By Shruti Menon Seeboo
In a landmark discussion held at the Indian High Commission in Ebene, alongside the Indian Business Council, Saurav Chatterjee, CEO and Director of CARE Ratings Africa, and Manisha Dookhony, a renowned economist and thought leader with extensive experience in African investment, explored significant developments in sovereign ratings across 39 countries, focusing specifically on seven African nations. This session represented an important milestone not only for the CareEdge Group but also for the Global South, which is often underrepresented in global financial discussions. As Saurav aptly noted, “I hope you have enjoyed this historic moment in the global financial sector, not only for CareEdge Group but also for the Global South.”
The discussion began with Saurav emphasizing the importance of the sovereign ratings presented. “The insights shared today regarding the ratings of Mauritius, Botswana, South Africa, Egypt, Ethiopia, Morocco, and Nigeria were particularly illuminating.” This focus on African nations reflects a growing recognition of the continent’s economic potential and the unique challenges it faces.
Joining Saurav was Manisha, who serves as the Chairperson of MINDEX Limited, Chairperson for the African Legal Support Facility (ALSF) and a Senior Advisor for the Namibian Investment Promotion and Development Board. Her insights proved invaluable. “We are fortunate to have someone like Manisha, who has been deeply involved in the rating assessments across Africa,” Saurav remarked, acknowledging her expertise and contributions to the field.
The investor perspective and methodology of sovereign ratings
Saurav then turned to Manisha, asking about her experiences with sovereign ratings from an investor’s viewpoint. Manisha acknowledged the complexities involved, stating, “It has been quite a demanding time. This is not just flimsy analysis; it’s a rigorous assessment based on methodology and detailed data.” Her experience sheds light on how fluctuations in ratings can drastically impact investor confidence and economic stability.
She elaborated on the repercussions of fluctuating sovereign ratings, explaining that a downgrade can significantly increase a country’s debt servicing costs. “For example, Ethiopia, which has never defaulted, faced challenges due to a rating change linked to payment issues,” Manisha noted. “This kind of volatility can have detrimental effects on African economies, which often lack the reserve currencies enjoyed by AAA-rated countries.” This stark reality underscores the vulnerability of African nations in a rapidly changing global economic landscape.
The discussion moved to recent developments in Kenya, where the government faced challenges in debt restructuring. “Kenya’s case is classic,” Saurav explained. “Instead of managing their bond preparations effectively, they faced downgrades which affected their refinancing options.” He emphasised the need for countries to engage with investors well in advance of such crucial financial decisions, a sentiment that resonates across the continent.
Shifting focus, Saurav asked Manisha to explain how CareEdge’s sovereign rating analysis differs from other rating agencies. Manisha identified three key aspects that distinguish their approach:
- Comprehensive Methodology: “Our methodology considers a broader set of metrics beyond just GDP per capita,” she explained. “For instance, we analyse nominal GDP, historical growth trends, and expected future growth to better understand a country’s economic viability.” This multifaceted approach allows for a more nuanced understanding of each nation’s economic health.
- Capacity to Pay: Manisha highlighted the importance of assessing a government’s ability to repay debts. “For example, Botswana has a sovereign wealth fund that positively impacts its capacity to pay,” she said. “We also evaluate recurrent payments like salaries and pensions, especially in countries benefiting from a demographic dividend.” This depth of analysis helps investors gauge the sustainability of a country’s debt levels.
- Country-Specific Analysis: Unlike other agencies that might focus solely on numerical data, CareEdge delves into the unique circumstances of each country. Manisha noted, “In Botswana, while the economy heavily relies on diamonds, the government is actively diversifying. We look at these strategies, not just raw numbers.” This personalised approach adds a vital layer of understanding, capturing the complexities that raw data may overlook.
Mauritius’ sovereign rating
A focal point of the discussion was the rating of Mauritius. Saurav noted, “The recent unsolicited rating of Mauritius stands at triple B, compared to triple B minus from other agencies. This rating was derived from publicly available data, underscoring our commitment to transparency and accuracy.” This proactive stance reinforces the importance of transparency in building investor confidence.
Manisha elaborated on this rating, stating, “When analysing Mauritius, we found that the level of debt rose during COVID-19 but has since decreased relative to GDP. The growth in GDP post-pandemic is crucial; it improves the denominator in the debt-to-GDP ratio, making the debt level appear more manageable.” This positive trend highlights Mauritius’ resilience and potential for economic growth.
She also highlighted the collaborative efforts of various institutions in Mauritius, noting, “The Bank of Mauritius, alongside the private sector, has played a pivotal role in achieving economic stability. Their proactive approach to tackling challenges has enabled the country to recover and plan for future growth.” This spirit of collaboration sets a precedent for other nations striving for economic stability.
