The Africa Centres for Disease Control and Prevention, alongside the World Health Organisation, have sounded the alarm on the current mpox outbreak in Africa. They’ve classified it as a health emergency. The epidemic, originating in the Democratic Republic of Congo, has now seeped into neighboring nations.
According to Fitch, seven countries have verified mpox cases: Cameroon, Côte d’Ivoire, Kenya, Nigeria, Rwanda, South Africa, and Uganda.
In a cautionary note, Fitch warned investors about potential under-reporting, hinting that the outbreak could further strain government budgets.
But does this sound the klaxon or is it merely hype?
Based on my decade-long scrutiny of rating agencies, there’s a transparent bias in their risk assessments for African sovereigns.
Fitch’s statement is yet another instance of rating agencies viewing African events through a skewed lens compared to their Western counterparts.
Many studies corroborate that rating agencies exaggerate certain danger elements on the continent.
A comparative analysis of 30 countries worldwide accentuates inconsistencies in using economic indicators in ratings.
This prompted the African Union to push for the creation of an Africa Credit Rating Agency.
However, some rating analysts argue that there’s no inherent bias against African nations in existing agencies.
Rating agencies claim their methods are impartial, and a Reuters article recently argued that no studies demonstrate statistical bias against Africa.
But this assertion raises a question: how are we gauging bias? Bias can be explicit in quantitative measurements or subtle through qualitative judgments.
In my opinion, credit ratings are prejudiced against Africa, mainly due to subjective evaluations and the geographical detachment of rating analysts.
A Limited Presence
The bulk of rating analysts are stationed in Europe, Asia, and the US. S&P and Moody’s each operate just one office in South Africa, with five to ten analysts covering around 25 sovereign, corporate, and sub-sovereign entities. Fitch Ratings shuttered its only Africa office in 2015.
This scenario raises concerns about analysts’ workloads and the precision of their ratings.
Analysts located abroad usually visit the countries they evaluate for a scant two weeks annually.
Such brief trips aren’t enough for analysts to thoroughly grasp and assess risk factors. The dearth of in-country consultation and short visits often lead analysts to rely on pessimistic assumptions, desktop reviews, virtual meetings, and publicly accessible data.
Important information often slips through, best acquired by being embedded locally. Subjective risk factors like policy efficacy, institutional quality, and political dynamics suffer from this.
Analysts’ conservatism, misunderstanding of context, and frequent rating errors characterize African evaluations.
Research reveals that analysts familiar with a country or geographically closer to it assign favorable ratings compared to those country analysts who are distant.
Room for Bias
To dissect potential bias, it’s pivotal to examine the credit rating methodology.
S&P Global’s sovereign rating methodology, for instance, evaluates five critical factors: economic and monetary (quantitative) and institutional, external, and fiscal (qualitative).
Rating agencies utilize a scoring range of 1 to 6 for qualitative assessments. Analysts hold significant discretion in assigning these scores, opening doors for bias.
Credit rating researchers Patrycja Klusak, Yurtsev Uymaz, and Rasha Alsakka discovered a link between a European finance minister and a top executive at a leading rating agency, which can skew rating decisions positively.
A finance minister’s connection to a rating agency’s senior figure can improve a sovereign rating by 0.5 to 1.3 notches.
African Rating Blunders
Consider these errors in rating African nations:
Tunisia: Fitch faltered in a December 2022 review of Tunisia. The agency rated Tunisia outside its scheduled timeline, missing crucial data.
Fitch later rectified its mistake, but merely to comply with the European Securities Markets Authority’s regulations for not deviating from the rating publication calendar.
If Fitch had a local presence, this error might have never occurred.
Cameroon: While affirming Cameroon’s Caa1 rating, Moody’s viewed a 5% salary hike for civil servants as a negative move.
The country also shelved an extra income tax, seen by Moody’s as another negative twist, despite Cameroon maintaining moderate fiscal metrics.
Cameroon could afford the raise, with fiscal budgets modest compared to peers with similar populations.
Rating agencies wrongfully rated Cameroon from November 2022 to August 2023 based on unverified debt service payment delays.
The agencies’ actions and reports a year later indicate a lack of timely, factual official data.
Sufficient engagement with relevant officials could’ve provided this information to analysts.
Nigeria: Moody’s reversed its downgrade of Nigeria within seven months, citing economic policy shifts like subsidy removals and unified exchange rates.
But these factors hadn’t changed between the downgrade and reversal. The government argued Moody’s didn’t grasp Nigeria’s local climate.
Such a rapid reversal suggests Moody’s initial analysis may have been flawed.
Way Forward
Increasing the number of analysts on the continent and broadening consultations will mitigate biases in rating African countries.
Africa-based analysts should widen their scope of consultations and spend more time in the nations they rate.
Local analysts’ risk perception differs from those stationed abroad, reducing bias and improving consultation quality.
