August 1, 2024
In 2002, Africa seemed poised to rise. Wealthy creditor nations were wiping billions of dollars of unsustainable debt off the books of sub-Saharan countries, and global demand was surging for the commodities the region exports, supercharging hopes of a sustained economic boom.
The United Nations, backed by the United States, had a plan to fuel the expansion: sovereign credit ratings.
These metrics — essentially an informed guess of a nation’s ability to repay lenders — would for the first time allow a wide swath of the poorest region on Earth to tap yield-hungry investors in the global bond market.
And the cash borrowed wouldn’t come with strict controls on how it would be spent, as is the case with financing from multilateral institutions like the International Monetary Fund. The U.N. heralded the initiative as “an assault on poverty in Sub-Saharan African countries.”
Today, the optimism has faded, washed away by a deluge of debt.
Essential to the plan were the “Big Three” U.S.-based credit rating agencies — S&P Global Ratings, Moody’s Ratings and Fitch Ratings, which together account for more than 90% of global ratings. The rating agencies collected fees for their services and began applying their complex analyses to the region.
Given the troubled economic history and conditions of sub-Saharan Africa, it came as little surprise that the Big Three gave most countries below-investment-grade, or “junk,” ratings.
Those low scores meant the countries had to pay higher interest rates on their bonds to attract investors who might otherwise balk at the risk.
The thinking at the time was that African countries’ ratings would improve, and their cost of borrowing decline, as their growing economies allowed them both to repay their debts and invest in development.
Instead, the push for credit ratings set these nations on a path to debt many could not afford. Over the past two decades, more than a dozen sub-Saharan countries borrowed nearly $200 billion from overseas bond investors, according to World Bank figures.
As their nations’ finances faltered, African leaders lashed out at the rating agencies with allegations that the firms were biased in their assessments.
Reuters did not find evidence of systemic bias in the Big Three’s ratings for the region. Rather, Africa’s debt crisis highlights the potential pitfalls when sophisticated financial markets meet impoverished countries eager for development.
After dozens of interviews with current and former Big Three employees, large investors and officials with government and multinational organizations, along with a review of hundreds of pages of regulatory and legal filings, Reuters found that the Big Three weren’t fully prepared for the challenges of rating a region awash in poverty and unfamiliar with the process, and that many of the nations involved weren’t ready for the torrent of cash their credit ratings unlocked.
The upshot: Billions of dollars meant to pay for badly needed improvements to infrastructure, education and healthcare are now going toward interest payments. Sub-Saharan Africa’s average debt ratio has almost doubled in the past decade — from 30% of gross domestic product at the end of 2013 to nearly 60% in 2022. The region today has the highest rate of extreme poverty in the world.
When debt service crowds out spending on infrastructure and other public goods, “the country doesn’t grow, and you just end up in a vicious cycle of poverty,” said Christopher Egerton-Warburton, founding partner of Lion’s Head Global Partners, a London-based investment bank that has advised African governments.
The financial burden carries deadly potential. In June, anti-government riots exploded across Kenya in protest against proposed tax increases, including levies on bread, cooking oil and other staples, to help fund payments on the roughly $80 billion Kenya owes creditors.
The rioting, which continued after the proposal was withdrawn, left dozens dead and many more injured.
Bad luck plays a part in Africa’s debt debacle. Some nations weren’t ready when prices plunged for commodities that underpin their economies. After the COVID-19 pandemic shuttered the global economy, cautious bond investors pulled back.
The Big Three slashed ratings for many sub-Saharan countries. Then as global inflation pushed upward, major central banks raised interest rates, increasing borrowing costs. Several African nations ended up defaulting on their bonds or struggling to pay debts.
That’s what happened to Ghana, a top cocoa producer. It defaulted on most of its external debt in 2022, after rising debt costs prompted Moody’s to cut its credit rating. At the time, Ghana said its interest payments were consuming up to 100% of government revenue.
After the downgrade, Ghana’s Finance Ministry took aim at Moody’s, issuing a statement in which it alleged “institutionalized bias,” and declared,
“We shall actively continue to support the global outcry against this leviathan.”
The ministry publicly named the Paris-based lead analyst for Ghana and her supervisor, and asserted that she had not visited Ghana since Moody’s assigned her to it earlier that year.
Moody’s declined to comment on the episode. Neither the analyst nor her supervisor responded to requests for comment.
In its reaction to the downgrade, Ghana joined a growing chorus of criticism of the Big Three from African leaders as they watched their already low credit ratings wilt and funding streams dry up.
