In the last decade, the sovereign debt of developing countries in Africa has almost doubled with the effects of the recent COVID19 pandemic being one of the contributors. Globally,the Ukraine-Russia war is having detrimental effects on global financial conditions. This to an extent will also contribute to sovereign debt being recorded in African states or governments (States) as goods and services imported from these warring countries, primarily agricultural products which ought tocontribute to economic growth in Africa are stunted, and with the prevalence of inflationary pressure on the few available ones exported to Africa. These global challenges have markedly hindered the Continent’s economic growth and brought more pressure to bear on its public debt profile.

The attendant difficulties now being witnessed by developing States in Africa are recordhigh levels of inflation and increases in interest rates, which have weighed down the ability of these developing States to service their debts. In 2022, public debt in Africa was reported to have reached USD1.8 trillion and a current major global concern is the increasing debt distress plaguing African States. A default by these States on their sovereign debts could have serious consequences on the global economic situation and this risk must be urgently considered.These nations have the option of negotiating the restructuring of their public debt obligations, however, a key player in achieving this critical step is credit rating agencies.

Credit rating agencies are companies that specialize in analyzing, evaluating, and rating the creditworthiness of corporate and sovereign issuers of debt securities. Credit agencies such as; S&P Global Ratings (S&P), Moody’s, and Fitch Group hold 95% of the global market. In essence, credit agencies act as an opinion maker to determine from available financial data, the ability of corporate or sovereign issuers to fulfill their debt obligations if regulatory approval is obtained for the issuance of debt security and then produce a credit report for information of the parties involved in the debt issuance. The impact of the risk assessment function of credit rating agencies is of immense benefit to assessment risk rate and sovereign investors because based on the credit scores provided, investors can decide to either invest in the debt issuance or completely avoid investing until a later date.

The credit report also helps determine the likelihood of a borrower’s state defaulting. This is determined through analysis of data of such State to determine the States’ ability to borrow. Therefore, credit agencies wield considerable power in shaping the outcome of debt restructuring negotiations.

This article explores the interchange of sovereign debt and credit agencies and highlights the critical role played by credit rating agencies in achieving the restructuring of sovereign debt. It is however agreed that credit agencies play a significant role in sovereign debt issuance, this is because Investors base their investment decisions based on their reports.

Overview of Sovereign Debt.

Sovereign debt occurs when a State takes a loan with a promise to repay the creditor. The financing of sovereign debt is accomplished through national and international creditors that may be either public or private.

The idea of a sovereign debt is the dependability and assured payment that sovereign powers enjoy. Historically, sovereign debt was mostly sought by States to finance wars and securetheir borders. Presently, we are in the third decade of the twenty-first Century with sovereign debt at a record high, following the financial crisis of 2008 where many developing nations were constrained to borrow more funds to not only service existing debt obligations but to also help their economies stem the tide of the financial crisis.

In 2019, the world was hit by the COVID-19 pandemic, countries and States had to provide stimulus packages to lessen the effect of the shutdown of important facilities, loss of income, health crisis and the developing African States already struggling with servicing their existing debts, were constrained to borrow more to finance these stimulus packages. As a result of the COVID-19 pandemic, it was observed that an additional 97 million people worldwide had been pushed into poverty in 2020

Following the aftermath of the COVID-19 pandemic, while these developing States were in the process of fiscal consolidation, the Ukraine Russia conflict commenced, bringing with it disastrous effects of high food prices and energy prices, most developing African countries are now grappling with much higher rates of inflation.

In 2022, public debt in Africa reached USD 1.8 trillion. While this is a fraction of the overall outstanding debt of developing countries, Africa’s debt has increased by 183% since 2010, a rate roughly four times higher than its growth rate of gross domestic product (“GDP”) in dollar terms. Africa’s debt profile is on the rise, within the last decade the series of events outlinedabove have made these developing economies vulnerable to shocks and a mounting debt crisis, with public debt as a share of GDP reaching an average of 56% in sub-Saharan Africa in 2022.

Further, another cause of the debt crisis in some developing countries is “mismanagement”. The evident accountability deficits, corruption, weak institutional frameworks and in some instances the complete disregard for the social contract plaguing African governments have also led to the mismanagement of borrowed funds. However, the default of payment can lead to a restructuring of the debt since investors must be repaid their capital and interest of their investment. This brings to bear the role of credit rating agencies before issuance of debt to the States.

