THE ALSF UNPACKING SOVEREIGN FINANCE: THE ROLE OF CREDIT RATING AGENCIES IN AFRICA

By Nicole Kearse and Kadiata Kane, The African Legal Support Facility (ALSF)[1]

1. Introduction

Credit rating agencies (CRAs) are pivotal in assessing the creditworthiness of countries, companies, and securities, shaping investment choices, bond and loan interest rates, and ultimately the stability of the international financial system[2]. These entities provide an opinion on the likelihood of a borrower meeting its debt repayment obligations that investors then consider when making investment decisions.[3] A good credit rating facilitates access to international capital markets, can positively influence the terms of financial transactions, and is therefore essential for sustainable and affordable sovereign financing on a global scale.

Standard & Poor’s Global (S&P), Moody’s, and Fitch Ratings, collectively known as the “Big Three”, are consistently at the forefront of discussions about global finance, particularly in the realm of sovereign ratings. The Big Three are currently the dominant CRAs in the international financial architecture, exerting significant influence over market perceptions and outcomes. Indeed, collectively they hold 90% of market share.[4]

Amid declining official development assistance (ODA) and as a result of the impact of global crises like COVID-19, climate change, and international conflicts, developing countries – especially those in sub-Saharan Africa – have increasingly turned to the international capital markets and other private creditors (e.g., banks and institutional investors such as pension funds and asset managers) for financing[5], to meet their national and sustainable development goals (SDGs).

With such newer sources of funding has come a new set of challenges for sub-Saharan African countries, including elevated borrowing costs and repayment pressures, which are often influenced by a sovereign’s credit rating from the Big Three.

This paper will examine the history and context of credit rating agencies, assess the general impact ratings have on African sovereigns and briefly discuss the establishment of an African credit rating agency along with its intended benefits for African sovereigns.

 2. Context of Credit Rating Agencies

Debt is a financial tool used by companies and sovereigns to undertake various expenditures (e.g., acquiring another company or financing an infrastructure project). The ability to obtain debt on reasonable terms is often determined by a borrower’s perceived creditworthiness. This is where CRAs play a role. They serve as assessors of a company’s or sovereign’s creditworthiness.

In the context of sovereign ratings, CRAs assess creditworthiness not only on the basis of economic indicators but also on “political risks” and the sovereign’s “willingness to pay.” Unlike corporate entities, which are legally bound to meet their obligations and can be compelled through bankruptcy or liquidation proceedings, sovereign states cannot be forced in the same way to honour their debts. While enforcement against sovereigns is possible in limited circumstances – such as when a state has waived immunity and creditors seek to attach commercial assets located abroad – such remedies remain uncertain and difficult to execute. Consequently, repayment ultimately depends on political choices, domestic priorities, and the perceived costs of default in terms of market access and reputation. This constrained enforceability, combined with their sovereign immunity from ordinary judicial processes, leads credit rating agencies to place particular emphasis on political stability, institutional strength, and the government’s commitment to servicing its obligations when evaluating sovereign risk.

There are several CRAs across the globe. While they all evaluate similar factors –economic performance, governance, fiscal health and external vulnerabilities and, more recently, climate change considerations – they each apply a different weight to, and approach for, these factors, each having their own respective methodologies.

The rating assigned by a CRA determines whether a sovereign or security is considered “investment grade” or “speculative grade”, with each CRA applying its own rating scale[6]. An “investment grade” rating tends to lower borrowing costs for a sovereign by signalling lower credit risk to investors.[7] In contrast, a “speculative grade” rating can trigger a “cliff effect”, where investors – either by choice or due to legislative, regulatory or institutional mandates – may be compelled to sell off their holdings.[8] This sell-off can drive down bond prices and increase market volatility, as the sudden shift in demand disrupts pricing stability[9].

The global financial crisis of 2008 prompted criticism of CRAs, in particular in respect of structural issues, such as: (i) a uncompetitive market structure with the Big Three playing a leading role, which some observers have described as having quasi-oligopolistic characteristics, (ii) conflicts of interest arising from the payment model of the “issuer-pays”, and (iii) an overuse of credit ratings in regulatory frameworks (e.g., credit ratings were the default tool used by financial institutions to assess creditworthiness until the United States 2010 Dodd-Frank Act and the European Union CRA regulation 462/2013 both instructed financial institutions to not solely rely on ratings to weigh risk)[10]. These criticisms prompted certain reforms within the sector, most notably leading the Big Three to adjust aspects of their methodologies to incorporate additional factors, a point that will be examined further in the next section. Nevertheless, many of the concerns raised remain the subject of ongoing debate. Despite the emergence of alternative CRAs in the aftermath of the 2008 global financial crisis, the Big Three continue to exert significant influence over sovereign ratings.

