The Africa Credit Rating Agency, known as AfCRA, launches on Wednesday, 7 October, in Port Louis, Mauritius. It is an African Union-mandated agency that will rate the creditworthiness of African governments, provinces and cities, companies and institutions, and it says it will sit alongside Moody's, S&P Global and Fitch rather than replace them.

The launch follows the 2nd Africa Annual Conference on Credit Ratings, also in Port Louis, on 5 and 6 October.

The idea has been nearly a decade in the making. In 2017, the African Union asked the African Peer Review Mechanism to help member states deal with credit rating agencies, and by 2019 African institutions were studying whether to build one of their own.

The agency is private-sector driven, self-funded and meant to be independent of governments, and it must be registered and licensed by Mauritius's Financial Services Commission. The African Union says it does not intend to create a lenient rating agency.

Only 32 of Africa's 55 countries currently carry ratings from the big three, which leaves 23 with no rating at all and little access to international capital markets.

There is a South African link: the agency's technical set-up was supported by Plus94, a South African research and intelligence firm. Why ratings matter comes down to the cost of money. A rating is an opinion on how likely a borrower is to repay on time, and the line that counts most is the one between investment grade and speculative grade.

IMF economists found that crossing into investment grade cut borrowing spreads by 36% beyond what a country's economic fundamentals alone would predict. Many pension funds and other institutional investors cannot hold speculative-grade debt at all, so the rating decides who is allowed to lend, not just the price.

TechFinancials carried an analysis by Daniel Cash of United Nations University, originally for The Conversation, noting that developing countries paid around 200 basis points more than developed ones for international capital between 2012 and May 2023, and that a sovereign downgrade tends to raise borrowing costs for banks and companies in that country too.

The African Union's launch page sets out the agency's mandate and that it may also rate non-African entities. Ecofin Agency makes the key point plainly: credibility will depend on whether the agency can withstand political pressure and issue unfavourable ratings when they are warranted.

For South Africa, the biggest gain is probably not our own sovereign rating, which the big three already cover. It is visibility into the rest of the continent. A South African company selling into, lending to or building in one of the 23 unrated African countries currently has little independent data on the risk it is taking, and a credible African agency could change that. Mid-sized companies are a second possible winner.

A rating from the big three is expensive and usually aimed at large issuers, so a cheaper rating that institutional investors accept could open bond markets to firms that cannot reach them today. That fits the access problem behind the JSE and TIA pilot preparing tech SMEs for investors.

The catch is acceptance. A rating only lowers borrowing costs if lenders and regulators trust it, and in South Africa rating agencies have to be registered with the FSCA before regulated investors can rely on their ratings.

So the launch is the easy part: the first ratings, and whether any of them disappoint the governments that backed the agency, will show whether it is worth anything.

You might also like our piece on Botswana's 42% unbanked and the shift away from banks, Mamor Capital's R300-million first close, and South Africa's trade talks with Brazil.

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