David Lubin

It’s a – yeah, it’s a cur – it’s a screen bias, I’m – I apologise.

Dr Raymond Gilpin

No, no, no, no, no, there is no screen bias. I just wanted to echo what particularly, Hannah mentioned about why this is important beyond just focusing exclusively on African markets. I think an African Credit Ratings Agency will do a lot to address the existing information asymmetries. A lot of investors really do not understand African economies, particularly domestic eco – political economy indicators and the role of the non-formal sector and some of the issues that Misheck has raised.

By catalysing efforts to address this, it becomes a global public good. So, whether it’s an investor within the continent or globally, they would have access to this, and they will be able to, you know, have more evidence-based pricing decisions, and so, I see it a little differently. It’s not just focusing on Africa. I think that it will make African markets more competitive globally, as well.

Marie Diron

Just maybe…

David Lubin

Yes, please…

Marie Diron

…to…

David Lubin

…go ahead.

Marie Diron

…improve on that? I think maybe it’s – what is coming up here is that there are different potential products and sets of services that are very valuable to healthy functioning of financial markets and robust allocation of capital. So, for us, as international Credit Rating Agency, the service we provide is that – a credible opinion on the risks, on a compara – on a globally comparable basis. So, I think that was your point…

David Lubin

Yeah.

Marie Diron

…David, and a lot of questions we get from investors are, ‘How do you compare Sovereign X,’ whoever it is, ‘with Sovereign Y in a completely different part of the world?’ Because that is how the investors we talk to really think and how they allocate the capital. But there are, of course, different investors with a different purpose who would have the need for a different kind of products and services. There are already a number of regional rating agencies in Africa, in Asia, in Latin America and so, these products and services exist, I think. Now, the question is whether there is a gap there as the potential need for something different or complementary.

On the diversity of opinion, I mean, fully agree with that. I think that is healthy. We – our analysis is really grounded in data and evidence, but there is a very important part of qualitative judgment and so, we do benefit from that diversity of opinion and indeed, diversity of data and information sources. So, we very much welcome that.

David Lubin

Very interesting. Hannah, you – earlier, you were emphasising the need for independence and transparency in the Credit Rating Agency, and you made an interesting comment about we need to know who the CEO is, we need to know more about the business model. And that, kind of, goes to another point that I think people often use to, kind of, criticise the idea of an African Credit Rating Agency, which is that, you know, it’s almost like Africa is saying, ‘We don’t like Moody’s, we don’t like S&P, we don’t like Fitch. We think they assess us as riskier than we really are, so we’re going to have an African Credit Rating Agency that’s going to truly reflect African default risk,’ which from the outside, may look a bit too much like Africa marking its own homework.

Hannah Wanjie Ryder

Hmmm hmm, yes.

David Lubin

And so, I wonder is that what you have in your mind when you…

Hannah Wanjie Ryder

Absolutely not.

David Lubin

Okay.

Hannah Wanjie Ryder

No, no, no, but the point is, is that yes, African governments and multilaterals are often, and even corporates, are often not happy with the homework that is marked by…

David Lubin

Right.

Hannah Wanjie Ryder

…S&P. But that doesn’t mean that they want an African Ra – Credit Rating Agency to do that, but it’s that a African Credit Rating Agency would understand the exercise better, is – that’s the theory of change here. The theory of change is they would actually be able to look with clearer eyes. You know, we talk about rose tinted glasses. It’s, kind of like, the other way round is the view, right? That the Big Three have some interference with – when they are marking the homework, yes? So, the idea is you would have a clearer sheet of paper in front of you to be able to mark the homework and that’s what the African Credit Rating Agency will do. That’s the theory of change here. It’s not about trying to – and that’s why independence is really important.

David Lubin

Okay.

Hannah Wanjie Ryder

So, the ideas – you know, it – African governments can’t be able to influence the direction of what the credit – what their – that would literally be completely damaging.

David Lubin

Right, okay.

Hannah Wanjie Ryder

Yeah.