3.Ratings Methodologies

According to the United Nations Department of Economic and Social Affairs (UN DESA), the general methodology of the Big Three is based on five main factors: (i) institutional and governance quality, (ii) economic growth and resilience, (iii) public finances, (iv) external accounts and (v) monetary flexibility.[11] Depending on which of the Big Three, these factors will be given a different weight to establish “anchor scores”, which in turn will determine the overall rating of the sovereign based on the objective and the subjective judgement of the CRAs analysts[12].

Table 1 – The Big Three agencies’ indicators[13]

Source: Imre Ligeti and Zsolt Szorfi, “Methodological Issues of Credit Rating – Are Sovereign Credit Rating Actions Reconstructible?”, Financial and Economic Review, vol. 15 (2016), pp. 7-32.

For a closer look at rating methodologies, we focus on Moody’s.

Moody’s defines a credit rating as a forward-looking opinion of the relative credit risks of financial obligations issued to, inter alia, financial institutions or public sector entities[14]. For Moody’s, a credit risk materializes when an entity does not meet its contractual financial obligations as they come due and includes any estimated financial loss in the event of default or impairment[15]. Moody’s uses qualitative (e.g., governance strength) and quantitative factors (e.g., GDP) to determine credit risk and ultimately the final credit rating of a sovereign[16].

Like other CRAs, Moody’s methodology relies on scorecards. It uses four main factors to determine the overall credit rating score of a sovereign, namely, (i) economic strength, (ii) institutions and governance strength, (iii) fiscal strength and (iv) susceptibility to event risk[17]. For the economic resiliency score, Moody’s uses equal weights by combining the scores of the economic, and the institutions and governance strength factors[18]. For the government financial strength score, Moody’s uses dynamic weights by combining the economic resiliency outcome with the fiscal strength score[19]. Finally, Moody’s assesses the sovereign’s susceptibility to event risk to determine a scorecard-indicated outcome, which is expressed as a range[20]. The sovereign’s final score is then assigned based on this assessment[21].

Table 2 – an illustration of the sovereign methodology framework[22]

Table 3 – an overview of the sovereign scorecard system[23]

To illustrate some of the subfactors in table 3, we can consider the three subfactors of the economic strength component, which are allocated different weights, namely: (i) growth dynamics (35%), (ii) scale of the economy (30%), and (iii) national income (35%) for an overall score of 100%[24].

For instance, the sovereign economic strength score is shaped by growth dynamics: periods of low or volatile growth generally heighten investor caution toward sovereign financial instruments, whereas sustained growth tends to bolster investor confidence. In the latter context, sovereigns are better positioned to attract capital and implement credit-positive reforms[25]. Further, the scale of the economy subfactor assesses a sovereign’s ability to withstand economic shocks (like the COVID-19 pandemic)[26]. Lastly, the national income subfactor measures an economy’s output relative to its population size[27]. Moody’s assesses this subfactor using per capita income in purchasing power parity terms[28]. All these subfactors determine the economic strength factor’s score. The same logic applies to the other three main factors in the Moody’s scorecard.

Further, credit ratings are divided into either a long-term or a short-term category, each assessing financial risk over different time horizons. Long-term ratings apply to issuers or obligations with an original maturity of eleven months or more, assessing both the probability of default or impairment on the contractual financial obligations and the potential financial loss in such events[29]. Short-term ratings, on the other hand, are assigned to obligations with an original maturity of thirteen months or less and evaluate the same factors – the likelihood of default or impairment and the expected financial loss[30]. It is important to note that while ratings are generally made public, private and unpublished ratings may also be issued[31]. For this note, we are only focusing on long-term, public ratings.

Moody’s also integrates environmental, social and governance (ESG) considerations into its ratings. It does so with its scorecards through, for example, the economic and fiscal strength factors (e.g., a physical climate risk such as a cyclone can affect a country’s natural resource extraction and by extension a country’s fiscal revenue) or will capture ESG through other discretionary considerations outside of its scorecards (e.g., crisis response in an economic downturn or reliance on multilateral support, etc.)[32].

Table 3 – ESG considerations in Moody’s analysis[33]

Source: Moody’s Investors Service

The rating methodology of Moody’s and other CRAs can be summarized as a two-part assessment with on the one hand (1) data on a country’s ability to repay its debt being collected through its weighted scorecard system as described above and then (2) the discretionary judgement made on such data by the CRAs credit analyst or credit committee[34].

