Private credit rating agencies shape Africa’s access to debt

Sovereign credit ratings – the assessments that determine how financial markets price a country’s risk – play a central role in this dynamic. These judgements about a government’s ability and willingness to repay debt are made by just three main agencies: S&P Global, Moody’s, and Fitch. The grades they assign, ranging from investment grade to speculative or default, directly influence the interest rates governments pay when borrowing.

For African economies, the stakes are extremely high. Borrowing costs rise sharply once countries fall below investment grade. When debt service consumes large portions of budgets, less remains for schools, hospitals, or climate adaptation. Many institutional investors are restricted to investment-grade bonds, effectively excluding lower-rated countries from large pools of capital. In practice, credit ratings shape not only the cost of borrowing but also whether borrowing is possible at all.

I have researched how sovereign credit ratings operate within the international financial system and followed debates on their role in development finance. Much criticism has focused on the agencies’ distance from the countries they assess, the suitability of analytical approaches, and the challenge of applying standardised models across different economic contexts.

Less attention, however, has been paid to the position ratings now occupy within the global financial architecture. Credit rating agencies are private companies that assess the likelihood of governments and firms repaying debts. They sell these assessments to investors, banks, and financial institutions rather than working for governments or international organisations. Yet their ratings have become embedded in regulation, investment mandates, and policy processes, shaping public outcomes.

This gives ratings a governance-like influence over access to finance, borrowing costs, and fiscal space. Ratings help determine how expensive it is for governments to borrow, which in turn affects public spending on health, education, and infrastructure. Yet credit rating agencies were not created to play this role. They emerged as private firms in the early 1900s to provide information to investors. The frameworks for coordinating and overseeing their wider public impact developed gradually and unevenly over time.

The question is not whether ratings should be replaced but how this influence is understood and managed.

Beyond the bias vs capacity debate

Discussions about Africa’s sovereign ratings often focus on two explanations. One is that African economies are systemically underrated, with rapid downgrades and harsher assessments than those applied to comparable countries elsewhere. Contributing factors include the location of analytical teams in advanced economies, limited exposure to domestic policy processes, and incentives shaped by engagement with regulators and markets in major financial centres.

The other explanation emphasises macroeconomic fundamentals: growth prospects, export earnings, institutional strength, and fiscal buffers. When these are weaker or volatile, borrowing costs tend to be more sensitive to global shocks.

Both perspectives have merit. Yet neither fully explains a persistent pattern: governments often undertake significant reforms, sometimes at high political and social cost, but rating changes lag behind. During this period, borrowing costs remain high, and market access is constrained. This gap between reform and recognition highlights a deeper structural issue in how credit ratings function within the global financial system.

Design by default

Credit ratings began as a commercial information service for investors. Between the 1970s and 2000s, they became embedded in financial regulation. US regulators first incorporated ratings into capital rules in 1975 as benchmarks for determining risk charges, followed by the European Union in the late 1980s and 1990s, with key international bodies adopting similar approaches.

This process was incremental rather than the result of deliberate public design. Ratings were adopted because they were available, standardised, and widely recognised. Private sector reliance on ratings often followed their formal incorporation into regulation, though markets had already relied informally on ratings long before formal adoption. By the late 1990s, ratings had become essential to distinguishing creditworthiness. This may have encouraged over-reliance on ratings at the expense of independent risk assessment.

Today, sovereign credit ratings influence which countries can access development finance, at what cost, and on what terms. They shape governments’ fiscal options and policy space for pursuing development goals. Yet the agencies remain private firms operating under commercial incentives. The power they wield is real, but mechanisms for coordinating that power over public development objectives emerged later and separately, creating a governance function without dedicated oversight.

Designing the missing layer

African countries have initiated reform efforts, for example by working with rating agencies to improve data quality and strengthen institutions. Yet these efforts do not always lead to timely changes in assessments.

Part of the difficulty lies in shared information constraints. The link between fiscal policy actions and market perception is complex. Governments need ways to credibly signal reform, agencies need mechanisms to verify change, and investors need confidence that assessments reflect current conditions rather than outdated assumptions.

A critical missing element has been coordination infrastructure: dialogue platforms and credibility mechanisms that allow information to flow reliably between governments, agencies, investors, and multilateral institutions. External validation can help reforms gain market recognition. Structured interaction between governments, rating agencies, development partners, and regional credit rating agencies around data, policy commitments, and reform trajectories is needed.

One option is the UN’s Financing for Development process, a multistakeholder forum negotiating how the global financial system should support sustainable development. Addressing how credit ratings function is a natural extension of this process.

Building this coordination layer does not require replacing ratings or moving them into the public sector. It means creating transparency, dialogue, and accountability structures to help the system function effectively.

Recognising this reality helps explain how development finance actually works. As debt pressures rise and climate adaptation costs grow, putting this governance layer in place is critical to safeguarding Africa’s development outcomes. – The Conversation

Daniel Cash is a Senior Fellow at the United Nations University; Aston University