Global Investing

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  apparent turnaround in Africa’s fortunes over the past decade has been attributed to the rise of China and its insatiable appetite for African commodities. So African policymakers, like those everywhere, will have been relieved by the recent uptick in Chinese economic data.

But is Africa’s dependence on China exaggerated?  A hard landing in the Asian giant will be an undoubted setback for African finances but according to Fitch Ratings.  it may not be a disaster.

Fitch analyst Kit Ling Leung estimates that if China’s economy grows at below-forecast rates of 5 percent in 2013 and 6.5 percent in 2014, African real GDP growth will slow by 90 basis points.  So a 3 percentage point drop in Chinese growth will lead to less than a 1 percentage point hit to Africa. Countries such as Angola will take a harder hit due to oil price falls but others such as Uganda, which import most of their energy, may even benefit, Yeung’s exercise shows.