David Lubin

Raymond, I’m so anxious about my screen bias. I want to ask you whether you have any comments on this idea that one – you know, that the rating ag – the African Credit Rating Agency may be criticised for, as I say, marking its homewo – marking its own homework.

Dr Raymond Gilpin

Actually, nothing to add on that. I think Hannah has summarised it quite well.

David Lubin

Good, thank you very much. Marie, you know, you’re looking at a bunch of different sovereigns and sub-sovereigns across a huge range of creditworthiness and I wonder whether it’s – if you can discuss this point a bit, which is that at very high levels of creditworthiness, you know, when a country’s ability to pay is beyond any question, a AAA, the balance sheet is strong, or in the case of the United States, you’re printing a currency that your liabilities are denominated in, then institutional analysis is not so – in other words, when the balance sheet is really strong, the quality of institutions, the quality of policymaking, the, kind of, softer, more objective, elements of creditworthiness assessment are a bit less important.

When you get to the riskier end of the credit spectrum, where you have weak balance sheets, by definition, the analysis of institutional quality, the analysis of the quality of policymaking, in other words, all those, kind of, fuzzy things about which it’s much easier to disagree, become much more important. And I wonder if that’s something that you think about, you know, about – in a way, I mean, I’m mischaracterising it a bit in this – if I put it this way, but it’s a bit like the distinction between the ability to pay and the willingness to pay. In other words, when the ability – the ability to pay is very high when you’ve got strong balance sheets. When you’ve got weak balance sheets, it’s something more about willingness and not ability. Is that a fair thing to say?

Marie Diron

I wouldn’t quite put it…

David Lubin

I can see – yeah…

Marie Diron

…like that.

David Lubin

…don’t worry, Hannah, don’t worry.

Marie Diron

I wouldn’t quite put it like that. So – and that’s – the part of our assessment that assessing the quality of the institutions, the governance strength, if you want, is very import and across the board. And all our decisions are taken by a committee, a group of people, and in these committees, that is really a part that we spend a lot of time really discussing, exchanging on, what are we looking at here?

I think the way I would put, I think, what you’re getting at, David, is that I often say when there’s a shock happening, Middle East conflict, and there’s been, again, no shortage of that kind of shocks in the last few years, sovereigns need to bui – the resilience is built on two things, financial and institutional resilience. To your point, I think, if you do have financial resilience, that gives you more time. That’s the reality, you know. It can be that the shock is such that international markets shutdown, there’s no financing available if a country that has substantial cash reserves will be able to be resilient to the shock, and can then, on a more considerate basis, really decide, okay, how do we adapt, how do we respond to this shock?

When countries do not have the financial resilience, then yes, the ability to respond really quickly without damaging the creditworthiness of the country in the longer term is really important. So, I think maybe that’s how I would put it, but yeah, governance, institution strength, is very, very important across the board.

David Lubin

Hannah.

Hannah Wanjie Ryder

So, I think your question points to this issue around weighing of factors, right?

David Lubin

Hmmm hmm, yeah.

Hannah Wanjie Ryder

And I think either – in all methodologies, different factors are weighted in different ways. One of our responses, for example, to Moody’s consultation on their methodology with regards to MDBs was around how different factors are weighted. And we disagree with how you weigh certain factors and that’s something you’re thinking about, etc., and you know, others have lots of different opinions.

David Lubin

Sorry to interrupt, Hannah.

Hannah Wanjie Ryder

But these are.

David Lubin

Is it – is the disagreement around the weight attached to the, kind of, subjective assessment of quality of governance or quality of policymaking?

Hannah Wanjie Ryder

That – we – I expect we do have some disagreement with regards to sovereign ratings, yes, but at – but I’m talking specifically about – around the MDB rating, which doesn’t have a – doesn’t quite have an institutional aspect in the same way. But for example, we were disagreeing with the weighting of geography and concentration, for instance, but it’s a completely different issue. But I’m saying weighting matters and I think what you’re indicating is that it might be interesting for Credit Rating Agencies to think about how they weight institutional factors at different levels of income, etc., because maybe that’s, in itself, creating bias if you rate them – if you weight them the same. Which is a very interesting point, and I think it’s worth thinking about analytically.

