Are low and intermediate income countries (LMICs) experiencing an existential sovereignty risk assessment crisis beyond normal countries and credit risk parameters? They consistently highlight the high costs of funding, credit, investment insurance and punitive surcharges to stop the ability to enter the market and become crowded with much-needed private capital, including many African countries that are disproportionately affected.
This malicious playbook is driven by a combination of metrics that are very stacked against LMIC. They are primarily focused on the OECD's Sovereign Rating Scale Regime and risk perceptions of exaggerated countries created by three large international credit rating agencies, including S&P Global Rating, Moody's Investors Services and Fitch Rating.
The appropriate case is the recent, highly controversial downgrade of Afreximbank, a Cairo-based multilateral Pan-African trade finance bank by Fitch and Moody's.
The basis for the rating was strongly contested by the African Peer Review Mechanism (APRM), UNDP, and the African Afreximbank. African countries and multilaterals consistently argue that the perceptions of rating agencies are highly subjective, unfair and lacking information. This means that they must pay additional insurance premiums and higher financial costs for essentially bankable projects.
The rating agency cites increased credit risk due to Afreximbank's increased non-performing loans (NPLS) ratio, low transparency, poor asset performance, and a weak risk management strategy that reflects banks' shift to unsecured lending to sovereignty under stress.
In a rapid Riposte, Afreximbank argued that “Fitch's definition of NPLS is different from banks' approaches to using future appearance information,” claiming that sovereignty is governed by treaty obligations to protect creditor status. Coming in September this year, the issue of sovereign credit ratings will undoubtedly be on the agenda of Dr. George Ernbi, new president of Afrusing Bank.
In a strong effort to counter the monopoly of Western rating agencies, the continent is working to launch its own African Credit Rating Agency (AFCRA), scheduled for September. Funded by public/private stakeholders, we publish regular sovereign credit ratings.
Africa's interests are very high. A 2023 UNDP survey found that African countries could save up to $74.5 billion when based on a subjective rating with low credit ratings. This will allow the principals of domestic and foreign debt to be repaid and free up liquidity for investments in human capital and infrastructure development.
Information and risk perception bias for Africa and other LMICs is further mitigated by the tone and conclusions of regular Article IV consultations with International Monetary Fund (IMF) member countries.
To add shaming to injuries, the IMF, a gatekeeper of the global economic and financial system, operates a controversial and highly punitive surcharge policy that charges additional fees on loans.
This policy probably encourages “financial prudence and timely repayment of loans.” In reality, it is a vicious cycle of debt chains based on flawed logic, as under fund rules, the country must repay the IMF before other creditors. The pushback to the removal of the IMF's surcharge policy has gained momentum and opposed to a distorted perception of African sovereigns and credit risk.
Unequal indicators
It is also a question of whether LMICS has acquired fair transactions in credit and investment insurance, and whether there is a de facto two-tier system in risk pricing based on the rating regime and differences between the development and developing markets.
For example, the IMF statement in the 2024 Clause IV consultation with the Netherlands in 2024 was breathlessly cut through an analysis of the impact of the Netherlands' economic and financial system on potential political risks following the November 2023 SNAP general election. It is no longer part of the cabinet.
However, when it comes to Africa and other developing countries, IMF staff do not refrain from socio-political risk, governance, and surveillance metrics. The same can be said for rating agencies.
LMIC is optimistic about its own unique economic and financial structural vulnerabilities. They know there is no panacea or quick fix binary solution. What they urgently want is a fair debt restructuring framework and a review of the international financial system. In particular, they oppose the process of sovereign credit ratings in African countries where data is often missing or of poor quality. They emphasize that the processes behind these assessments often feel distant, opaque, stylistic, and detached from the reality of the nation.
“It is true that premium costs are a major problem for African countries,” acknowledged Maëlia Dufour, formerly chief executive of Bern's national and multilateral credit and investment insurance companies and BPIFRANCE ASSURENCE Chief Export Officer. “As you know, we follow the OECD country risk classification of participants and the export credit arrangements officially supported in the category 0 to 7. If a country is rated 5, 6, or 7, the premium is a decision determined by the economist within the OECD.
“We can't ask them why they valued country 6 instead of 5. Not surprising, they are countries that say they don't deserve a 6 rating. You're right. This is a problem for developing countries, but we have to keep it as is.
“In Africa, there is a sovereign debt problem, and as a result, it is true that more exporters are seeking support and guarantees for African contracts.
Can African sovereigns achieve their assessment?
Changing changes in national risk perceptions and engineering behavior by industry peers is not easy, but possible. Collaboration and cooperation are essential. “Despite the rapidly growing sovereign debt and its services, trade imbalances, the impact of Trump's tariffs, lower oil prices and revenue headwinds,” says Ravi Bhatia, Africa director, sovereign and IPF valuation, S&P Global.
Given that the 26 Sovereign S&P rate is not above the investment grade, does he assume that African sovereigns are assigned an “A” rating? “Botswana has been in the 'A' category in the past,” he says. “This was the height of the diamond boom. Today it's been mitigated by competition with lab-made diamonds. There's nothing to stop African sovereigns from entering this category. But our entry standards are very high. Achievements. That's how the country is falling at the moment in the rating spectrum.”
There is a UNDP Credit Rating Initiative launched in 2024 in collaboration with the AFCRA project. It is a key advocacy group supporting the African government, improving engagement and promoting more transparent, evidence-based assessments. The initiative is being promoted by serial countries, an advisory group of experts who work directly with the government to resolve rating methodologies and build internal capacity.
The challenge written by Bilal Bassiouni, director of risk forecasting at Pangea-Risk, in a recent article on the Ministry of Trade and Treasury payments, “The extent to which AFCRA closes the gap between the risk perception and debt foundations in Africa depends more on institutional identity than whether the rating is interpreted as analytically rigorous and whether the rating is interpreted if it is told to promote it continuously in a way. The feasibility of impacting the investor model and the sovereign funding strategy.”
