The Africa Credit Rating Agency is in talks with 15 sovereign borrowers and aims to issue its first ratings by the end of March, interim chief executive Sifiso Falala told Reuters.
The Mauritius-based agency plans to charge governments that commission an assessment. Those governments can be clients, but the agency’s ownership rules bar them from holding shares. The talks are an early step for borrowers seeking another assessment of their ability to repay debt.
What a sovereign rating measures
A government raising money through a bond promises to make interest payments and to repay the principal. A credit rating expresses an assessment of its ability and willingness to keep those promises. Investors can consult that opinion alongside a bond’s maturity, the currency in which it is issued and the price at which it is offered. A rating agency cannot set the interest rate at the auction.
Currency makes a practical difference. A government may collect a growing amount of tax in local currency while owing interest in dollars. If the local currency weakens, the same dollar payment takes a larger share of that revenue. An analyst examining the debt would want to know when the payment falls due, what foreign exchange the country earns and whether it already has reserves or financing available. A single debt-to-GDP figure cannot answer all three questions.
The test for a new agency
A solicited rating gives analysts an opportunity to question officials directly and examine the figures behind a budget. It also puts the borrower on the paying side of the transaction. The distinction between paying for an assessment and influencing its conclusion is consequential. Investors will be able to judge the new agency by how clearly it explains its assumptions, applies them across borrowers and accounts for a change in its view.
Even two agencies reaching the same headline grade could give investors different information. One might identify a large bond repayment due in the next year as the greatest concern. Another might focus on longer-term revenue weakness. Publishing the underlying reasoning lets readers distinguish a temporary cash shortage from a persistent problem meeting commitments.
For governments in discussion with the agency, March is a prospective date for the first assessments. A conversation is still several steps removed from a published opinion that a finance ministry can cite in a prospectus. The first releases will offer something the launch itself cannot: country-by-country examples against which borrowers, investors and rival analysts can test the agency’s judgement.