But I think what is also points to, and I think Marie, your – is two things. Your response points to two things. One thing is that we know anecdotally, for sure, that African governments work very hard to avoid default. I mean, we have seen it through COVID. We’ve seen it through countries not even going into DSSI when it was available because they wanted to avoid any indication that they’re seen as non-credible. And then, we’re – and with the Common Framework, we’ve had four African countries go in and that’s it. Whereas – and you would think that many would be more eligible, especially because we’ve had the precedent of things like HIPC, etc.

But – so, we know that African governments will work very hard. They will do so – I’m from Kenya. The Kenyan Government has done so much to work around these issues. And so, it is incumbent, I think, on Credit Rating Agencies, to take forward – to use lots of different sources of information and not necessarily the traditional ways of thinking around default or risk. And I think Marie, what you were talking about was very traditional ways of thinking about institutions and governance, but for example, in my firm, we collected a huge and fascinating dataset around COVID-19, which shows the entire world’s response to the same event and you can see that African governments were way more responsible, that they deployed finance faster than many other regions. And that kind of information is going to tell you a lot more about the propensity to – and ‘willingness’, as you say, willingness to pay, but it may not necessarily be that traditional.

And so, I think this is where we need to evolve our thinking and again, it’s where an African Credit Rating Agency can bring more information to the market, more information to investors that actually reflects reality.

David Lubin

Thank you.

Marie Diron

Can I pick this up?

David Lubin

Please.

Marie Diron

Yeah, just, so a few points on that. So, fully agreement, African sovereigns, default is a last resort for sovereigns in Africa, for sovereigns across the world. We rate more than 140 sovereigns globally. In a given year, we might see two or three default. In a really difficult year, we will see five or six. Vast majority of sovereigns will do – will take, really, a significant number of measures to avoid default. So, yes, it is very rarely, I think, about willingness. It is much more about no other choice at that point, a very difficult decision to take. So, really agree with that.

I think sometimes what I’ve really come to appreciate in these exchanges is that there might be misunderstanding of our rating scale. I mentioned earlier these default probabilities at different levels, and if you recall, for a B rated sovereign, which is relatively low in the rating scale, probability of default within a year from now is 5%. It is very low. So, when we talk to investors and when we say, ‘We think the rating is a B2 rating,’ we’re not telling them default is imminent by any means. We’re telling them default is a, really, a very low probability event, to which we would attribute about a 5% probability. So, I think there’s also some of that sometimes that is misunderstood and tends to affect the exchanges.

David Lubin

Thank you very much. Ladies and gentlemen, the floor is yours. If you’d like to ask a question, please put up your hand. A microphone, I think, will be coming towards you. Yes, gentleman in the front, if you could tell us who you are and where you’re from in terms of institution.

Dr Ishaka Shitu Al-mustapha

Thank you very much to distinguished panellists. David Lupin, thank you so much. Dr Ishaka Shitu Al-mustapha, a Senior Lecturer at the Claude Littner Business School, University of West London, a Maritime Consultant and African governance expert. I have question for Marie and also for Raymond from US, thank you. One, my question is very clear, if African Rating Agency finally launch, maybe next month, we expect many impact, as all of you have agreed and one of the impact I see is the lowering costs of borrowing and also access to finance, and maybe removing – reducing the biasness of African weighting credit rating.

We all know that it cost $75 billion annually, according to the United Nations Developmental Programme Report for African grading – to cost African countries for the crediting – rating. Do you think the frame – what do you think of the framework for validation if African Rating Agency come on board? What do you think of the framework of validation with the dominant three group, S&P, Moody and Fitch?

To you, Raymond, from the US, should Africa country, instead of having a credit rating agency, why can’t do they continental Bureau of Statistics that will do to capture data collections and standardisations across the continent? We all knew those who have issue with Africa, collecting data is a key issue in all sectors of national economy. Do you think we should focus more on that before we go to the Credit Agency? And that said, and what’s your opinion on Nigeria as a leading economy in Africa?

