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Posted on Thursday, 02 October 2014 13:55

Should Africa establish its own credit ratings agency?

By The Africa Report

Moody's downgrading of south african banks in august and Ghana's government in June raises questions about whether external rating agencies have sufficient local knowledge to chart african risk.

 

Yes It's incredibly important for the development of Africa's capital markets and the increase in investment across all asset classes. An African ratings agency would mean you have an entity that is taking an in-depth look at the transaction and balance-sheet activities of entities across the region. One of the issues across Africa is that it is hard to get this kind of information. A lot of companies are not comprehensively audited so the more ratings penetration across the region, the more comfortable investors are going to be about getting into the market and that will drive investment. You are looking at a continent that has a very low level of penetration into the capital markets, and a ratings agency is crucial to understanding credit quality. The problem is that it is important to be benchmarked on an international scale. You therefore want the combination of deep local knowledge and international benchmarking. The credibility of any ratings agency lies in the strength of the analysis and the ratings. It is essential to have solid analysis that backs up the reasoning for the rating outcome. The reason it has not been done before is that the markets were not mature enough. But that is changing. The demand for ratings is growing and the supply will follow that. ● Alexandra Mousavizadeh - COO of Arc Ratings

 

 

No Credit rating agencies exist to reduce the information asymmetry between investors and borrowers, so instilling in investors the confidence that the instruments in which they invest are suitably structured and priced relative to the risk they assume. In a globalised financial world, investors seek guidance from ratings agencies that have depth of knowledge and insight and demonstrable track records in terms of their analysis and guidance; in short, ratings agencies that they trust. The contrived establishment of local agencies would not provide prospective investors with the confidence that they seek and so would rapidly prove superfluous to requirements. If the sentiment is that the global credit rating agencies do not provide good input on African debt issuers or issuances then the challenge is less about establishing rival entities and more about identifying areas in which the existing industry participants need to be educated and informed, and ways to achieve this. Perhaps there is the opportunity to work with the credit rating agencies to establish the veracity of, and therefore the validity of taking into account, risk mitigants that are unique to African societies. Alternatively, if the concern is that African entities are not suitably rated, then efforts need to be expended in improving governance and disclosure levels so as to secure the desired levels of scores. ● Jonty Levin - Partner, Alkebulan



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