Washington, DC — Not having a widely used credit rating system stymies investment in Africa, U.S. Secretary of State Colin Powell told two dozen African central bankers and Finance Ministers, Tuesday, opening a "sovereign credit ratings" conference, the department's "first ever" meeting on private capital markets and credit ratings for African countries.
"It's simple. It's straightforward. It's not rocket science. By attaining a sovereign credit rating, your country will help reduce risk and encourage investment," he said.
A sovereign credit rating is the benchmark investors use to evaluate risk and potential in a nation's economic environment. In Sub-Saharan Africa where only four nations - Senegal, Botswana, Mauritius and South Africa - have the rating, getting rated will "give your country an important role, an important edge," Powell told his audience. "Money, capital is a coward. A sovereign credit rating gives courage to capital."
A couple of other" African nations are under consideration for rating, according to Veronica Kalema, Associate Director for Africa for Fitch Ltd., one of the World's largest rating companies. She was unwilling to say which nations her company was reviewing, calling the discussions proprietary. "Credit ratings are used by investors as indications of the likelihood of getting their money back in accordance with the terms on which they invested," says a Fitch statement.
Fitch's own corporate statement shows a muscular company with global reach; "Real power," one participant whispered. Fitch Ratings has a presence in 75 countries and maintains 40 offices worldwide. It covers 1,600 financial institutions, 1,000 corporates and maintains surveillance on 3,300 structured financings and 17,000 municipal bond ratings in the U.S. tax-exempt market. Fitch Ratings also covers over 800 insurance companies, plus 69 sovereigns."
At the request of Secretary of State for African Affairs, Walter Kansteiner, Kalema and Fitch Managing Director David Riley came to Washington from London to speak to the African group.
"If you look and see that four African countries have sovereign debt credit ratings and if you look and see that, clearly, the trend toward access to capital markets is with the private capital markets, these guys can't get into the private capital market without a credit rating," Kansteiner told allAfrica.com "They can't even get into the game Let's help them get a ticket to the game."
Gaining a rating involves a careful, detailed look at both economic and political particulars, Fitch's Riley told the audience. Important questions to be answered include: "Just how transparent is the economy of the country? If there is an economic shock how will it respond?"
"We don't come to promote an Anglo-Saxon economic agenda," he said. But "experience" says Riley, "shows that countries where products do not reflect costs are countries that have poor growth prospects."
Riley called his company's need to evaluate a nations's political and social situation "one of the most contentious aspects of the ratings process." But again, he insisted: "We don't come with an agenda saying this is the best political model. But what is important is good governance."
The fees for rating are costly for poor countries, involving a US$35,000 "surveillance" fee that does not include travel and other on-site expenses, plus a US$115,000 annual maintenance fee. The United States, says Kansteiner, will pay the fees of African nations for the first year.
African participants seemed non-committal during a conference break. Some worried aloud about the cost, others raised questions about the rating's value and the mandatory acceptance of deep probes into sensitive economic and political aspects of their nations to compile information that would ultimately remain the property of a private company. When one banker asked why Fitch should own the credit ratings report, Riley was frank and blunt. "We essentially have to make judgements. In the end the report reflects our judgement."
Nigeria's ambassador to the United States, Professor Jibril Aminu, had another concern: "The effect of being rated low, that is a thing that is really worrying some people here. They do have some worry about the impact of this thing on their credit worthiness if their rating turns out to be negative."
Linha Mohohlo, Governor of the Central Bank of Botswana, declaring herself happy with the results, said it took ten years of debate before her country decided to seek the credit rating. "We needed investment and since we don't have conflict, nobody was paying much attention to us." It may work for some countries but this is not likely to be a priority for Nigeria, Ambassador Jibril said. "A country like Nigeria might be interested but I have the feeling they wouldn't take the time."
Walter Kansteiner recognised that for many, the entire proposition is unfamiliar. "We probably need a couple more [sessions] to get everybody familiar with, and comfortable with, the technical processes and how they work," he acknowledged.