4. Ratings Impact on Africa’s Sovereign Finance

For sovereigns, debt is instrumental to funding growth-catalysing governmental projects (e.g., in the health, education or infrastructure sectors). This debt is issued through a combination of financial instruments such as bonds, bills, notes and loans[35]. The structure of a government’s debt is dependent on market conditions or government preferences among other things[36]. What differentiates sovereigns from other debtors includes: (i) the sovereigns’ ability to curb its expenditures or increase tax revenues; (ii) the absence of an overarching framework to compel debt resolution; and (iii) the high probability of survival even after an event of default.

Through the years, African countries have developed an appetite for Eurobonds (bonds issued in a currency other than that of its issuer – usually U.S. dollars or Euros) in part because of their ability to quickly provide liquidity to governments without the associated conditions imposed by multilateral or bilateral borrowers.[37] Eurobonds account for at least $113.5 billion of bonds issued by sub-Saharan African countries since 2004 according to JPMorgan[38].

Notwithstanding the extent of a sovereign’s presence on domestic and international capital markets, only 35 African sovereigns have a credit rating as of September 2025, which were all rated as non-investment grade with most countries having junk statuses, except for three countries (Botswana, Mauritius and Morocco)[39]. S&P noted in a 2004 report that investor sentiment toward African countries is influenced by “perceptions” of macroeconomic fragility, as well as fiscal and social instability[40]. Since entering the international capital markets, investor’s perception of risk has been one of the main factors impacting African sovereigns credit ratings.

Table 4 – Credit ratings and investment positions of African Countries by the Big Three and Trading Economics[41]

Source: Trading Economics (2022) as of August 2022 and author’s approximation. *Note: Trading Economics ratings uses an algorithm that relies on a forward looking macro-economic model without any discretionary opinions as found with the Big Three ratings and its assessment are on a scale of 0 to100, with 100 being the best investment grade rating.

Developing and sub-Saharan African countries’ challenges with ratings intensified during the COVID-19 pandemic[42]. Indeed, sub-Saharan African countries experienced the most downgrades during this period despite undergoing only mild economic contractions[43]. Many sub-Saharan African countries did not participate in the Debt Service Suspension Initiative (DSSI) or the G20 Common Framework for Debt Treatments Beyond the DSSI (“Common Framework”)[44] because of their fear of being downgraded. This fear was not unfounded. For example, Ethiopia’s reliance on the Common Framework led to a downgrade by two of the Big Three (S&P and Fitch) in the spring of 2021[45]. Cameroon, Côte d’Ivoire, and Senegal were also downgraded as a result of their participation in the DSSI[46].

It was reported that 95% of sovereign credit downgrades occurred in developing countries[47] — with about 20 out of the 32 affected nations being African countries that were either downgraded or assigned a negative outlook by at least one of the Big Three[48]. In comparison, African countries’ downgrades were disproportionally higher than other regions at 62% (e.g., 45% for Asia or 28% for the Americas)[49].

Source: Hippolyte Fofack, “The ruinous price for Africa of pernicious ‘perception premiums’”, October 2021.

Downgrades have adverse effects on market perception and borrowing costs and the overall stability of domestic financial markets[50]. More specifically, ratings can influence investor behaviour, trigger changes in portfolio allocations, and ultimately affect access to international capital markets. In addition to the ratings, announcements by CRAs such as “reviews”, “outlooks” or “watches” can also result in changes to investment decisions and pricing. These are forward-looking statements that signal potential changes to a credit rating before an actual upgrade or downgrade occurs.

Specifically, Moody’s defines rating outlooks as “an opinion regarding the likely rating direction over the medium term” and has four categories of outlooks: Positive (POS), Negative (NEG), Stable (STA), and developing (DEV)[51]. These categories are self-explanatory and may be assigned at the issuer (i.e., government or corporate entity) or the rating level (i.e., instrument)[52]. The timing surrounding a new rating outlook and a rating action varies but is typically between a year to 18 months after an initial assignment[53].

In this respect, developing countries have experienced a more pronounced increase (160 basis points) in downgrades, “reviews”, “outlooks” and “watches” compared to advanced economies (100 basis points)[54]. In addition, a negative or a “speculative grade” credit rating can amplify market and pricing volatility through cliff effects (e.g., forced selling of bonds after downgrades) and procyclicality (e.g., ratings upgrade in booms and downgrade in downturns), worsening instability precisely when financing is most critical[55].

