2024 APRM Mid-Year Outlook shows increasing optimism by the international community in Africa’s economic prospects

The 2024 Mid-Year Outlook of the Africa Peer Review Mechanism (APRM) shows that the first half of 2024 was marked by more positive changes in outlooks and rating upgrades of several African countries by the three most important rating agencies in the world: Standard & Poor's (S&P) Moody's and Fitch. The work of these agencies basically consists in expressing an opinion on the ability of States to repay commercial debts contracted with international lenders based on a comprehensive economic analysis of their financial markets. The reason why these ratings are important is that they are used by investors in their investment appraisal process and by borrowers in setting the interest rates to be applied on the money they lend. A poor credit rating means that a loan to a certain State has a higher risk to remain unpaid, which prompts an increase in the interest charged to that nation as a measure aimed at compensating for the substantial risk of lending.

The creditworthiness assessments of S&P, Moody's and Fitch have been accused by many African observers to be inaccurate and unobjective, and are deemed to be the main reason why interests that African countries pay on the capital they borrow from the private sector are so high. According to the APRM report, Africa currently faces high borrowing costs averaging 7.5%. This is a little different from the UNCTAD calculations, which indicated in its “A world of debt report 2024” the average debt rate of Africa at 9.8%, noting that developing countries have borrowing costs which are 2 to 4 times higher than those of the United States and 6 to 12 times higher than Germany. The 2023 Mid-Year Outlook of the APRM, in 2023, questioned the ability of the 3 largest credit rating agencies to correctly rate African countries, citing significant errors in carrying out their assessments and noting that despite these errors, they continue influencing in a negative way the global financing decisions of investors and flow of capital to Africa. All these agencies, the report noted, are headquartered in London or New York and have very limited presence in Africa, so the objectivity of their assessment is questionable. The report therefore proposed the creation of an African Credit Rating Agency (AfCRA), whose establishment is currently ongoing. AfCRA should act as an independent entity to provide alternative and complementing rating opinions for African States that should lead to a reduction of interest rates on bonds and other investment securities. However, the main question is how much authoritative and reliable this agency will be considered by the international community, at the point of preferring its judgments to those of Moody's, Fitch and S&P, which will continue to exist and to make assessments on the health of African economies. And if the interest rates of bonds and other financial instruments issued by African governments to fund their debt will decrease, will they still be attractive for investors (especially foreigners) or they will be diverted to other investment opportunities?

However, the good news that emerges from the latest APRM Mid-Year Outlook is that a total of 8 countries have had their rating outlook upgraded from ‘negative’ to ‘stable’ or from ‘stable’ to ‘positive’, even if the judgements of these agencies are not unanimous, as some of them have different views regarding specific African countries. But, in general, this positive outlooks are a sign that the international community is nurturing optimism in Africa’s economic prospects.

Notably, Cote d’Ivoire, one of the five African countries amongst the world’s 10 fastest-growing economies in 2023/24, was upgraded due to a significant improvement in the fiscal and debt metrics. Moreover, the country has been rated positively because of its economy resilience and the increasing private sector investments. Same for Tanzania. Cape Verde, on the other hand, has seen a robust economic growth and strong fiscal performance which has led to a decline of the government debt. Instead, Cameroon was upgraded by S&P due to the improved government liquidity position and payment discipline, even though Moody’s and Fitch Ratings judgements are different, as they deem that the country has a limited debt management capacity. Ethiopia, Ghana and Zambia remain in ‘selective default’, but this is likely to change positively following Ghana and Zambia debt restructuring deals with its international bondholders.

One of the major drivers of the rising yield curves of African debt, notes the report, is the concern that governments channel borrowed funds into social and recurring expenditures, which are unproductive sectors that just absorb resources without yielding any returns. It therefore concludes with a series of recommendations which include an important one: i.e., the need to invest borrowed funds in productive sectors. Which ones? Infrastructure, social development, health and education should be the primary choice.