David Lubin

Well, I think you can’t have too many questions, but the quest – the second – let’s take the second question to Raymond first. It’s a very important question about data transparency and statistical infrastructure. Raymond.

Dr Raymond Gilpin

Thank you so much for that question. You’re absolutely right, the data question is front and centre, which is why we at UNDP have been working very hard with African countries and with statistics offices, and there is good news and there is not so good news. The good news is that in most countries, the Bureaus of Statistics are doing a great job of compiling your – both macro and fiscal and – macro and fiscal data. The not so good news is that having these as part of a really integrated and comprehensive effort to tell the country’s story in terms of ability to repay in the future, or credit readiness, creditworthiness, has not been so good.

I mentioned earlier that we did an executive study tour in the Philippines, where we spent half an afternoon with the statistics office there and we had representatives from 11 African countries who learned how more robust statistical structures do help enhance credit readiness and creditworthiness. So, my sense is that a new Africa Credit Ratings Agency would and should prioritise the data side and it’s something that we can do concomitantly, rather than having it as a choice between an agency or the statistical offices. Over to you.

David Lubin

Thank you. Marie.

Marie Diron

On the validation – one word on the data. I think the availability of transparent data is very important for policymakers to take robust decisions, firstly. So, yes, rating agencies use data as well, but I would say for me, first priority is for policymakers in a given country to have the information that they need to take the right decision for the country.

On the validation, so I’m going to – I hope I understood your question. What we do to really foster a good understanding of what our ratings are based on, which I think we discussed is very important, is establish our ratings within the context of methodological frameworks. So, there’s really defined frameworks that are based on data. We’ve been rating sovereigns for more than 100 years, at is happens. So, we’ve collected a lot of data on what tends to drive that risk of that a country may not be able to repay that debt in time in full. So, we bring these data together in the context of a framework that then allows each of the committees to take the decisions on a comparable basis, very important.

Publish these frameworks, Hannah mentioned the – in the context of multilateral development banks, we’ve put out a request for comments. So, when we refresh with frameworks, with methodologies periodically, we open that to comments from financial markets, but from – to anyone, really, anyone is free to comment, to provide views on what we propose. And we get a lot from that, and in the context of the MDT methodology, we are busy looking at every comments, more than 200 of them, and…

David Lubin

How many have…

Marie Diron

…reflecting on…

David Lubin

…you had?

Marie Diron

…what they tell us. Then come the, well, engagement with the issuers. So, in the context of this exchange here today, engagement with governments. We do that very regularly. Very important to explain our analysis, to listen to their plans. How are they going to respond to the latest shocks? How are they planning for the future, climate adaptation investment, pandemic prevention and response? And all of these very important questions.

Take the rating decisions, I mentioned a few times the committee, which really believe is a very good and sound decision-making framework, and then publish that decision with, again, a clear explanation of what it is based on. Investors when they call us, and they call us very often, my team and I last year have had something like 400 or 500 meetings with different investors, they ask us – they don’t ask us what the rating is. That they know already. They ask us why is the rating where it is and what would lead you to upgrade or downgrade the rating? That’s really the basis of our discussion.

David Lubin

Thank you. Next question. Gosh, a lot of you. Gentleman at the front, yes, with the glasses, and if I can just ask everyone to – if we minimise the question asking time, we can maximise the question answering time, and that would be great. Thank you.

Ricardo Giletto

Hi, Ricardo Giletto, personal capacity, a delegate at Chatham House. So, I have two questions. One is about, you know, obviously, who pays for the ratings? I mean, I know the answer, but…

David Lubin

I’m going to limit you to one, I’m afraid…

Ricardo Giletto

Okay.

David Lubin

…because there’s so many other people…

Ricardo Giletto

So…

David Lubin

…that want to ask…

Ricardo Giletto

…there’s a lot of unsolicited ratings, as well, but a lot of missing or withdrawn ratings for various reasons. So, what is the idea behind the new African agency to work around the weight – the pricing model? Is that a replica of the existing Big Three or would you have a different proposal? If you allow me to very quickly, on – in terms of timing at a committee cycle at the existing agencies, the reality is that often, the markets are faster than the agencies. We’ve seen this recently with South Africa, we’ve seen it with the Middle East, we – a number of different things as this. What is the proposal for the African agency to overcome this delay?

