African ratings agency a feasible option?

As the G20 Summit approached, the conversation around a new African credit ratings agency was gaining momentum. The proposal has broad political appeal: many argue that global agencies such as Moody’s, S&P and Fitch systematically under-rate African economies, forcing them to borrow at higher costs.

But a key question remains: will a home-grown agency meaningfully change outcomes, or will it simply measure the same realities in different units?

This debate isn’t just about sovereign debt. Credit ratings affect the cost of borrowing for governments and corporates alike – and by extension, the intercompany lending rates multinationals apply across Africa. If perceptions of risk shift, it could influence how transfer pricing analyses are benchmarked.

In other words, when a nation is seen as high-risk, lenders charge higher interest rates. Those same perceptions filter down to private companies operating there, even affecting how multinationals operating in a country price loans between their own group companies.

If an African ratings agency were to help improve the continent’s perceived creditworthiness, borrowing could become cheaper across the board, from governments and banks to businesses and their subsidiaries. That would make it easier to invest, grow and create jobs.

Why credit ratings matter

A sovereign rating acts as the ceiling for all borrowers within that country. If a government’s creditworthiness is considered poor, no local company can be rated higher – even if it has sound fundamentals.

That matters because large companies often lend money between their own subsidiaries, just like a bank would. To make sure those internal loans are fairly priced, they use credit ratings to see what interest rate an independent lender would charge. If a country or company has a low rating, the cost of borrowing rises – and that affects how much interest the business pays and reports for tax purposes.

It’s a circular problem. A perception of sovereign risk filters through to company-level financing, raising costs for business and potentially reducing profitability. An African ratings agency could, in theory, change that dynamic – but only if it’s credible.

The African proposition

The proposed Africa Credit Rating Agency (AfCRA), to be headquartered in Mauritius under the African Union’s umbrella, aims to provide that alternative view. Backed by Afreximbank and several African development institutions, it promises a methodology better suited to African realities.

Ian Macleod, Co-Founder and Head of Strategic Narrative at Boundless World, believes that new thinking is overdue.

“We typically look at African markets with a long-term view – years, decades, even generations,” he says. “That requires understanding foundational factors like demographics, early education and savings levels. These are powerful forces that shape a society and an economy. Importantly, they tend only to change gradually. While one needs to monitor and account for variables that can change by the day, week or month, it is useful to read these against the backdrop of these heavy foundations.”

The Boundless World team has developed analytical frameworks that can add nuance to a ratings methodology.

“The Six Factor Model is a big data tool that quantitatively evaluates the strongest contributors to long-term prosperity,” Macleod explains. “It incorporates millions of data points over several decades, interrogating them to distil the ones with greatest significance for economic growth. Consider demographics as an example. A society with more young people entering the workforce than older ones leaving it is well positioned to grow over a generational time span. Similar reasoning applies to places with sound foundation phase education, primary healthcare and elevated savings levels.”

The Africa Investment Navigator framework has a shorter time horizon and evaluates 31 African countries on 20 metrics. 

“We standardise these publicly available data, enabling us to score each country for overall investability. Additionally, it allows us to compare countries on particular pillars. This lets us apply it at an industry or company level of granularity. For example, Seychelles and Mauritius have been the top two overall scorers for the last two years. 

However, they have small populations. So they offer little scope for mass consumption. For a firm looking to sell large volumes at a low margin, we would then elevate the weighting of population size and growth,” he explains. 

Beyond data, Macleod argues, narrative itself plays a measurable role.

“The Nobel Prize winning economist Prof. Bob Shiller has championed the field of narrative economics. This body of work makes explicit the fact that the stories people share are drivers of the economy. We have seen evidence of this with so-called ‘meme stocks’. From coffee shops to online discussion boards, narratives in many shapes can move markets. When assessing creditworthiness, this must be accounted for. One must have a finger on the pulse of the national dialogue to appreciate political and economic risks.”

Credibility is the real currency

Henry Dicks, my colleague and advocate of Graphene Economics, points out that international investors are unlikely to accept ratings they perceive as lenient.

“Credit ratings underpin real financial decisions,” he says. “If AfCRA systematically produces higher scores than Moody’s or S&P, the question becomes: why? What’s different in the methodology, the data, or the weighting of qualitative factors? Furthermore, we need to ask whether the market will accept the difference or ‘recalibrate itself’. 

If an entity credit rating is calculated using an African rating system, will financial institutions pay any attention to this, or will they rely on and default back to the known ratings agencies? Unless there are compelling reasons not to do so, I would think this would be the case.”

He notes that the OECD Transfer Pricing Guidelines highlight similar issues when multinationals use “publicly available tools” to approximate credit ratings. “Transparency is everything,” he says. “Market participants need to see the algorithmic inputs, the peer-review process and the governance safeguards. Without that, they’ll revert to what they know.”

Global agencies follow a rigorous, auditable process: data collection, management interviews, peer comparisons and multi-layered credit committees. 

“If AfCRA wants to be trusted, it will have to match that discipline – and show how its model addresses perceived bias rather than just producing different numbers,” Dicks says.

Macleod agrees that reliability is earned over time. “There’s no quick route,” he says. “Independence, acumen and resilience will need to be demonstrated year after year. The currency of this industry is consistency.”

Risk, perception and reality

The question, then, is whether Africa’s problem is the way risk is measured, or the underlying fundamentals? I believe the latter will still dominate. At the end of the day, macroeconomic realities drive ratings: fiscal deficits, inflation, governance and policy stability. Unless those improve, perception can only shift so far.

Macleod takes a complementary view. “Narrative should not be seen as an alternative to data. Rather, narratives can be measured as data points. From central bank meeting minutes to social media trends, we can monitor narratives with the help of quantitative tools.”

Macleod suggests that a credible African agency would need to 

balance both – grounding its models in data but also recognising the social, institutional and demographic tailwinds that global models overlook.

The risk for AfCRA is being politically satisfying but economically redundant. To conquer this, it needs to prove it can offer a truer reflection of real, evolving African risk.

Implications for transfer pricing

For TP practitioners, an African credit ratings agency could have tangible consequences.

If AfCRA’s ratings are accepted by lenders and tax authorities, Hewson explains, the indicative credit ratings used for intercompany loan benchmarking could rise. 

That would lower arm’s-length interest rates, reduce tax deductions, and potentially improve after-tax profitability for African subsidiaries.

However, if global investors disregard AfCRA’s outputs, little will change. Transfer pricing always tracks the market. If the market doesn’t move, neither will the benchmarks. The benefit only materialises if genuine perceptions of credit risk – and therefore pricing in third-party loans – shift.

Ultimately, this ties back to fundamentals. Better governance, consistent fiscal policy and transparent institutions reduce real risk. That’s what rating agencies, local or global, respond to. Improved metrics will follow improved reality.”

For success, AfCRA must operate with absolute independence, publish its methodologies openly, and build partnerships with regional and global peers. 

Over time, a consistent track record could help normalise an African perspective within global capital markets.

For Africa’s economies – and for companies navigating intercompany financing and tax compliance across the continent – accuracy will matter far more than sentiment.

Michael Hewson is a Director at African transfer pricing firm Graphene Economics