(Ecofin Agency) - Many African leaders argue that the three major international rating agencies have a "negative bias" when evaluating the credit risk of African nations, denying them access to essential financial resources.

The African Union (AU) plans to launch a new African credit rating agency in H2 2025 to address concerns about what some African countries see as “arbitrary” ratings from major international agencies. This was revealed in a report published on February 11 by the African Peer Review Mechanism (APRM).

APRM, which is responsible for assessing governance in AU member states and implementing the New Partnership for Africa’s Development (NEPAD), presented the soon-to-be-launched agency as a game changer. The agency will give Africa a stronger voice in the global financial system, APRM said.

The report, titled Africa Sovereign Credit Rating Outlook – 2024 Year-End Review, mentioned that African policymakers and financial sector leaders agreed upon making the new agency independent, led by the private sector. “The Agency’s niche will primarily derive from its context-sensitivity which will allow it to generate more comprehensive credit insights, using competent experts based in Africa and its relatively better access to data,” the document read.

The idea of creating an African credit rating agency has been in the pipeline for years. In September 2023, the AU officially announced its plans to move forward with the project. This decision comes after repeated criticism of the “Big Three” rating agencies—Moody’s, Fitch, and S&P—accused of applying a “negative bias” when assessing African economies. Critics argue that these ratings often lead to higher borrowing costs for African countries and, in some cases, make it harder for them to access international financial markets.

The push for an African credit rating agency indeed gained momentum in 2022 when Senegal’s former president Macky Sall, who was then chair of the AU, called for a new system to “end the injustices” faced by African countries.

“In 2020, when economies worldwide were struggling with the effects of COVID-19, 18 out of the 32 African countries rated by at least one of the major agencies saw their ratings downgraded. That’s 56% of African ratings being cut, compared to a global average of just 31% during the same period,” he said. He also pointed out that studies have shown that at least 20% of the rating criteria for African countries are based on subjective cultural or linguistic factors rather than economic fundamentals. These ratings, he said at the time, drive up the cost of borrowing for African nations.

Of course Moody’s, Fitch, and S&P have denied any bias, insisting that their rating methodologies are applied consistently across all regions.

However, an April 2023 report by the United Nations Development Program (UNDP) found that the way major rating agencies assess African economies has cost the continent $74 billion in missed financing opportunities. The report stated that the methods used by S&P, Moody’s, and Fitch are not always appropriate for African economies. It noted that these agencies rely on algorithms designed for traditional macroeconomic models, which do not always reflect the unique realities of African markets.

The report also highlighted that rating agency analysts may fail to capture the full picture, often basing their risk assessments on prevailing investor sentiment rather than on-the-ground economic conditions.