David Lubin

Cost of ratings and timeliness of ratings. Okay, let me take a couple of other questions. Yes, lady in the front.

Professor Ruth Taplin

Thank you, and thanks to the panel and KAS for bringing up this very important issue. I’m Professor Ruth Taplin. I’m Editor of the Journal of Interdisciplinary Economics and Business Law. It seems to me, and I would like the opinion of the panellists, that if we could use a non-biased, non-African biased model, which a lot of rating agencies are using at the moment, to very, very good effect, we could have a much clearer, more transparent outcome that could be more standardised. You know, and for example, letting governments explain how they’re actually supporting entrepreneurs in Africa and in the informal sector. So, the model I’m – and yeah, the model that I’m alluding to, which is widely used by rating agencies, is ESG.

David Lubin

Okay, got it, thank you. Yes, gentleman in the middle there.

Islam Alhalawany

Thank you for the interesting discussion. My name is Islam Alhalawany from LSE. I’m ex-S&P. So, I have my first question, I promise to be brief.

David Lubin

Just one.

Islam Alhalawany

In…

David Lubin

Just one.

Islam Alhalawany

Okay, and in the paper, you mentioned the example of the scope in Europe. If you can expand on it, how it can work in comparison to the African Credit Rating Agency, especially in the absence of a similar credit assessment framework in Africa, which I think is still, like, a missing conversation in the continent. If I can just solicit one more point about…

David Lubin

Just ‘cause I’m a softy, I’m going to say yes, go on.

Islam Alhalawany

Thank you. Hannah mentioned something about the Kimchi and Panda bonds market and that how African Credit Rating Agency can expand to wider market. How do you think it can be appealing in the new bond market, compared to the traditional ones? Thank you.

David Lubin

Thank you very much. Panellists, who would like to take any of those questions? We have questions about the cost and timeliness of ratings. We have questions about the possibility of unbiased ratings and the folding in of ESG and we have questions – well, really, that’s a question for Torsten. Actually, why don’t you take the question about your paper first and then you can…?

Professor Torsten Schmidt

Yes, why not.

David Lubin

Yeah.

Professor Torsten Schmidt

You – the question about scope. So, I think it’s a good example for – and you can learn a lot for the new African Rating Agency, because it’s private – it’s a private firm, so it’s private money spent into that. So, they have a working business plan. The problem is that they are not very important for ratings, even in Europe. So, the idea was after the financial crisis, to build same idea. The ratings in Europe are dominated by the Big Three, so we should have an European Rating Agency and then it was built by these private agents and some pension funds, for example. But I think it’s not a big success in the sense that they really compete with the Big Three. So, they add something to the market because they are still on the market, but – and they are not very well-known, in particular, at the international level.

So, well, I think they made it, but I think it’s not the big solution for an additional and independent firm that provides different ratings compared to the Big Three. So, well, I’m – from my perspective, it’s not a big success.

David Lubin

Thank you. Misheck.

Dr Misheck Mutize

Well, thanks for that. I don’t know. On scope, in our consultation, they always classify themselves as legislating agency in European Union.

David Lubin

That’s…

Dr Misheck Mutize

So, I don’t know where they get their statistics, but…

Professor Torsten Schmidt

I know…

Dr Misheck Mutize

…the impression is that they have…

Professor Torsten Schmidt

…those statistics…

Dr Misheck Mutize

…made an impact. So, that’s a little bit contrary. But I wanted to make a few points and paint this picture so that we leave the room with a, I think, a different picture of how ratings dynamics are in Africa, which is very different from Europe and the US. In Africa, we’ve got a – so, I’m answering this question…

David Lubin

Yeah.

Dr Misheck Mutize

…that yeah…

David Lubin

Good, thank you.

