Credit ratings come to Africa – investors next?

LONDON – A steady succession of sovereign ratings is helping sub-Saharan Africa move away from the fringes of the global financial system and could lift the region’s fortunes by attracting more mainstream investment.

Sovereign rating – letter-based grades assigned by independent agencies that assess the credit worthiness of governments – were traditionally given to countries seeking access to borrowing in international capital markets. But broader economic development, stemming from the greater transparency that a sovereign rating brings, is the primary motivation in Africa’s case this time around.It was international development organisations that started the push for sub-Saharan ratings four years ago.Since then the drive has taken on a momentum of its own.”Governments that are not rated suddenly see themselves as more exceptional,” said David Beers, managing director of Standard & Poor’s sovereign ratings.Twenty sub-Saharan countries, from Senegal to Lesotho, have received ratings, up from just one – South Africa – at the end of the 1990s.About 30 countries in the region are still unrated but rating firms say many of these will get one within 10 years.Sub-Saharan Africa is still the biggest hole on the sovereign-ratings map.S&P for instance, measures the performance of 113 sovereigns, up from just 11 in 1981, and only 12 of these are in sub-Saharan Africa.Unique in Africa’s case has been the role played by outside political actors with developmental goals.The US State Department linked forces with Fitch, while the United Nations Development Programme (UNDP) and S&P formed a partnership.”We had to persuade the governments it was better to be rated, even if unfavourably, than not at all,” said Lamin Manneh of the UNDP regional bureau for Africa.Ratings are seen as a way to promote foreign direct investment (FDI), private sector access to capital markets abroad and deeper capital markets at home.They tie in with efforts by G7 developed nations to encourage African states to borrow on domestic markets to fund infrastructure projects.LURING INVESTORS The belief is that regular scrutiny and reporting by rating agencies will boost confidence in how government manage the economy – and, at the very least, will make plain any failures.”It’s good they go through the process because it does enhance transparency and in time it improves governance,” said Paul Rawkins, senior director of sovereign ratings at Fitch.Private investors will likely be the ultimate arbiters of whether sovereign ratings do attract the sort of money that many believe is essential for these countries.Early signs have been promising, though their willingness to put money in Africa has doubtless been encouraged of late by ample global liquidity chasing higher, if more risky, returns.The market’s gaze has broadened in the relentless search for higher yields, snapping up bonds denominated in relatively obscure local currencies, like the pula in Botswana.”Having a rating on the side acts as a significant guide to lots of investors, many of whom don’t know these countries that well and are still looking to diversify their portfolios,” said Abah Ofon, Africa economist at Standard Chartered.Of course, there is nothing to stop investors from ploughing money into unrated countries, and high risk appetite means unrated Zambia and Tanzania have also attracted strong inflows.But investor interest can pick up impressively after a country receives a rating, as having this stamp of approval is an essential prerequisite for many investment funds.Eyebrows were raised last year when Fitch, then S&P, assigned Nigeria a BB- credit rating, just three notches below investment grade and level with Turkey and Ukraine.Ofon says the agencies’ assessment has since been justified with foreign investors snapping up Nigerian bonds.In a broader sense, the ratings are a milestone for African countries on the road to integration in global capital markets.They had been held back since the 1980s by the mass of money owed to foreign lenders, but that hurdle was partly cleared by a US$40 billion (about N$297 billion) debt write-off led by G8 rich nations in 2005.Urging Africa to borrow again may seem counter-intuitive, but the UNDP’s Manneh thinks things are different this time.”Countries can’t just go out and borrow helter-skelter,” he said, adding governments are obliged under debt forgiveness plans to direct inflows to alleviating poverty.Ultimately, broader economic reforms are what really count, investors say.A sovereign rating is important but it only reflects the state of an economy and the quality of governance.”It’s one more small step, getting a rating is like getting a badge of approval,” said Antoon de Klerk, Africa analyst for Investec Emerging Markets Debt Fund in Johannesburg.”It’s telling the world out there that you’re ready to receive the capital, that you’re maturing.”Nampa-ReutersBut broader economic development, stemming from the greater transparency that a sovereign rating brings, is the primary motivation in Africa’s case this time around.It was international development organisations that started the push for sub-Saharan ratings four years ago.Since then the drive has taken on a momentum of its own.”Governments that are not rated suddenly see themselves as more exceptional,” said David Beers, managing director of Standard & Poor’s sovereign ratings.Twenty sub-Saharan countries, from Senegal to Lesotho, have received ratings, up from just one – South Africa – at the end of the 1990s.About 30 countries in the region are still unrated but rating firms say many of these will get one within 10 years.Sub-Saharan Africa is still the biggest hole on the sovereign-ratings map.S&P for instance, measures the performance of 113 sovereigns, up from just 11 in 1981, and only 12 of these are in sub-Saharan Africa.Unique in Africa’s case has been the role played by outside political actors with developmental goals.The US State Department linked forces with Fitch, while the United Nations Development Programme (UNDP) and S&P formed a partnership.”We had to persuade the governments it was better to be rated, even if unfavourably, than not at all,” said Lamin Manneh of the UNDP regional bureau for Africa.Ratings are seen as a way to promote foreign direct investment (FDI), private sector access to capital markets abroad and deeper capital markets at home.They tie in with efforts by G7 developed nations to encourage African states to borrow on domestic markets to fund infrastructure projects. LURING INVESTORS The belief is that regular scrutiny and reporting by rating agencies will boost confidence in how government manage the economy – and, at the very least, will make plain any failures.”It’s good they go through the process because it does enhance transparency and in time it improves governance,” said Paul Rawkins, senior director of sovereign ratings at Fitch.Private investors will likely be the ultimate arbiters of whether sovereign ratings do attract the sort of money that many believe is essential for these countries.Early signs have been promising, though their willingness to put money in Africa has doubtless been encouraged of late by ample global liquidity chasing higher, if more risky, returns.The market’s gaze has broadened in the relentless search for higher yields, snapping up bonds denominated in relatively obscure local currencies, like the pula in Botswana.”Having a rating on the side acts as a significant guide to lots of investors, many of whom don’t know these countries that well and are still looking to diversify their portfolios,” said Abah Ofon, Africa economist at Standard Chartered.Of course, there is nothing to stop investors from ploughing money into unrated countries, and high risk appetite means unrated Zambia and Tanzania have also attracted strong inflows.But investor interest can pick up impressively after a country receives a rating, as having this stamp of approval is an essential prerequisite for many investment funds.Eyebrows were raised last year when Fitch, then S&P, assigned Nigeria a BB- credit rating, just three notches below investment grade and level with Turkey and Ukraine.Ofon says the agencies’ assessment has since been justified with foreign investors snapping up Nigerian bonds.In a broader sense, the ratings are a milestone for African countries on the road to integration in global capital markets.They had been held back since the 1980s by the mass of money owed to foreign lenders, but that hurdle was partly cleared by a US$40 billion (about N$297 billion) debt write-off led by G8 rich nations in 2005.Urging Africa to borrow again may seem counter-intuitive, but the UNDP’s Manneh thinks things are different this time.”Countries can’t just go out and borrow helter-skelter,” he said, adding governments are obliged under debt forgiveness plans to direct inflows to alleviating poverty.Ultimately, broader economic reforms are what really count, investors say.A sovereign rating is important but it only reflects the state of an economy and the quality of governance.”It’s one more small step, getting a rating is like getting a badge of approval,” said Antoon de Klerk, Africa analyst for Investec Emerging Markets Debt Fund in Johannesburg.”It’s telling the world out there that you’re ready to receive the capital, that you’re maturing.”Nampa-Reuters