Then-Senegalese President Macky Sall in 2022 decried “the sometimes very arbitrary ratings.” Kenyan President William Ruto said last year that the process “needs to be overhauled.”
In a statement to Reuters in March, Finance Minister Wale Edun of Nigeria said: “The concern is that the methodologies employed may not be consistently applied across the board, particularly for African countries.”
Reuters asked officials from the four countries for evidence to support allegations of bias. None provided any.
Nigerian Finance Minister Wale Edun told Reuters that the Big Three rating agencies’ methodologies “may not be consistently applied … particularly for African countries.”
Moody’s sent Reuters a brief statement in which it said: “We stand by the performance of our sovereign credit ratings, the application of our global methodology, and the rigorous processes we employ to ensure their accuracy, independence, and integrity.”
In an interview with Reuters, Jan Friederich, Fitch’s Hong Kong-based head of sovereign ratings for Europe, the Middle East and Africa, said African leaders’ assertions of bias are based on the misapprehension that all regions share similar risk profiles and should have similar credit ratings.
“Our response, of course, is that it’s not the ratings that are unusually distributed,” he said. “It’s the African countries that have unusual features.”
Friederich noted, for example, that for 2023, government debt in sub-Saharan Africa was about 340% of revenue — by far the worst of any region in the world.
“For economies that have such features that are so distinct … it should be no surprise that there is a significant difference in creditworthiness,” he said.
‘NO CLEAR, OUTRIGHT BIAS’
Reuters reviewed research on global sovereign ratings and found no evidence of bias in the Big Three’s ratings for sub-Saharan Africa. Ten academics, analysts and economists who built models to replicate the firms’ rating process told Reuters in separate interviews and notes that they found no meaningful inconsistencies between Big Three ratings assigned to sub-Saharan countries and ratings suggested by their own models.
While the rating agencies do not publish their models in their entirety, they have described them in enough detail for researchers to reliably reproduce them — a blend of quantitative analysis of factors like a nation’s debt burden, and qualitative assessments of governance and institutional strength. Neither the 10 researchers, nor 20 additional economists and academics interviewed about the modeling, including critics of the rating agencies, were able to refer Reuters to any studies that found bias by applying a ratings methodology similar to those published by the rating agencies.
I never doubted that there were going to be defaults.
David Beers, S&P’s former global head of sovereign ratings
“There is no clear, outright bias towards African countries in terms of credit ratings,” said Oliver Takawira, a University of Johannesburg economist who co-wrote a paper examining two decades of ratings for South Africa. Takawira said his model matched the rating agency’s conclusions 93% of the time.
Still, he said, he understood the frustration of African countries. They “do not know what methodologies or criteria are used by credit rating agencies,”
Takawira told Reuters. That leaves them feeling vulnerable, and they assume the low ratings result from bias, he said.
In the credit rating process, the Big Three must collect masses of reliable, standardised data, information that is hard to come by in many African nations with large, untracked informal economies. Nearly all agency analysts work in capital cities or financial centers outside of Africa — places like New York, London and Hong Kong.
And ratings can be undercut by the lack of government transparency, endemic corruption, political instability and civil strife that afflict parts of the region.
‘A TICKET TO THE BENEFITS’
About 30 years ago, the Heavily Indebted Poor Countries Initiative, spearheaded by the World Bank and the IMF, began the process of wiping more than $100 billion of debt off the books for nearly 40 countries, most of them in sub-Saharan Africa, through a combination of loans, grants and buybacks.
In return, the debtor nations had to commit to policy changes and poverty reduction.
To fund development moving forward, the Eurobond market, where money can be raised quickly, was widely seen as the natural choice, said Zephirin Diabre, a Burkina Faso economist who worked on the ratings push while at the UNDP.
Eurobonds — debt securities denominated in a currency other than that of the issuer’s home country, usually U.S. dollars — accounted for at least $113.5 billion of bonds issued by sub-Saharan countries since 2004, according to JPMorgan figures.
“The World Bank can’t give them all that money in concessional loans” — that is, loans at lower-than-market interest rates, Diabre said.
The U.S. government championed the idea of credit ratings for sub-Saharan Africa. At a 2002 State Department conference in Washington, D.C., then-Secretary of State Colin Powell told an audience that included many African officials: “A sovereign credit rating can be your country’s ticket to the benefits of the global economy and to the capital flows that exist in the global economy, and we are here today to help you earn that ticket.”
The U.S. government partnered with Fitch, picking up the initial tab for country evaluations. The UNDP did the same with S&P.
