IN FOCUS CREDIT IN THE GLOBAL SOUTH
DEALING WITH DEBT FOR A FAIRER FUTURE ACROSS THE GLOBAL SOUTH Rating agencies aren’t powerful because they inform. They’re powerful because they’re systemically necessary. How fair and sustainable are these dynamics? By Daniel Cash, Senior Fellow, United Nations University Centre for Policy Research (UNU-CPR)
T he balance of power is shifting. With Official Development Assistance (ODA) recently cut in real terms by at least 1 percent, private creditors have become dominant across the Global South. According to UNCTAD, the organization promoting the interests of developing countries in global trade, private creditors are now holding 62 percent of all developing world debt. One of the implications of this development is the exceptional rise of the influence of credit rating agencies, because they “inform” how private creditors perceive sovereign risk. To put this into perspective: Developing countries’ average interest paid on external borrowing is now three
times higher than that of developed countries, with separate analysis showing that borrowing from the capital markets is costing African governments 500 percent more than borrowing from official creditors – money that might otherwise be spent on essential sectors like healthcare and education. Yet the relationship between Global South sovereign issuers and credit rating agencies remains relatively nascent and marked by deep asymmetry. Sovereigns often have little insights to rating agencies’ methodologies or insufficient opportunity to present their reforms and resilience strategies. All too often rating engagements leave issuers with extremely narrow windows to frame their narratives effectively. Compounding this gap is the limited in-country presence of rating agencies, especially in low-income nations. There are some ways to overcome this detachment. I am advocating a two- part structured dialogue that would, according to my research, improve the quality of rating engagements. The first part would be the establishment of Structured Peer Forums, where small clusters of sovereigns engage thematically with rating agencies outside the formal rating process. Thematic areas could include fiscal reforms, debt sustainability, governance resilience or external shocks.
The second complementary part would involve a light-touch, voluntary Charter to govern these forums, safeguarding confidentiality, ensuring procedural fairness and protecting participants. Crucially, it would not infringe on rating agencies’ independence or methodologies, nor compel sovereigns to disclose sensitive information. Multilateral development banks (MDBs) – potentially including the OPEC Fund – are ideally positioned to convene these forums because they can be embedded within existing capacity- building programs. Previous successful models include the World Bank’s Debt Management Facility’s Stakeholder Forums, which helped debt managers and investors engage more effectively, or the African Financial Markets Initiative led by the African Development Bank (AfDB), which enhanced market transparency and strengthened sovereign issuance capacity. However, both of these examples focus on technical assistance and market access – not on the relationship between sovereign and rating agency. The proposed dialogue would fill this gap by specifically addressing how governments present their case and how that is interpreted via the credit rating process. That is an important element that is missing from existing frameworks.
“Developing countries’ average interest paid on external borrowing is now three times higher than that of developed countries.”
Daniel Cash, Senior Fellow, United Nations University Centre for Policy Research
Views and opinions expressed are solely the author’s and don’t reflect the opinions or beliefs of the OPEC Fund.
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