Credit rating agencies like S&P Global and Fitch have an outsized influence on the economic fortunes of developing countries. Their assessments shape investor perceptions, influence borrowing costs, and ultimately shape a country’s development path. With many African countries now issuing bonds in global markets amid falling levels of official development assistance (ODA), their role is coming under increasing scrutiny.
The major credit rating agencies exist to opine on the likelihood that a debtor (say, a country) will repay their creditors on time and in full. They are rated on a sliding scale. Whenever a rating agency believes that a debtor will not meet their obligations, they are obliged to put that debtor into a ‘default’ rating. This means that the debtor can no longer access private financing.
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The negative role of rating agencies has been felt in other ways too. For example, threats of downgrades have also led to developing countries steering away from seeking debt relief under a recently introduced G20-initiated debt treatment programme. The reason is that getting help would mean that sovereign debtors have to restructure their debts. But credit rating agencies have warned that doing this will likely lead countries being given a ‘default’ rating.
As a result, no rated country has applied for debt relief through the G20. This has been called a ‘credit rating impasse’.
Change needs to happen on two fronts: the building of credit rating capability in the Global South, combined with shoring up capacity in countries in an effort to rebalance existing relationships with rating agencies.
As a researcher who has looked closely at the working of rating agencies, I would argue that South Africa’s 2024–25 G20 Presidency presents a rare opportunity to push for more equitable reforms. It also provides a platform to spotlight African-led initiatives that are already making progress.
The aim is not to ensure every country receives a top-tier credit rating. Rather, it is to ensure that all countries have the capacity, knowledge, and tools to engage in the rating process on fair terms.
Alternatives
Among the boldest reform efforts so far is the establishment of the African Credit Rating Agency spearheaded by the African Union. The agency aims to deliver fairer, more contextually grounded credit assessments of African sovereigns.
Structured as a specialised agency owned by AU member states and funded through a mix of regional support and service revenue, the agency is a tangible step toward rating independence. Naturally, there are challenges. These include legitimacy, credibility with global investors, generating the necessary capital to appropriately invest in research and credit analysis, and blowback if and when it will have to downgrade.
Its creation is rooted in dissatisfaction with the big three agencies. But it’s also inspired by parallel developments in other regions, such as China’s own domestic rating ecosystem.
Though still in development, the proposed African agency represents the most advanced reform effort in the credit rating space from a Global South perspective.
But building this institutional capacity is only one piece of a larger puzzle. For many countries, support is urgently needed to engage more effectively with the existing system.
Expertise mismatch
The lag in expertise and experience on the part of countries in the global south is understandable: sovereign debt trading has been around since the 19th Century. The first Eurobond was issued in 1963. In contrast, many African nations only began issuing Eurobonds in the late 1990s, with Tunisia being the first in 1997.
At present, that expertise is often provided by ‘credit rating advisory’ teams embedded within the Investment Banks arranging a country’s bond sale – typically offered at no cost. There is a valid perception that this advice is not independent.
One way to close the gap is through independent credit rating-related capacity building. Done well, it can empower developing countries to engage with credit rating agencies on a more equal footing, improve the quality of credit interactions, and make informed decisions in a market that often prioritises investor interests over national development goals.
A few initiatives are well underway.
The African Union’s Africa Peer Review Mechanism , in partnership with the United Nations Economic Commission for Africa, has been offering tailored, hands-on support. This includes technical workshops, advocacy against problematic ratings, and the publication of the ‘Africa Sovereign Credit Rating Review’, a regular report that helps member states track trends and identify areas for improvement.
Building on this, the UNDP Africa and AfriCatalyst recently launched the ‘Credit Ratings Initiative’. This includes an innovative web platform, a panel of former rating analysts known as the ‘Concilium’, and a community of practice to share knowledge.
Early pilots with East African countries have already made an impact, showing how independent, neutral advice can boost sovereigns’ technical understanding and strategic engagement with rating agencies.
All parties are actively collaborating to share best practice at key global events. This momentum is a promising sign of broader change.
These efforts underscore an important lesson: while long-term reform is crucial, short-term, practical tools can have an immediate and meaningful effect.
Quest for a fairer financing systems
South Africa currently holds the G20 Presidency. The government has adopted the idea of a ‘Cost of Capital Commission’ to examine how financing conditions affect developing nations. One of its aims is to review credit rating methodologies and promote transparency and data efficiency.
Read more: The G20: how it works, why it matters and what would be lost if it failed
This is a promising start. But there is room to go further. South Africa could use its leadership role to champion the establishment of a global credit rating capacity building initiative. Such a move would align with its development priorities, position Africa as a leader in financial reform, and create a blueprint for global action.
Crucially, this would not be just another technical fix. It would be a shift in the power dynamics of global finance – from crisis response to structural empowerment. As the U.S. prepares to take over the G20 Presidency next, South Africa’s advocacy could lay the groundwork for a broader coalition committed to fairer financing systems.
Daniel Cash does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
This article was originally published on The Conversation. Read the original article.