While downgrades tend to attract the most attention due to their destabilizing effects, upgrades can also have significant implications for sovereigns. Indeed, the converse of the above is also true. Ratings upgrades may lower borrowing costs, improve access to international capital markets, and attract a broader pool of investors. They can also signal robust fiscal management or strong economic fundamentals, reinforcing positive market sentiment. For example, on 30 May 2025 Moody’s upgraded Nigeria’s rating from “Caa1” (i.e., substantial risk) to “B3” (i.e., non-investment grade speculative) invoking significant improvements in the country’s external and fiscal positions[56]. In their statement, Moody’s highlighted the recent changes to Nigeria’s foreign exchange framework, which contributed to an improved balance of payment and strengthened the Central Bank of Nigeria foreign exchange reserves[57]. Moody’s also adjusted Nigeria’s economic outlook from positive to stable citing external accounts and fiscal health[58]. Essentially, economic policies (e.g., exchange rate liberalisation, tighter monetary policy, removal of fuel subsidies, etc.) helped stabilize borrowing costs and goods and services price growth[59]

5. Initiatives to Improve Africa’s Credit Ratings and Market Access

  a. The African Union’s Africa Peer Review Mechanism

The African Union’s (AU) Africa Peer Review Mechanism (APRM), was designed to support African countries, including in matters pertaining to their credit ratings. The APRM routinely reviews rating actions and reports by international CRAs on African nations[60].

On 24 January 2025, the APRM “noted with concern the errors” of Moody’s credit rating action of Kenya[61]. Moody’s changed Kenya’s outlook from “negative” to “positive”, skipped the “stable” outlook and reaffirmed the country’s rating at Caa1 (e.g., speculative grade with substantial risk)[62]. The APRM, in its press release, noted that the change from negative to positive is an admission that the negative outlook (i.e., downgrade) was an incorrect, premature and speculative rating as it was largely driven by the protests in Kenya over the proposed 2024 Finance Bill[63].

While the APRM reviews and comments do not have an immediate impact on sovereign rating actions, the APRM has distinguished itself internationally as a tool to advocate for more transparency and equity in sovereign credit rating methodologies, for the establishment of an African credit rating agency and the development of domestic capital markets in Africa.

b. The United Nations Development Programme Africa Credit Rating Initiative

The United Nations Development Programme (UNDP) Reginal Bureau for Africa, in collaboration with AfriCatalyst (an independent global advisory firm working to promote initiative, evidence-based solutions to Africa’s development challenges) and the Government of Japan launched in 2024 the Africa Credit Rating Initiative[64]. This initiative aims to strengthen African governments’ capacity to navigate the credit rating process in order to boost credit ratings and provide access to more affordable capital. The Africa Credit Rating Initiative is anchored in three main arears of service:

1. The Africa Credit Ratings Resource Platform – which serves as a central hub for resources and tools on credit ratings;
2. A Concilium of expert advisors providing high level technical guidance and support to countries seeking to enhance their credit ratings; and
3. A community of practice designed for knowledge sharing and collaboration among government officials and other stakeholders.

The aim is to bridge information gaps, strengthen institutional capacity, and enable African governments to present strong narratives of their creditworthiness, leading to fairer assessments and greater access to affordable development finance.

 

??????? .c. The establishment of the African Credit Rating Agency

On 14 February 2025, on the margins of the 37th AU Ordinary Summit, Heads of State and Government met for a Presidential Dialogue on the Establishment of an Africa Credit Rating Agency (AfCRA)[65]. The primary objective of the AfCRA is to provide a local pan-African alternative to the risk perception and the credit worthiness assessments of the international CRAs[66], specifically the Big Three. The AfCRA’s objective is to create “a credit rating system that reflects Africa’s unique socio-economic realities and fosters a [fair] representation of its creditworthiness” and will achieve this objective by collecting “region-specific data and socio-economic indicators”[67]. The AfCRA is positioning itself to be an independent specialized agency of the AU.

According to the United Nations Development Programme (UNDP), risk misperception has cost the continent over $24 billion in excess interest and more than $46 billion in forgone lending[68]. In addition, obtaining financing by way of Eurobonds has proven to be expensive to African sovereigns, since countries must repay their obligations in an international reserve currency rather than their national currency[69].