Dr Misheck Mutize

In Africa, we’ve got the Big Three combined, they rate about 26 countries. Each one rates about 26 countries maximum, but some rates others don’t, and those sovereign – that’s sovereign ratings, actually. In those sovereigns – I think because Moody’s is here – amongst those, almost half of those are unsolicited and, you know, they always try to scientifically distinguish between unsolicited, participatory and non-participate. In other words, if it’s unsolicited, they get to issue the rating without participation or consultation with the government in these institutions. So, what that means is that this rating is being issued as an encouraging to support sub-sovereign ratings in municipalities or local authorities or other entities that – ‘cause we have really taken Moody’s and Fitch about unsolicited ratings. Fortunately, S&P doesn’t have any.

And this also answers to the question of who pays the ratings. The answer is that the one who is receiving the rating pays for the rating, and if they don’t pay, it means that the rating is being issued with minimum investment from the issuer, because there is not really much benefit, although they might expect to have benefit from other investments into – in corporate ratings or sub-sovereigns. And from looking at the spectrum of sovereign ratings, I have concluded over the years – I’m sure if we were to talk to a commercial person in Moody’s and S&P, that they don’t really make a lot of revenue from rating sovereigns, because I’ve seen – because in consultation with [inaudible – 81:29], ‘Show us your contract with the S&P?’ In most cases those contracts are not there. It means the sovereigns are not paying.

So, this is very important for this new agency that in as much as there is a lot of optics and expectation that the market wants to see how different it’s going to be from the Big Three, it might not be able to sustain itself from rating sovereigns, although it’s important for the optics. So, that still goes back to the point that I was making about where it is going to make an impact. It’s not going to make an impact or pay absolutely change the way that the Big Three see Africa, which is a public good, I agree with that. But in terms of sustenance and long-term, you know, success of the agency, it’s really going to find it difficult to make it or generate revenue in the international market. Of course, it has to do that within Africa to establish itself rating corporates and sub-sovereigns there.

On the oligopoly of the Big Three, of course that’s going to be very difficult to dislodge because they have an established market and they have a specific market that they save. But there is a lot of potential in changing the perception of how the Big Three see the instruments that are issued by African sovereigns. And of course, for me, I always cite the point that if there was no value in local rating agencies, there was no reason why Moody’s had to acquire GCR, the Global Credit Rating company which was the largest African rating in terms of rating portfolio, now they have acquired – they acquired it in 2022 and now they have relinquished all their licences in Africa because they said, ‘We don’t need it. We will let the GRC operate or run our operations within Africa.’

So, that’s the point that drives this logic, that there is still some value in a context sensitive analysis that an African Rating Agency is going to bring to the market.

Hannah Wanjie Ryder

Hmmm hmm.

David Lubin

Thank you very much. Best question so far comes online from Nicola Swann, who says, ‘Has the moderator’s anti-screen bias extended to those of us who are asking questions remotely?’ So, I will, in deference to – respect to Nicola Swann, ask an interesting question. ‘Which African Central Banks or Sovereign Wealth Funds have undertaken to use the African Credit Rating Agency’s ratings in their own investment policies?’ Which actually, I’d like to, kind of, extend to a broader question, which is, who’s – who do you expect to be using the ratings supplied by the African Credit Rating Agency? Is it – I mean, maybe we’re going a little bit back over old territory. Is it primarily domestic providers of capital? Is it bondholders? Is it buyers of dim sum bonds? You know, who’s – who is the audience? Maybe Raymond, I can put that to you first.

Dr Raymond Gilpin

Thank you very much. One would hope that the audience would be much broader than a small subset of the potential investors, because as we’ve been discussing, what we anticipate an African Credit Ratings Agency would bring to the table would be this closer knowledge of domestic markets, being able to ensure that we have a systemised approach to the data question and also being more regionally focused in terms of the general operations. So, what – I wouldn’t think that there is going to be a smaller slice of the market. I think that African countries, African institutions, should find it helpful. But to answer Nicola’s point directly, which ones have committed, I would not know. Misheck might have more information on that.

David Lubin

Do you, Misheck?

