AfCRA outlines new methodology for rating Africa’s credit risk

The Africa Credit Rating Agency (AfCRA) has highlighted some of its key rating methodologies that will be used to measure Africa’s credit risk, accounting for new data.

The agency, however, maintains that its assessment will be based on measurable evidence, while variables won't deviate much from international standards, noting that they will not be country-specific to ensure uniformity.

The rating agency further points out that directionally, close to 33 per cent of ratings in Africa were likely to be an error.

For the first time, African countries will have an opportunity to interact with their credit rating agency both virtually and physically.

They will be able to input their data into the AfCRA portal after being granted access, with the data expected to be used as part of the total analysis in assessing their credit worthiness.

According to AfCRA CEO Dr. Sifiso Falala, the aim of the agency is not to judge issuers but to give them the data the agency has and to use the data provided to determine if it makes a difference to their credit rating.

“We need better research, research that can be instrumental in catalysing change and part of the change that might emerge could be a deeper understanding of Africa’s financial market and the resource base that is capable of funding and financing Africa and options for undertaking infrastructure development projects,” said Dr. Falala.

Ted Maseselesele, AfCRA’s Interim Chief Rating Officer, added: “Our assessment needs to be based on evidence that is measurable and reproducible, so the variable that we use for various measurements of sovereigns won't change based on which sovereign we use it; it will be based on historical and best international standards, just like the big three rating agencies use.”

AfCRA is further pursuing ways to incorporate and factor in the continent's natural resources in its profiles, arguing for the need to do things different from what the big three agencies have done to create new value.

“We do use natural resources that could be a different one, but like you already know, it's very difficult to factor in how that credit risk is seen currently. It's seen as a credit weakness rather than a neutral point, so it's something we will be doing further research on and how to integrate that in the credit profile,” stated Mr. Maseselesele.

Dr. Falala noted: “It's not just about including natural resources; it's about understanding how much of a difference they make to the accuracy of retrospective data, then you roll all that forward in time.”

But it is not just the use of natural resources in risk profiling that will be the point of difference between AfCRA and other rating agencies. The forecasting methodology is also expected to stand out.

Dr. Misheck Mutize, Lead Expert Credit Ratings Agencies, APRM, says: “What could be different is the forecasting methodology, the assumptions and the outcomes, and also perhaps the qualitative indicators that are individual judgment or an analyst's discretion. That could be formulated differently because of assumptions that need to underlie such estimation.”

To ensure it remains afloat, it will focus more on sovereign business at 70 per cent, with corporate accounting for only 30 per cent of its business in the medium term; however, the sweet spot is expected to be a 50:50 ratio in the long term.

Dr. Falala added: “In the medium term it will tend to be 30 per cent commercial and 70 per cent will be sovereign, but that will change as we begin to roll out our services to the rest of the continent.”

Plus94 Research is the majority shareholder of the new agency with 100 per cent, but AfCRA is set to open its shares to other buyers set to take up 2000 additional shares in the agency, leaving Plus94 Research with 1000 shares.

Upon conclusion of the share sale, Plus94 Research is expected to hold at least 33 per cent of shares in the agency, with investors taking up the rest.

With the agency launched, and the methodology outlines what remains to be seen is the impact the agency will have on the continent's financial sector.