For an African nation, ratings “would signal to various types of investors around the world that the government was prepared to be more forthcoming” about its economy and public finances, said Beers, the former S&P executive.
Many investors are prevented by regulations from buying bonds of issuers that don’t have Big Three ratings.
For the Big Three, the program bore little downside. From 2003, S&P initiated ratings for more than 20 sub-Saharan nations — business that Beers said enriched the firm’s bottom line.
Early attention focused on two of the region’s largest economies: Ghana, a source of oil, gold and cocoa, and Nigeria, Africa’s top oil exporter and most populous nation.
Ghana was one of the first to get a rating under the program. In 2003, S&P gave it a B+ with a stable outlook. That’s four rungs below investment grade, but given the nation’s bright prospects at the time, its leaders were enthusiastic.
“To ask if Africa is ready for portfolio investment is to ask a starving man if he is ready for food,” Ghana’s finance minister said at a 2003 event in New York organized by the UNDP with the New York Stock Exchange.
Four years later, Ghana made its market debut, raising $750 million through a sale of Eurobonds. Investors were drawn to the 8.5% coupon, almost twice the rate on the benchmark 10-year U.S. Treasury notes; demand for the Ghanaian bonds was four times greater than the amount offered.
In 2006, S&P gave Nigeria a rating of BB-, one notch above Ghana’s. In 2011, the country issued its first Eurobond, for $500 million. It was more than 2.5 times oversubscribed. Nigeria then raised $1 billion more in two separate bond issues that were also oversubscribed.
“Bondholders really welcomed them with open arms,” said Giulia Pellegrini, senior portfolio manager for emerging market debt at Allianz Global Investors.
The enthusiasm seemed justified. Ghana’s economic growth hit 14% in 2011, the fastest in the region. Nigeria’s growth was at a strong 5.3% and showing signs of improvement.
Despite Nigeria’s ambitious goals to boost power grid capacity with Eurobonds, diesel-run generators are still ubiquitous in the country, including its commercial capital, Lagos.
By this time, Moody’s — the last among the Big Three to expand its portfolio of sovereign ratings in sub-Saharan Africa — had begun to seek a bigger footprint in the region.
In August 2010, Moody’s hired Nigerian economist Weyinmi Omamuli to join its sovereign risk team as a London-based vice president and senior analyst. Omamuli had degrees from the London School of Economics and experience at a Nigerian investment firm and at Britain’s finance and international development ministries. She was initially assigned to cover Nigeria, Kenya and other countries.
Omamuli soon came to believe that Moody’s slow start in sub-Saharan Africa resulted in part from ambivalence toward the continent, according to her witness statement in a race and disability discrimination claim she brought against Moody’s and one of its executives in a London tribunal.
The case was settled in 2015; terms were not disclosed.
ALLURING TO INVESTORS
All told, 22 African countries were assigned Big Three ratings in the decade ending in 2010. With interest rates at historic lows after the global financial crisis, African countries could count on strong investor demand for their comparatively high-yield debt.
Ghana and Nigeria returned to the Eurobond market in 2013. Kenya and Ethiopia debuted in 2014, followed by Angola and Cameroon the next year.
Many countries also leaned more heavily on bond markets as another major source of funding, China, began to pull back. China pushed into sub-Saharan Africa at the start of the new century, and by 2016, it accounted for nearly 20% of the region’s external public debt, according to a Reuters analysis of World Bank data.
It has since reduced such lending, while the region’s public bond debt shot up from about 6% of the total in 2000 to more than 32% in 2019.
Some countries used credit ratings and the cash they unlocked to positive effect without blowing out their budgets. With $400 million raised in a 2013 Eurobond issue, tiny Rwanda finished construction of a convention center that has hosted scores of events since it opened in the capital in 2016; bolstered the fast-growing national airline RwandAir; and completed a hydropower project that as of 2020 accounted for about 13% of the nation’s power capacity.
In Nigeria, the then Central Bank governor, Godwin Emefiele, continually insisted the country’s currency, the naira, was stable. He labeled those who questioned its value as “unpatriotic.”
“Investors could see right through it,” said Rick Harrell, an emerging markets credit-focused portfolio manager at New York-based Aperture Investors, who attended numerous meetings with other investors from 2017 to 2019.
International lenders and the rating agencies were caught off-guard when it was revealed, after a restructuring of the bonds in 2016, that the government had also guaranteed an additional $1.4 billion in previously undisclosed loans for the project.
If Africa wants to really become the continent it’s projected to be, you can’t avoid the capital markets. That’s the way of the world.
REUTERS
