African countries face higher costs of financing because of inflated risk perceptions from credit-ratings companies, the head of the continent\u2019s biggest bank said.<\/p>\n\n\n\n
A United Nations Development Programme study last year showed that subjective risk assessments by rating companies resulted in $75 billion (R1.32 trillion) of added costs and foregone revenue by African countries, Standard Bank Group Chief Executive Officer Sim Tshabalala said at a Future Investment Initiative Institute conference in Riyadh on Monday. <\/p>\n\n\n\n
He described the added costs as \u201cpreposterous\u201d and \u201cunconscionable.\u201d<\/p>\n\n\n\n
\u201cThis perception issue does make a massive difference and needs to be addressed,\u201d he said.<\/p>\n\n\n\n
Tshabalala\u2019s remarks echo growing calls in Africa for changes to the way credit-rating companies assess risk on the continent. <\/p>\n\n\n\n
Leaders, including Senegal\u2019s former president and Zimbabwe\u2019s finance minister, have called for the creation of a pan-African agency. <\/p>\n\n\n\n
The African Peer Review Mechanism, African Development Bank, African Export-Import Bank, and African Union Commission have announced plans to ensure such an entity is rolled out next year.<\/p>\n\n\n\n
Even when African countries have similar ratings to countries elsewhere, they end up paying more for debt, with loans subjected to credit spreads that are much wider than warranted, said former Senegalese Economy Minister Amadou Hott.<\/p>\n\n\n\n
In some instances, African nations pay as much as 500 basis points more for debt than other sovereigns that have the same rating, he said, citing an unspecified study of 15 countries on the continent.<\/p>\n\n\n\n
\u201cWhen the other country pays 5% on a bond, African governments pay 10% on the bond,\u201d he said. <\/p>\n\n\n\n
\u201cFive hundred basis points over 20 years on a $1 billion loan is another $1 billion of extra cost,\u201d Hott said, which can increase countries\u2019 debt vulnerability if left unaddressed.<\/p>\n\n\n\n
Tshabalala cited the examples of South Africa and Denmark, which, despite having similar institutions, policies, and processes, have divergent ratings: while the Nordic country is rated AAA, South Africa has a full house of junk ratings.<\/p>\n\n\n\n
\u201cIt\u2019s really hard to understand why there\u2019s such a big difference,\u201d he said.<\/p>\n\n\n\n