South Africa and the rest of the continent will on Friday welcome a new rating agency, Sovereign Africa Ratings (SAR) as demand for credit rating services in Africa surges.
SAR, the brainchild of renowed researcher Sifiso Falala, will on Friday publicise its first sovereign rating. The launch of SAR comes just months after Moody’s said it had bought a 51% majority stake in Africa’s leading credit ratings agency, Global Credit Rating.
The move was largely seen as Moody’s positioning itself for a bigger market share in Africa with a robust increase in demand for credit rating services on the continent on the cards.
Credit rating agencies are key players in financial markets as they provide a quantified assessment of the creditworthiness of a borrower.
Falala said SAR will be a disruptor in the market and will look into metrics the big three credit rating agencies, Moody’s, Standard and Poor’s (S&P) and Fitch Ratings, who control around 95% of the credit ratings in the financial markets, overlook when they look into African states, including South Africa. One of the rating metrics SAR will zoom on is Africa’s vast natural resources assets and how these impact on governments’ ability to repay their debts.
“Our thinking process is that resource endowments are a natural asset of sovereigns, and, depending on ownership and control, can be exploited to improve the country’s ability to honour its debt obligations,” Falala said.
“The impact of correct exploitation and value add of the expansive resources has the potential, longer term, to not only help the continent meet its debt obligations but could diminish the appetite for borrowing.
“The potential for creating a more direct relationship between optimal resource exploitation and infrastructure development, mechanisation and digitisation of African economies is the obvious straight line towards economic growth. To that extent, viable natural endowments cannot be discounted as a measure of ability to pay, unless there is a contest on their true present or future value,” he said.
The Financial Sector Conduct Authority earlier this year approved the licence application of SAR to operate as a credit rating agency.
SAR was founded in 2018 on the belief that there exists a need for an independent African credit rating agency.
Falala said the underlying rationale for the establishment of SAR is therefore that the sole reliance on external credit ratings agencies to determine the investment grades of emerging markets, as well as the juristic entities conducting business within emerging markets, could place the economies in a precarious position.
“Sovereign credit ratings are a prerequisite for governments to access the capital market, particularly the international capital market, to finance infrastructure investments. Developing countries are increasingly engaging with international rating agencies to rate the creditworthiness of their governments. Sovereign credit ratings, therefore, become more relevant, as they contribute to fiscal risk evaluations and fiscal adjustment. The evaluation of financial risks, including contingent liabilities, across all sectors – be it corporate, household, financial or the public sector – has become an even more imperative requirement for adjustment,” Falala said.
Falala is also the CEO and founder of Plus 94 Research. He is a trained demographer with a master’s of science in population studies. He holds a PhD in Management of technology and Innovation from the Da Vinci Institute.
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