Africa’s development finance challenge has reached a critical point. Mounting debt pressure is squeezing fiscal space. And essential needs in infrastructure, health and education remain unmet. The continent’s governments urgently need affordable access to international capital markets. Yet many continue to face borrowing costs that make development finance unviable.
Sovereign credit ratings – the assessments that determine how financial markets price a country’s risk – play a central role in this dynamic. These judgements about a government’s ability and willingness to repay debt are made by just three main agencies – S&P Global, Moody’s and Fitch. The grades they assign, ranging from investment grade to speculative or default, directly influence the interest rates governments pay when they borrow.
Within this system, the stakes for African economies are extremely high. Borrowing costs rise sharply once countries fall below investment grade. And when debt service consumes large shares of budgets, less remains for schools, hospitals or climate adaptation. Many institutional investors also operate under mandates restricting them to investment-grade bonds.
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Countries rated below this threshold are excluded from large pools of capital. In practice it means that credit ratings shape the cost of borrowing, as well as whether borrowing is possible at all.
I am a researcher who has examined how sovereign credit ratings operate within the international financial system. And I’ve followed debates about their role in development finance. Much of the criticism directed at the agencies has focused on: their distance from the countries they assess; the suitability of some analytical approaches; and the challenges of applying standardised models across different economic contexts.
Less attention has been paid to the position ratings now occupy within the global financial architecture. Credit rating agencies are private companies that assess the likelihood that governments and firms will repay their debts. They sell these assessments to investors, banks and financial institutions, rather than working for governments or international organisations. But their assessments have become embedded in regulation, investment mandates and policy processes in ways that shape public outcomes.
This has given ratings a governance-like influence over access to finance, borrowing costs and fiscal space. In practice, ratings help determine how expensive it is for governments to borrow. This determines how much room they have to spend on public priorities like health, education, and infrastructure. Yet, credit rating agencies were not created to play this role. They emerged as private firms in the early 1900s to provide information to investors. The frameworks for coordinating and overseeing their wider public impact – which grew long after they were established – developed gradually and unevenly over time.
The question isn’t whether ratings should be replaced. Rather, it’s how this influence is understood and managed.
Beyond the bias versus capacity debate
Discussions about Africa’s sovereign ratings often focus on two explanations. One is that African economies are systemically underrated, with critics pointing to rapid downgrades and assessments that appear harsher than those applied to comparable countries elsewhere.
Factors often cited include the location of analytical teams in advanced economies, limited exposure to domestic policy processes in the global south, and incentive structures shaped by closer engagement with regulators and market actors in major financial centres.
The other explanation emphasises macroeconomic fundamentals, the basic economic conditions that shape a government’s ability to service debt, such as growth prospects, export earnings, institutional strength and fiscal buffers. When these are weaker or more volatile, borrowing costs tend to be more sensitive to global shocks.
Both perspectives have merit. Yet neither fully explains a persistent pattern: governments often undertake significant reforms, sometimes at high political and social costs, but changes in ratings can lag well behind those efforts. During that period, borrowing costs remain high and market access constrained. It is this gap between reform and recognition that points to a deeper structural issue in how credit ratings operate within the global financial system.
Design by default
Credit ratings began as a commercial information service for investors. Over several decades, from the 1970s to the 2000s, they became embedded in financial regulation. United States regulators first incorporated ratings into capital rules in 1975 as benchmarks for determining risk charges. The European Union followed in the late 1980s and 1990s. Key international bodies followed.
This process was incremental, not the result of deliberate public design. Ratings were adopted because they were available, standardised and widely recognised. It’s argued that private sector reliance on ratings typically followed their incorporation into public regulation. But in fact markets relied informally on credit rating assessments long before regulators formalised their use.
By the late 1990s, ratings had become deeply woven into how financial markets function. The result was that formal regulatory reliance increased until ratings became essential for distinguishing creditworthiness. This, some have argued, may have encouraged reliance on ratings at the expense of independent risk assessment.
Today, sovereign credit ratings influence which countries can access development finance, at what cost, and on what terms. They shape the fiscal options available to governments, and therefore the policy space for pursuing development goals.
Yet ratings agencies remain private firms, operating under commercial incentives. They developed outside the multilateral system and were not originally designed for a governance role. The power they wield is real. But the mechanisms for coordinating that power over public development objectives emerged later and separately. This created a governance function without dedicated coordination or oversight structures.
Designing the missing layer
African countries have initiated reform efforts to address their development finance challenge. For instance, some work with credit rating agencies to improve data quality and strengthen institutions. But these efforts don’t always translate into timely changes in assessments.
Part of the difficulty lies in shared information constraints. The link between fiscal policy actions and market perception remains complex. Governments need ways to credibly signal reform. Agencies need reliable mechanisms to verify change. And investors need confidence that assessments reflect current conditions rather than outdated assumptions.
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While greater transparency can help, public debt data remains fragmented across databases and institutions.
A critical missing element in past reform efforts has been coordination infrastructure: dialogue platforms and credibility mechanisms that allow complex information to flow reliably between governments, agencies, investors and multilateral institutions.
Evidence suggests that external validation can help reforms gain market recognition. In practice, this points to the need for more structured interaction between governments, rating agencies, development partners and regional credit rating agencies around data, policy commitments and reform trajectories.
One option is the Financing for Development process. This is a multistakeholder forum coordinated by the United Nations that negotiates how the global financial system should support sustainable development. Addressing how credit ratings function within the financial system is a natural extension of this process.
Building a coordination layer need not mean replacing ratings. Or shifting them into the public sector. It means creating the transparency, dialogue and accountability structures that help any system function more effectively.
Recognising this reality helps explain how development finance actually works. As debt pressures rise and climate adaptation costs grow, putting this governance layer in place is now critical to safeguarding development outcomes in Africa.
Daniel Cash is affiliated with UN University Centre for Policy Research.
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James Endersby has grown research and insights agency, Opinium Research, from a small London start-up to an international insight agency with clients all over the world, including South Africa. His business grew 50 percent last year, and won an international research award for its work with the London School of Economics measuring democratic engagement around the world. Endersby helps build better futures for children from the poorest countries in the world in his postition as Interim Chairman for Street Kids International.