Sovereign credit rating--how it works and why it is vital: why are organisations such as Moody's and Standard and Poor's so influential? Who are they and what do they do? What is sovereign credit rating? Neil Ford provides answers to these and other investment related questions.

Author:Ford, Neil
Position:INVESTMENT
 
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One of the main factors that deters foreign companies from investing in sub-Saharan Africa outside the oil, gas and mining sectors is ignorance. Many globally well known conglomerates simply do not know much about the region. Investors use many sources of information to judge the attractiveness of any particular market, but none more so than the credit risk ratings that are provided by companies such as Fitch Ratings, Moody's and Standard and Poor's.

Until recently, these firms largely ignored sub-Saharan Africa beyond South Africa but some have now begun to offer ratings under a scheme developed by the UN. These ratings should provide some assurance for companies willing to dip their toes in African waters.

During 2003, the United Nations Development Programme (UNDP) launched a credit rating programme with Standard and Poor's (S & P's) to provide sovereign risk ratings for much of Africa.

Ghana was the first to be assessed, with a B+ long term foreign currency rating, followed by Cameroon and Benin with long term and short ratings.

The list of ratings was extended during the course of 2004 and now comprises the African Development Bank, Benin, Botswana, Burkina Faso, Cameroon, Development Bank of Southern Africa, Egypt, Madagascar, Mali, Morocco, Mozambique, Senegal, South Africa and Tunisia.

It is hoped that the ratings will help provide comprehensive economic statistics to potential investors and assist African governments in accessing international capital markets.

In 2004, the associate administrator of the UNDP, Zephirin Diabre, appealed for the expansion of sovereign risk coverage to take in yet more African countries. He told delegates at a Corporate Council on Africa (CCA) conference: "The investment potential in Africa is huge. Through our credit rating initiative, we intend to support countries in their efforts to mobilise resources from private capital markets. We hope that better access to financing will help African countries to tackle a broad range of poverty alleviation issues and provide an incentive to achieve the Millennium Development Goals." At the same time, the US sponsored CCA is attempting to highlight the fact that African investment projects can be profitable for financiers.

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When Mali was added to S & P's list last year, Diabre explained: "With this rating, Mali appears on the map of rated countries and increases its visibility on the international financial scene. The rating will increase...

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