Dr Misheck Mutize

Unfortunately, I’m all – I’m not privy to disclose that at this point because of the delicacy of the process. I’m sure the audience will understand that in as much as the project have got a lot of support, but there are also other quarters that may not want the project to succeed. So, what I can say is that there is a lot of support for – and commitments that we have received from institutions that wants to be rated by the agency…

David Lubin

Thank you.

Dr Misheck Mutize

…as part of supporting its sustenance.

David Lubin

Thank you. Let’s take a final round of questions. Yes, gentleman at the back, lady here and one of you guys. You slug it out between you.

Gregory Kronsten

Right, thank you very much. My name is Gregory Kronsten, Frontier Markets Economist, semi-retired. So, I’ve got a question about MDBs. What do the panellists think about the Washington definition of the plurilateral development bank? I think it’s an IMF piece of – expression, I think. In other words, if you pay dividends, have lots of foreign shareholders, you shouldn’t be an MDB any longer. Thank you.

David Lubin

Thank you. Lady here.

Audrey Brown

Hello, my name is Audrey Brown and I’m from the Commonwealth Foundation, and in the interests of brevity and spirit of curiosity, I want to know, Marie and Hannah, you said that African governments were very determined – are very determined not to default and I was just wondering why. Why is that so important to them?

David Lubin

Okay, thank you. Oh, did you guys make a decision?

Malcolm Siba

Thank you. We’ve gone – undergone a little democratic process here.

David Lubin

Very good.

Malcolm Siba

So, I’ll speak…

David Lubin

Very good.

Malcolm Siba

…on his behalf. My – I’d like to start by thanking my neighbour for granting me the mic. He is from Mauritius…

Professor Torsten Schmidt

Yeah.

Hannah Wanjie Ryder

Yes, I could…

Malcolm Siba

…and would like to articulate that they are fully in support of the process. My name is Malcolm Siba. I am visiting from Papua New Guinea. I’m ex-Fitch, although happy to say I didn’t downgrade anyone so I can speak freely today. My question is for the panel members, I’d like to get your views on if we can cast our minds to 2030, what does success for the African Credit Rating Agency look like? Is it investors taking an Africa rating with the same weight as, say, a Big Three rating, or some other factor? I’m curious to get your views on how you see success a few years from now.

David Lubin

Great, thank you. We’ve got three very interesting questions, and I want to give each of the five of you a chance to answer but bearing in mind we’ve got very little time left, please be brief. Who’d like to start? Sorry?

Marie Diron

I can take the…

David Lubin

Yeah, go ahead.

Marie Diron

…question on plurilateral, why do governments, African and others, really see default as a last resort? On the plurilateral, maybe just for the everyone. So, the supranational, the Multinational Development Bank space, has been characterised by the International Monetary Fund in two groups, the multilateral space and then plurilateral. The – what that means for us, it is one piece of information that might tell us that if a sovereign is heading towards this, really go – heading into difficulties and may default, then that so-called plurilateral financial – plurilateral bank may not see that preferred creditor status.

So, the sovereign may default on the loans, or the bank may be involved in the default restructuring and not get preferential treatment, if you want, or special treatment. So, that’s one piece of information. We look at really a range of information, but in our framework, in our ratings for Multilateral Development Banks in general, it is an important aspect. Are sovereigns really going to see that creditor as one they will repay at nearly all costs?

Going to the lady’s point, why do sovereigns really try to avoid default so much? It is, as I said earlier, a very, very difficult decision at that point, because really, governments are deciding, do they repay the loans on creditors which can – who can be anywhere in the world, or do they pay wages and salaries, do they pay essential social services? I think the – really, the resistance to defaulting is that because sovereigns know from experience that if they default, then it’s going to be very difficult for them to access financing for some time to come. There will be that fact, that event that is there, what has conducted, what has led to the default? And investors globally are going to take that into account in their assessment.

David Lubin

Thank you.

Marie Diron

And that…

David Lubin

Hannah.

