Uncovering Africa's hidden economy

For years, the debate over Africa's credit ratings has centered on a critical question: Are African nations being assessed fairly?

The focus is understandable, as sovereign ratings influence government borrowing costs, shape investor perceptions of country risk and can affect financing conditions for banks, state-owned enterprises and businesses across an economy.

But this debate often overlooks a crucial issue: much of Africa's investable economy remains unrated. According to the Africa Credit Rating Agency, Africa's first credit rating agency, the continent's capital market is estimated at approximately $4 trillion, yet less than 5 percent of African capital-market instruments by value have a credit rating. This gap deserves greater attention.

The challenge facing Africa is not only whether governments receive an accurate assessment of their creditworthiness, or if existing methodologies adequately reflect African economic realities.

It is also whether enough companies, municipalities, utilities and investment vehicles in the continent are being independently assessed. The problem is not only about the ratings countries receive but also about the extent of the continent's investable economy that remains unrated.

Africa's "unrated economy" doesn't mean that businesses, cities or infrastructure projects are invisible to investors or that information about them is unavailable. Rather, it highlights a gap in the continent's financial framework: many potential issuers lack independent credit assessments that enable investors to evaluate and compare their risk consistently.

This gap is particularly pronounced beyond sovereign borrowers. Municipalities, utilities, infrastructure vehicles and many mid-sized companies often lack external ratings. Sub-sovereign coverage is especially thin: only South Africa, Nigeria and Kenya have sub-sovereign ratings, as noted by AfCRA.

This matters, because being unrated is not the same as being uncreditworthy. A viable company, municipality or infrastructure project may struggle to communicate its risk profile in a way that institutional investors can readily assess and compare.

Without credible credit information, investors may face greater uncertainty or simply not consider otherwise viable opportunities.

Thus, Africa's ratings challenge is partly about how risk is assessed as well as who and what gets assessed, and how much of the potentially investable economic activity remains outside the formal ratings ecosystem.

AfCRA's significance extends beyond offering another opinion on African sovereign creditworthiness.

Its mission encompasses sovereign, sub-sovereign and corporate ratings, alongside ambitions to widen coverage, strengthen local-currency and regional capital markets, improve credit information and build analytical capacity on the continent.

This can potentially bring more municipalities, infrastructure vehicles and companies into a system where their risks can be independently assessed and compared.

For Chinese investors, this ambition is particularly relevant. Information gaps that constrain African capital markets can also make it harder for external investors to assess potential partners, projects and investment opportunities.

This is crucial as China-Africa economic engagement increasingly encompasses investment, industrial and supply-chain cooperation, African businesses and more commercially structured infrastructure projects. The Forum on China-Africa Cooperation framework, for example, encourages Chinese businesses and financial institutions to participate in African projects through market-based investment, public-private partnerships and other commercially oriented models.

In this environment, credible entity-level credit information is extremely valuable.

AfCRA could provide an additional lens through which Chinese investors assess and differentiate risks across African companies, cities and projects. Its value lies not in presenting African opportunities as less risky than they are, but in helping make those risks easier to identify, compare and price.

However, expanding ratings coverage will achieve little if the ratings themselves do not inspire confidence. AfCRA's continental mandate and African origins may give it institutional significance, but neither will automatically translate into market credibility. Its ratings will matter only if investors, regulators and issuers trust the analysis on which they are based.

That places a high burden on the institution from the outset. Operational independence, transparent methodologies, comparable rating scales, rigorous management of conflicts of interest and strong analytical capabilities are essential.

Regulatory recognition is important, but actual market acceptance is crucial: investors must be willing to incorporate AfCRA's assessments into real financing and investment decisions. The African context should enrich the evidence used to understand credit risk, not become a justification for standards that are difficult to compare internationally.

AfCRA recognizes the importance of methodological transparency and the analytical courage to disagree — and to downgrade — when the evidence warrants it.

AfCRA's credibility will not be demonstrated when it gives an African borrower a better rating. It may be most convincingly demonstrated when its analysis leads to a difficult rating and the market still trusts the process. Without that trust, wider coverage alone will not address Africa's ratings gap.

Ultimately, AfCRA should not be judged by whether it gives Africa better ratings but whether it helps make more of Africa credibly ratable.

The author is the founder and executive director of the Africa-China Centre for Policy & Advisory.

The views don't necessarily reflect those of China Daily.

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