A group of entrepreneurs on September 23 launched Africa’s first credit ratings agency, Sovereign Africa Ratings (SAR), based in Centurion.

The agency also published its first credit rating report on South Africa, grading it “BBB” with a stable outlook in the long term, and “B+” with a stable outlook in the short term, which constitutes investment grade.

Standard & Poor’s credit rating for South Africa stands at ‘BB-’ with a positive outlook. Fitch’s rating was last reported at ‘BB-’ with a stable outlook. Moody’s Investor Service has a ‘Ba2’ rating with a negative outlook on South Africa.

In its rating, SAR places emphasis on the South African government’s ability, capacity and proven track record to honour its debt obligations. 

SAR’s credit rating model comprises of 82 variables, which also translate into risk determinants, including fiscal, economic, environment, governance, climate change and wealth generated by natural resources aspects.

SAR considered South Africa’ tax revenue generation, liquidity, external position and its amount of reserves relative to imports. The ratings agency finds that the country’s deteriorating and aging infrastructure hampers its economy and trade, as do its inefficient ports.

The country’s rising interest rates, weak exchange rates and rising inflation all have a bearing on its creditworthiness and performance.

SAR chief ratings officer David Mosaka finds South Africa’s economy is growing at a rate of 1.9% this year, and likely 1.4% next year, which is not conducive for meaningful employment creation or tax revenue generation.

The agency prides itself on considering projections, contingent liabilities, historical performance of indicators and prospects of government expenditure as some of its differentiating factors as a credit ratings agency.

Another differentiating factor of the agency is the significant weight it gives to mineral wealth as a performance indicator, especially for Africa and its well-endowed mineral resources.

Mosaka says as the agency grows in the market, it will generate sub-ratings for African countries.

He vows on behalf of the entity that it will not be characterised by conflict of interest, and will rather be prudent, thorough and objective in its research and analysis.

SAR chairperson Portia Ravhuhali says the ratings industry has not seen new entrants in the market for more than a century. The three giant ratings agencies of Standard & Poor’s, Moody’s and Fitch have been around since 1860, 1909 and 1913, respectively, and have captured 95% of the credit ratings market.

She affirms SAR will be a catalyst of change in the African economy and help to restart its economic outlook. Ravhuhali believes SAR will undoubtedly impact on Africa’s financial system. “Our credibility is our only real currency. SAR commits to quality control procedures, well-researched methodologies and ethical business practices.”

SAR, with its nine board members, are at an advantage in that its permanent presence is in an emerging market and on the continent – close to the sources of information. Ravhuhali is confident that local experts have a deeper appreciation and insights into South Africa’s economic aspects, and can easily tap into more local understandings of assets.

“SAR have a unique vantage point to evaluate emerging economies, especially since on-the-ground, informal activity does not often get factored into real gross domestic product figures,” she explains, adding that SAR will zoom in on all kinds of economic activity that bears significance to credit ratings and economic performance, without long-existing prejudice and colonial perspectives that are often prevalent with other ratings agencies.

SAR CE Dr Sifiso Falala agrees, saying that hard-wired institutions often develop blind spots in evaluations, with some serving interest groups outside of the countries being evaluated.

He explains that questions have been raised about the three giant rating agencies’ efficacy, especially as they are often opaque in their methodologies and lack transparency. Falala believes some of these agencies have too much control over the world’s perception of countries’ governance, and that in and of itself presents a risk to the financial market, and may instigate market volatility.

“We are not here to supervise African sovereigns. If ratings are based on legislation and developmental indicators, then agencies start to perform a supervisory role over the competency of governments, instead of serving a financial function. It may be unintentional on their part, they are ultimately becoming surrogate supervisors on behalf of paymasters,” Falala states.

He highlights that a “one-size-fits-all” approach for credit ratings will not work in Africa. “Different economies are at different levels of industrialisation and digitalisation,” Falala notes, adding that SAR ushers in some of the reform that the ratings industry desperately needs.