The AfCRA seeks to address the challenges experienced by African sovereigns in the international financial markets, most notably through: (1) supporting the development of African capital markets by providing credit ratings for local currencies, thereby enabling African sovereigns to access affordable capital in their own currencies[70], and (2) offering an alternative rating agency to the Big Three that will provide an opportunity for the remaining unrated 22 African countries and the approximate 90% of corporations and municipalities to be rated (and this notwithstanding the possible ratings for small to medium enterprises, initial bond offerings, ESG scores, and other instruments)[71].  

6. Conclusion

For an African sovereign, obtaining a credit rating - and ultimately securing financing - is a complex undertaking. It demands a thorough understanding of international financial markets, substantial financial and legal resources, as well as considerable time. It is important for every African sovereign embarking on this journey to understand the intricacies of credit ratings as this has a direct effect on their borrowing position.

 

Resources

1. D. Cash and M. Khan, United Nations Centre for Policy Research, Rating the globe: reforming credit rating agencies for an equitable financial architecture, (2024), available at https://collections.unu.edu/eserv/UNU:9832/rating_the_globe.pdf
2. UNDP Strategy, Analysis and Research team, Reducing the Cost of Finance for Africa The Role of Sovereign Credit Ratings, (April 2023),  available at https://www.undp.org/sites/g/files/zskgke326/files/2023-04/Full%20report%20-%20Reducing%20Cost%20Finance%20Africa%20Report%20-%20April%202023.pdf
3. UN DESA, Credit Rating Agencies and Sovereign Debt: Challenges and Solutions, (2023) available at https://financing.desa.un.org/sites/default/files/2023-03/Credit%20Rating%20Agencies_paper_1.pdf
4. Daniel Cash, OECD Development Matters, “To Fix Africa’s debt crisis, reform credit ratings”, available at https://oecd-development-matters.org/2024/12/06/to-fix-africas-debt-crisis-reform-credit-ratings/?utm_term=dcd&utm_content=DevMatters%2C3-DEV%2CAfrica&utm_medium=social&utm_source=linkedin&noamp=mobile
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6. Daily Nation Newspaper, How Africa’s’ Ticket to Prosperity Fueled A Debt Bomb, (August, 2024) available at https://www.pressreader.com/zambia/daily-nation-newspaper/20240814/282316800346901?srsltid=AfmBOopW_1IPYzOenZS_nv-2eY9r8kSjEon37qbUjaaG4sDb39jha2Uj
7. Trading Economics, Credit ratings of African Countries,(last accessed 2 October 2025) at https://tradingeconomics.com/country-list/rating?continent=africa.
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10. UN Office of the Special Adviser on Africa, Policy Paper, “Eurobonds, Debt Sustainability in Africa and Credit Rating Agencies, (February 2022), available at https://www.un.org/osaa/sites/www.un.org.osaa/files/docs/2118580-osaa-eurobonds_policy_paper_web.pdf
11. Moody’s Investors Service, Sector In-Depth Sovereigns & Supranationals – Global, “Credit impact of climate resilient debt clauses depends on scale, details of terms”, (18 October 2023), available at https://www.moodys.com/reports/sector-reports?sector=Supranational_Sovereigns
12. Israel Ojoko, Nairametrics, “Moody’s upgrades Nigeria’s credit rating to B3, citing strong economic improvements”, (31 May 2025), available at https://nairametrics.com/2025/05/31/moodys-upgrades-nigerias-credit-rating-to-b3-citing-strong-economic-improvements/
13. APRM Press Release, Moody’s Investor Services Erred on Its Kenya Rating Actions, (28 January 2025), available at https://aprm.au.int/en/news/press-releases/2025-01-28/moodys-investor-services-erred-its-kenya-rating-actions#:~:text=The%20APRM%20notes%20with%20concern,improving%20debt%20affordability%20over%20time
14. UNDP, The Africa Credit Rating Initiative, available at https://www.undp.org/africa/credit-ratings-resource-platform/about-the-africa-credit-ratings-initiative
15. African Union & APRM Press Release, African leaders convene on establishment of homegrown solution the Africa Credit Rating Agency, (7 February 2025), available at https://au.int/en/pressreleases/20250207/african-leaders-convene-establishment-homegrown-solution-africa-credit-rating
16. Malado Kaba, African Business, “How an African credit rating agency can tame risk perception”, (17 February 2025), available at https://african.business/2025/02/finance-services/how-an-african-credit-rating-agency-can-tame-risk-perception
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   18. Theresa Smith, ESI Africa, “What you need to know about the Africa Credit Rating Agency”, (21 February 2025), available at https://www.esi-africa.com/finance-and-policy/what-to-know-africa-credit-rating-agency/