Some of the world's poorest countries, on the margins of the global economy, are getting a hand up from Standard and Poor's (S&P), the international credit rating agency.
S&P plans to issue sovereign debt ratings for as many as 50 countries over the next decade, mostly in the Caribbean, the Pacific, South Asia and Sub-Saharan Africa. Since 2000, when Senegal became the first Sub-Saharan African government outside South
Africa to get an S&P credit rating, eight more governments in the region have been assigned sovereign ratings: Botswana, Ghana, Cameroon, Benin, Burkina Faso, Madagascar, Mali and Mozambique. More Sub-Saharan African governments are expected to be rated in 2006 under a two-year-old partnership between S&P and the United Nations Development Program. In an interview with the International Herald Tribune, David Beers, Managing Director of sovereign and international public finance ratings at S&P, the ratings were stimulating investor interest.
While international debt issuance is not an option for most Sub-Saharan African governments, which are still hamstrung by the borrowing excesses of the 1970s, the ratings are helping to open the capital markets to private-sector borrowers. It helps to offset a lack of independent, third-party research, and memories of past political, economic and debt failures that have kept lenders away in the past, said Beers, of S&P. A sovereign rating also allows investors to have a benchmark for little-known markets against more established ones, said Abah Ofon, Africa economist at Standard Charted Bank. Although the trend is recent, more and more foreign investors are beginning to take a closer look at Africa because of attractive yield plays that are available, Ofon said, and also "because of structural reform, which means investors are more assured of getting a return on their capital."
In 2004, developing countries received a net $301.3 billion in private-sector debt and equity flows, according to World Bank data, up from $248.4 billion the previous year. The total included $165.5 billion of foreign direct investment, $109 billion of private-sector loans and $26.8 billion of portfolio equity investment. The private sector investment was almost four times larger than a record $78.6 billion that donor countries provided in official development aid last year, according to the Organization for Economic Cooperation and Development, in Paris, and it helped to offset a net withdrawal of $25.3 billion by multilateral lenders like the World Bank and the International Monetary Fund.
Private capital flows in recent years, however, have been heavily concentrated in a handful of preferred countries, and particularly in the so-called BRIC economies Brazil, Russia, India and China. In 2004, China alone accounted for 34 percent of net direct investment flows and 39 percent of net portfolio flows to the developing world, according to the World Bank, while sub-Saharan Africa received just 7 percent of direct investment and 13 percent of portfolio flows, most of which went to South Africa, the region's most developed country.
According to Beers, there is a growing realization among governments in the region of the need to develop their neglected domestic capital markets and end their over-reliance on foreign-currency borrowing. As a result of past economic mismanagement, poor regulatory safeguards and politically directed bank lending, borrowing costs are high and companies face enormous difficulties raising capital particularly the small and medium-size enterprises (SMEs) that economists are counting on to drive future growth.
Multinationals in Africa can raise capital relatively easily, Ofon said. "What's more important for African economies now are the SMEs that is the sector which is going to be the main engine of growth in countries all across Africa; that is the sector where there is little access to capital." Nobody expects that to change overnight. There is, however, a sense among investors that the investment environment is changing for the better.