Despite growing investor interest and domestic savings in Africa, the continent’s capital markets struggle with a paradox. Fragmented financial systems hinder the allocation of available funds to critical infrastructure and businesses, impeding sustainable growth. This challenge persists even as Africa’s financial system evolves, with initiatives like S&P Global’s recent acquisition of a majority stake in Agusto & Co, a Nigerian-based credit rating agency, aiming to bridge the gap between global expertise and local market needs.
Connecting the Dots
Samira Mensah, who leads S&P Global’s Africa National Ratings, notes that Africa is currently grappling with the challenge of creating an environment where capital can be effectively utilized.
“Africa already has meaningful pools of domestic savings, including pension funds, insurance assets, sovereign wealth funds, bank deposits and diaspora capital but too little of this capital is channelled into long-term productive investment,” she points out.
That assessment may be informing the 85-year ratings agency’s operations in Africa. In July, S&P announced an agreement to acquire a majority stake in Agusto & Co, a Nigerian-based pan-African credit rating agency with operations in Nigeria, Kenya, Rwanda and Ghana. S&P Global Ratings says that the acquisition means that its international experience will be combined with Agusto’s local market knowledge, with Agusto expected to continue operating as a separate ratings entity under applicable local regulatory requirements.
Mensah says the rationale goes beyond adding another business to S&P’s African portfolio.
“This acquisition is a logical step for us to expand credit markets and deepen credit markets where it’s relevant.”
Nigeria, in particular, is central to that strategy.
“Nigeria is certainly a key market, and there is no African strategy without Nigeria.”
African countries remain unconvinced and will launch their own Africa Credit Rating Agency in early October in Mauritius.
“National ratings speak to the specificity of an individual market, an individual jurisdiction,” Mensah says.
“To cater to these markets, we take a tailored approach that reflects local knowledge and the unique characteristics of domestic markets. One solution does not fit all.”
The fact that global ratings agencies have faced criticism for not adequately reflecting African realities has led to plans for an African ratings agency to counterbalance global ratings, with S&P and other agencies insisting that their ratings are independent and fact-based.
Strategies for Mobilizing Capital
Connecting pockets of innovation to financing needs requires blended finance structures. Concessional capital and guarantees can make projects attractive to private investors. However, transactions are not easily replicated because they lack standardization.
A Test Case
A recent dispute over one of Africa’s multilateral heavyweights, the African Export-Import Bank, is illustrative of the tension between global agencies and the continent’s institutions. Fitch, another Big Three ratings agency, questioned the bank’s status as a preferred creditor after $750m lent to Ghana was included in the country’s debt restructuring. Afreximbank, backed by the African Union among others, argued that its treaty-based status guaranteed preferential repayment. Fitch downgraded Afreximbank’s rating to BB+ after it assessed its non-performing loans ratio to be over 7%, culminating in the bank severing ties with it.
S&P Global rated Afreximbank at BBB+ with a stable outlook, citing robust injections from shareholders and structured collateral as evidence of the bank’s stability. Moody’s, another of the Big Three agencies, issued a similar assessment.
Mensah argues that the bank’s status as a preferred creditor is not as relevant for an institution that does much of its business with the private sector. “Afreximbank does very little with sovereigns,” she says, noting that about 20% of its lending exposure is to sovereigns and the public sector. “The preferred creditor status is not a critical factor in determining the Bank’s business model.”
The broader point remains that accurate and contextualised data is critical to these assessments. The continent’s sovereigns may thus welcome S&P’s incorporation of the GEMS database, which captures credit-loss experience across multilateral development banks, into its risk-adjusted capital framework. “Broader data and enhanced data quality really could contribute potentially to free up additional capital,” Mensah says.
Mensah points to Nigeria as an example of what less intimate observations of the continent’s markets may be missing. While it does not match the depth of South Africa’s market, she argues that pension assets have grown following reforms, banks have expanded across borders and Nigerian financial institutions have built expertise in trade and complex oil and gas transactions. “There is real sophistication and professionalism in Nigeria’s financial sector. They are really experts in their respective domains.”
“You have one blended finance transaction structured one way while a similar project is structured differently. That means that you have to look at everything again. There is no standardisation; each has its own particularities.”
The consequence of this is that transactions cannot be easily replicated and each new one requires the full gamut of steps from end to end. That is expensive and can become a barrier to the scale required for long-term investment.
