Ratings more than a piece of paper for Africa

By Reuters Staff
February 28, 2013

By Stephen Eisenhammer

Does a sovereign credit rating from a glass tower in London or New York impact life in the country being rated? Apparently in Africa it does.

According to research by the rating agency Fitch, sovereign credit ratings significantly boost foreign direct investment (FDI) to Africa.

Credit ratings added 2 percent to Gross Domestic Product in sub-Saharan Africa each year from 1995 to 2011 through increased  FDI when compared to countries in the region which do not have a rating, Fitch said in a note.

There are a number of possible factors behind this.

Firstly the rating works as a kind of advert to investors, showing that the country is open to foreign capital. It also helps investors to make a more informed decision as to where to put their money, as the ratings come with reputable data and risk analysis.

There’s also, Fitch said, a “positive effect” on economic policy in the rated countries as they attempt to implement reform in order to achieve an upgrade or at least avoid a downward revision.

The majority of FDI goes to resource rich countries such as South Africa and Nigeria, but recently other countries have entered the fray.

“In addition to South Africa and Nigeria (the main FDI recipients), new commodity countries have gained in importance (e.g. Angola, Ghana, Mozambique, Uganda, Zambia),” Fitch said.

But service sectors such as banks and drinks companies, booming off the back of a growing consumer base, are also starting to attract FDI.

“FDI in service sectors accounted for 34% of total greenfield projects in Africa in 2011,” Fitch said.

The benefits of a credit rating are not lost on African governments.  Since 1994 when Fitch assigned South Africa a rating, it and other ratings agencies have rapidly expanded their business on the continent. A total of 20 African countries now hold credit ratings, Fitch says.

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