Addressing biases in ratings
When asked about potential biases in ratings, Manisha acknowledged the challenges but emphasised their commitment to objectivity. “We provide ratings based on fundamental analysis and quantitative data, not personal preferences,” she stated. “Even though we focused on seven African nations, we assessed a larger set of jurisdictions to ensure our ratings are robust and credible.” This commitment to transparency is crucial for maintaining trust in the rating process.
Saurav added, “It’s crucial for the growth of local economies to have a reliable rating system, which in turn fosters trust among investors.” The conversation highlighted the importance of establishing credibility in the rating process to enhance investment prospects across Africa.
The importance of local context
The discussion highlighted the necessity of a well-developed local bond market for economic growth. Saurav noted, “In Kenya, African institutions played a critical role in supporting the country’s growth. In Mauritius, we’ve seen the local bond market evolve significantly over the past few years.” This evolution is vital for fostering local investment and reducing reliance on external funding.
He cited the case of the Mauritius Commercial Bank (MCB) as a success story, explaining, “In 2018, MCB voluntarily sought a rating to enhance its market position. Such initiatives strengthen the banking system and local bond market, ensuring they are well-equipped to fund infrastructure growth.” This proactive approach reflects a growing recognition of the importance of local capital markets in driving economic development.
Manisha emphasised that local institutions have a responsibility to ensure that public funds are used wisely, noting, “SICOM, for instance, mandates that investments in the local bond market must meet specific rating criteria. This reflects a commitment to managing public resources prudently.” Such measures can instill confidence among investors and encourage more substantial investments in local markets.
Saurav addressed the influence of international rating agencies on local economies, suggesting that lower ratings often lead to higher interest rates for loans. “It’s a double-edged sword,” he said. “While Africa seeks funding, international investors often hesitate due to perceived risks driven by these ratings.” This paradox illustrates the challenges faced by African nations in accessing the capital they need for growth.
Manisha echoed this sentiment, stating, “There’s a need for a shift in how we view African economies. Our ratings reflect a more nuanced understanding of the underlying factors that contribute to sovereign health.” This call for a more equitable perspective on African economies is essential for fostering investment and economic growth.
The future of sovereign ratings in Africa
As the discussion drew to a close, Saurav and Manisha expressed optimism about the future of sovereign ratings in Africa. Saurav remarked, “The bond market in Mauritius is becoming increasingly robust, with institutions looking to invest locally rather than relying solely on international funds.” This shift signifies a growing recognition of the potential within African economies.
Manisha highlighted the importance of collaboration between public and private sectors. “Mauritius has shown that when the public and private sectors work together, they can effectively tackle challenges,” she stated. This spirit of cooperation is crucial for fostering a more resilient economic environment.
The insights shared by Saurav and Manisha during this historic discussion reflect a commitment to reshaping the narrative around sovereign ratings in Africa. By focusing on comprehensive methodologies, capacity for repayment, and the importance of local contexts, CareEdge is paving the way for a more equitable representation of African economies in the global financial sector. Their work not only enhances investment prospects but also fosters a deeper understanding of the complexities inherent in sovereign ratings across the continent.
As African economies continue to evolve, the insights provided by CareEdge will undoubtedly play a crucial role in guiding both investors and policymakers toward a more sustainable future. With the right focus and collaboration, African nations can harness their potential, attract investment, and drive economic growth, contributing to a more balanced global economic landscape.
About CareEdge Ratings
CareEdge is a knowledge-based analytical group offering services in Credit Ratings, Analytics, Consulting and Sustainability. Established in 1993, the parent company CARE Ratings Ltd (CareEdge Ratings) is India’s second-largest rating agency, with a credible track record of rating companies across diverse sectors and holding leadership positions in high-growth sectors such as BFSI and Infra. The wholly owned subsidiaries of CareEdge Ratings are (I) CARE Analytics & Advisory Private Ltd. (previously known as CARE Risk Solutions Pvt. Ltd.), and (II) CARE ESG Ratings Ltd, (previously known as CARE Advisory Research and Training Ltd.). Besides CareEdge Global IFSC Ltd., CareEdge Ratings’ other international subsidiaries entities include CARE Ratings Africa (Private) Limited in Mauritius, CARE Ratings South Africa Pty. Ltd, and CARE Ratings Nepal Limited.
The entire report on Sovereign Ratings of Global Economies can be accessed at Sovereign-Ratings-A-Fresh-Perspective-Online-Version.pdf (careedgeglobal.com)
