Africa's great credit rating agency downgrade

Since 2020, Africa has seen an onslaught of sovereign credit-rating downgrades. Fitch, Moody’s, and S&P downgraded 18 of the 32 African nations that are currently rated. Virtually all African countries’ credit ratings have deteriorated over the past three years, which will seriously increase the cost of servicing their external debt, and their cost of borrowing. 

Rating agencies, having hurt African prospects, need to consider refined methodologies for African developing nations that won’t hamper development or entrench poverty. (Simon Dawson/Bloomberg)

In fact, over 50 percent of rated African countries have been downgraded since 2020, the highest number of any continent. Not only have a large number of African nations been downgraded, the majority have also received negative rating outlooks as well. The outlook of 13 nations has gone from stable to negative.

Downgrades included countries like Morocco, South Africa, Egypt, and Gabon with some nations having their paper moved to junk status. Approximately, 93% of African sovereigns are now rated below investment grade.

The very large number of African nations receiving negative outlook ratings has hampered their ability to obtain various forms of both credit and finance. The downgrades have impeded their growth prospects in one form or another. While some countries have lost direct access to credit lines as a result of downgrades and negative outlooks, others will have to pay higher premiums for borrowing. Credit rating downgrades make affordable access to finance a bigger challenge, which in turn challenges the ability of African nations to finance growth and development. 

Downgrades happened for many reasons. For Ghana, the volatility of the Eurobond market played a key role in their downgrade, and in the increase in frequency of their sovereign credit rating reviews. In the past half decade, Ghana started issuing Eurobonds to rely less on foreign aid, and finance key infrastructure projects. But, since Eurobonds are denominated in a currency different from Ghana’s cedi, and are issued on international financial markets, global investors require regular credit assessments of their issuers. Accordingly, sovereign credit assessments became a core requirement for Ghana as it had issued Eurobonds of sizeable amounts. The negative consequences of the Eurobond issuances, and the lacklustre rating agency reviews, have left Ghana reeling. 

More recently, Fitch downgraded South Africa to BB - and gave it a negative outlook. Fitch cited a continued rise in government debt, the overwhelming percentage of debt to GDP, and a failure of South Africa to formulate a coherent pathway for stabilization. Worse still, South Africa's credit rating was downgraded to junk status. A junk rating implies that a government will be unable to pay back its debts; a devastating assessment. This all started in 2017, when S&P first cut South Africa's rating from investment grade to junk. It further lowered it in 2020 into junk territory, as it warned that Covid-19 will have negative impacts on the economy and the nation’s tax revenues.

For Gabon, its sovereign credit rating was downgraded from B to CCC for wholly different reasons. The rating agencies explained Gabon’s downgrade primarily by saying that falling oil prices will make it difficult for it to honor its commitments to external creditors. When oil prices recovered, Gabon’s credit rating was not upgraded.

For African sovereigns, it takes an average of 7 years for a downgraded developing country to be upgraded once more. The bottom line is when countries like the US are downgraded from AAA to AA creditworthiness, there is little impact on their economy. 

For developing African nations, credit rating downgrades can be a trigger for economic doom. For African countries over the past three years, and like the rest of the world, COVID, and a very strong dollar, impacted the ability of various nations to meet their debt obligations. These exogenous shocks played a major role in rating agency downgrades that in turn became an additional impediment to growth and financial stability. 

Without doubt, rating agencies, while doing their job, have undermined the ability of several African countries to achieve their development goals. Rating agencies need to consider refined methodologies for African developing nations that won’t hamper their development, or further entrench poverty on the continent.