Fitch shakes up Africa: Afreximbank downgrade fuels fears for future of intra-African trade

A tremor just ran through the African financial world. Today, June 4, the global ratings giant Fitch delivered a blow to Afreximbank, slashing its credit rating to BBB-, and placing one of the main and most influential financial institutions in Africa, particularly in the realm of trade finance and economic integration, precariously close to a "junk" status. The reasons? Fitch points to "high credit risks and weak risk-management policies" as the culprits behind the downgrade.

The timing couldn't be worse for the pan-African lender, which is already in a fierce battle to shield its loans from restructuring in Ghana, Zambia, and Malawi. Adding to the unease, Fitch's assessment of Afreximbank's non-performing loans (NPLs) paints a far grimmer picture than the bank's official reports. While Afreximbank claimed a 2.44% NPL ratio for the first half of the year, Fitch pegs that figure at over 6%. This significant discrepancy, stemming from differing definitions and Afreximbank's use of IFRS 9 flexibilities (International Financial Reporting Standard 9, an accounting standard used by banks and other financial institutions when reporting their financial statements), raises serious questions about the transparency and the true health of its loan book.

The ripple effects of this downgrade are profound. A lower rating means higher borrowing costs for Afreximbank, which could directly impact its ability to lend and the rates at which it does so. The negative outlook further compounds the anxiety, as it suggests a looming risk that some of its sovereign debt could be swept into broader restructuring efforts. If that happens, Fitch warns, it would "put pressure on our assessment of the bank’s policy importance and heighten the risk associated with its strategy."

Afreximbank has remained silent on the downgrade so far, leaving many to wonder how it will navigate this challenging new terrain. The stakes are undeniably high for a bank so central to Africa's economic development.

But there is also another implication: this downgrade is likely to have a negative impact on the implementation of the African Continental Free Trade Area (AfCFTA). In fact, Afreximbank is a key enabler of the AfCFTA. It plays an absolutely central and indispensable role in both the Pan-African Payment and Settlement System (PAPSS) and the AfCFTA Adjustment Fund, which are two of the most critical instruments for the successful implementation of the AfCFTA and that now risk to lose part of their operational efficacy and financial sustainability due to the increased operational and borrowing costs which AfreximBank is expected to incur due to this downgrade. Moreover, Afreximbank is playing a pivotal and proactive role in Africa's ambitious continental transit bond project, primarily through its African Collaborative Transit Guarantee Scheme (AACTGS). This initiative is a flagship project for the AfCFTA designed to address the high costs associated with goods moving in transit across many borders in Africa. Right now, this movement is incredibly expensive and slow due to multiple national transit bond requirements at each border. The AACTGS aims to fix this by offering a single, continent-wide guarantee. The scheme's effectiveness hinges on Afreximbank acting as the primary guarantor, either directly or by providing crucial counter-guarantees and reinsurance to local sureties. However, with Afreximbank's recent credit rating downgrade, its borrowing costs will rise. This increase could translate into higher costs for the guarantees provided through the AACTGS. If Afreximbank's operational costs grow, the overall cost-saving benefit of the AACTGS might be reduced. More generally, any impediment to the financial capacity or perceived stability of Afreximbank will inevitably create headwinds for the ambitious continent-wide free trade agreement, potentially slowing down its progress and the realization of its economic benefits.