Hannah Wanjie Ryder

I’ll probably take similar questions, too. So, I think we have to be very careful about the World Bank’s own definition and anything coming out of the World Bank and IMF on preferential creditor status, because of course, there’s a conflict of interest there. They are creditors themselves, and so, we do need to have an independent assessment of that question. If you ask those in my firm, we don’t think preferential creditor status should exist for anybody. However, there are treaties that establish preferential creditor status for certain international organisations, in particular African organisations have in their treaties, preferential creditor status. There’s quite a few African organisations that have that, and so, if you’re going to take account of anything, you must do that. But in general, we don’t really actually understand the economic rationale, necessarily, for that kind of definition, but as I said, pinch of salt.

In terms of why African governments work so hard, I think Marie’s got to it. It’s really about if you default today, what’s going to happen tomorrow? And access to Eurobonds in particular. And I think part of it is not just about a reliance on external debt, and I know a lot of people put it down to reliance on external debt and say, ‘No, no, no, we should be focusing only on our internals.’ It’s very difficult to just focus on your internal. There’s hard – there’s not enough money. I know Misheck was saying four trillion, but again, four trillion in the overall Sovereign Wealth Funds, overall amount of capital, those pension assets, it’s still 4%, maybe even 3% of the world’s – those sort of assets.

Being able to get access to finance externally is very important, but I think this is where access to markets come into the question on partnerships. Looking at other markets or whether they could use the African Credit Rating Agency if they don’t have their own agencies, or maybe as a second opinion, etc., these are definitely going to be areas where – that can help and in terms of diversifying, create more opportunities and incentives for African governments to diversify their sources of external finance.

David Lubin

Okay.

Hannah Wanjie Ryder

Finally, can I just say about success?

David Lubin

Very quickly.

Hannah Wanjie Ryder

It’s a really great question. It will be set up in Mauritius, so a shout out to His Excellency over there. It will be there working, doing great work. There’s going to be a lot to do by 2030, so even just in that shorter space of time, decisions like the cost model, decisions like who is – who are the key – what are the key products that are – those are going to be abso – if those are done by 2030, that’ll be a great success.

David Lubin

Okay. Torsten, very briefly, please.

Professor Torsten Schmidt

Yes, I think it would be a success if the rating agency is still there and working with the governments, improving the information provision by the sovereigns, and yes, I think that’s the main point.

David Lubin

Thank you. Misheck, very briefly, please.

Dr Misheck Mutize

Yeah, no, two points. I also believe that IMF is not the right adjudicator in the preferred creditor status in the definition of multilateralism, especially in Africa, because they are the interested party, you know. It really paints them in the picture that they want exclusivity in PCS, which is not the right thing. The banks are found by African governments, and they have a certain preferred treatment that they would want to exercise on their institutions.

And on the second point, success of AfCRA, of course, it’s not to give favourable ratings to Africa, but we expect it to be run by competent and credible people. We expect Marie, perhaps you will submit your CV.

David Lubin

Are you sure?

Dr Misheck Mutize

So, perhaps…

Marie Diron

No.

Dr Misheck Mutize

…a few…

Marie Diron

If you want and elderly woman…

Dr Misheck Mutize

…years to come…

Marie Diron

Well, I’ll – that’s…

Dr Misheck Mutize

…a few years – by 2030, she will be representing…

David Lubin

Thank you.

Dr Misheck Mutize

…AfCRA sitting on…

David Lubin

Thank you very much.

Dr Misheck Mutize

…the panel.

David Lubin

And the last…

Dr Misheck Mutize

Thank you [applause].

David Lubin

Last word to you, Raymond.

Dr Raymond Gilpin

Sorry, Maria, I can’t offer you much more than he has already done, but my hope is that by 2030, we’ll have a credible, independent, transparent institution. We would see African countries making the sorts of regulatory reforms that allow them to utilise ratings from the African Credit Ratings Agency to help direct some of the capital that Misheck has alluded to.

Thank you very much. My sincere apologies to everyone online who submitted questions that I didn’t get to, except for Nicola’s. Thank you all very, very much for an interesting discussion and thank you all very much for coming along. Thank you [applause].