The global influence of credit rating agencies (CRAs), particularly the “Big Three” – Moody’s, S&P, and Fitch – is facing a potential turning point in 2024. Historically, these agencies, headquartered in the United States, have wielded immense power over global finance, issuing the majority of sovereign credit ratings and effectively controlling the flow of capital to developing economies. However, their dominance is being challenged by a wave of sovereign downgrades, primarily impacting the Global South, and the emergence of alternative financial players, notably China. The disproportionate downgrades, coupled with the growing role of China as a major trade and investment partner for Africa, signal a shifting landscape in global credit markets. This shift presents an opportunity for emerging economies to reshape the system and challenge the established dominance of Western CRAs.
The surge in downgrades, concentrated in Africa, the Middle East, North Africa, and Latin America and the Caribbean, reflects a widening gap in access to debt capital between developed and developing countries. These downgrades, effectively demotions on the CRAs’ proprietary scales of creditworthiness, have far-reaching consequences. They make it more difficult and expensive for sovereign nations to borrow, pushing up interest rates and exacerbating existing economic challenges. Furthermore, sovereign downgrades can trigger a cascading effect, leading to lower credit ratings for other entities within the affected economies, from national banks and insurance companies to private enterprises and infrastructure projects. This systemic impact underscores the extensive power CRAs wield over the financial destinies of developing nations.
The “sovereign credit rating card,” as it’s described, represents the unique leverage CRAs gain from their assessments of sovereign debt. While CRAs are ostensibly tasked with evaluating the creditworthiness of fixed income securities for investors, their focus on sovereign ratings goes beyond simply informing investors. Sovereign ratings serve as gatekeepers for private credit flows, granting CRAs enormous influence over entire economies. This influence is arguably disproportionate to the revenue generated directly from sovereign ratings, as these assessments often receive discounted fees or are even conducted free of charge. The true value for CRAs lies in the market share they gain by leveraging their sovereign assessments to access a wider range of rating opportunities within the rated economy.
Historically, the dominance of the Big Three has been reinforced by a combination of longevity, perceived brand value, and the post-World War II financial dominance of the United States. In countries with less developed governance systems, credit ratings offered a seemingly objective measure of creditworthiness, often becoming a substitute for robust internal credit assessment mechanisms. However, major financial crises, such as the 1997 Asian financial crisis and the 2008 Global Financial Crisis, have exposed the flaws and limitations of the existing system. In both instances, inaccurate credit ratings, particularly sovereign ratings, played a significant role in exacerbating the crises. While these events prompted regulatory scrutiny, particularly in the U.S. and EU, the focus remained on preventing conflicts of interest rather than addressing the fundamental issue of rating accuracy and bias.
The current wave of downgrades hitting the Global South is not unprecedented and highlights the vulnerabilities of developing economies to external shocks exacerbated by CRA actions. The trifecta of lower credit ratings leading to higher borrowing costs, a strengthening U.S. dollar making it more expensive to service debt denominated in foreign currencies, and the resulting political and economic instability can create a vicious cycle that further discourages private investment. This pattern underscores the need for alternative credit assessment frameworks and mechanisms that are more responsive to the unique challenges faced by developing economies.
In response to the historical over-reliance on and potential bias embedded in the existing credit rating system, Africa is taking proactive steps to establish its own credit rating agency, the African Credit Rating Agency (AfCRA). This initiative, originating from a 2002 African Union blueprint, has gained significant momentum in 2024 amidst the surge in sovereign downgrades. The United Nations Development Program, in partnership with AfriCatalyst, has launched a capacity-building program to support African governments in their negotiations with CRAs. Furthermore, the African Peer Review Mechanism, collaborating with UNDP-Africa, has fostered high-level dialogue and secured unanimous support from all 55 African states for the establishment of AfCRA. The agency has also garnered support from key African financial institutions, including the African Development Bank and the African Export-Import Bank, positioning AfCRA to have a robust deal pipeline upon its anticipated launch in June 2025. Despite some skepticism about the financial viability of AfCRA, proponents point to the success of other rating agency startups that have successfully challenged the established players. The potential for AfCRA lies in its ability to offer a more nuanced and context-specific assessment of African creditworthiness, free from the biases and limitations of the existing system dominated by Western CRAs. The level of interest and support surrounding AfCRA suggests a growing recognition of the need for a more equitable and representative credit rating system that serves the interests of developing economies.