The Role of Credit Rating Agencies in the Restructuring Plan

Credit rating agencies are private assessors who provide information to investors and financial markets on the creditworthiness of sovereign borrowers. For the investor, this information enables a valuation of the risk of a debt security offered by a sovereign and to decide whether to invest or not. The sovereign’s rating is very important to the sovereign borrower because where there is a rating downgrade it has the immediate effect of making the country’s borrowing more expensive, in essence, the State would have to issue its debt securities at a higher interest rate to balance the high risk of its possible default on its obligation.

Further, where a sovereign determines that it cannot realistically continue to service its debt, it must act decisively by enteringnegotiations with its creditors to restructure its debt and to returnits debt to a sustainable level at the lowest cost to the sovereign and its creditors. The essence of undertaking this step is to prevent a sovereign default, which may severely affect the development of the sovereigns economy.

Why restructure?

The potential consequences of a sovereign default include lower credit ratings, which will affect the sovereign’s ability to seek further loans and where it can borrow, the interest rates will be very high due to the potential risk of it defaulting again. Foreign investors will also begin to sell their local assets to exit the defaulting country, leading to plummeting exchange rates in the international market. Internally, the defaulting country may likely experience high inflation rates, unemployment and bank runs due to the financial crisis occasioned by the exit.

Sovereign debtors like all other debtors are uniquely exposed to hostile creditors’ legal actions. Where a sovereign defaults on its debt’s obligations, it can be subject to a suit before most national courts in respect of its commercial activities under the “restrictive “theory of sovereign immunity. Furthermore, there are no bankruptcy courts or codes that a sovereign can rely on for a temporary stay of suits by its creditors. Where a judgment is given against a sovereign, assets of that sovereign within the jurisdiction of the forum court including immovable property can be attached just as in a private matter.

Therefore, to prevent what is in effect “doomsday” for any country’s economy, these developing nations have the option of seeking a restructuring of their debt obligations. ‘A sovereign debt restructuring can be defined as an exchange of outstanding sovereign debt instruments, such as loans or bonds, for new debt instruments or cash through a legal process’.

Having recognized its impending default, the sovereign seeks to change the terms of its sovereign debt to make its debt servicing more manageable and this can involve changing maturities, adding grace periods, reducing the principal amount of the debt, reducing the interest rate, debt service suspension, etc.

How to restructure?

African countries are not new to debt restructuring, as since the early 1980’s there have been at least 317 sovereign debt restructurings in Africa. As with all commercial dealings, a sovereign debt restructuring commences with a discussion between all the parties involved in the debt issuance towards defining the issues which are basically the sovereign’s debt crisis, and proposed terms of  restructuring which must be fair and professionally presented for the creditors consideration.

In undertaking restructuring there are various methods and techniques available to parties, with the three main techniques provided below:

a. change the maturity dates for amounts of principal or interest falling due under the affected debts and introduce grace periods;
b. reduce the principal amount of the debt ( haircut”), and
c. reduce the interest rate on the debt (“coupon adjustment”).

How are Credit Ratings Done?

Credit rating agencies, in deciding sovereign ratings use a whole range of both quantitative indicators and qualitative factors. A rating committee decides on a sovereign rating after consideringvariables listed as being key determinants of a sovereign rating.There is no uniform procedure on how the determining factors are to be considered as rating agencies attach different weights to these factors.

Applying the regression analysis recommended by chard Cantor and Frank Packer, rating agencies use eight variables to determine sovereign ratings. The identified variables are as follows:

a. Per capita income – The greater the potential tax base of the borrowing country, the greater the ability of a government to repay debt. This variable can also serve as a proxy for the level of political stability and other important factors.
b. GDP growth – A relatively high rate of economic growth suggests that a country’s existing debt burden will become easier to service over time.
c. Inflation A high rate of inflation points to structural problems in the government’s finances. When a government appears unable or unwilling to pay for current budgetary expenses through taxes or debt issuance, it must resort to inflationary money finance. Public dissatisfaction with inflation may in turn lead to political instability.
d. Fiscal balanceA large federal deficit absorbs privatedomestic savings and suggests that a government lacks the ability or will to tax its citizenry to cover current expenses or to service its debt.
e. External balance A large current account deficit indicates that the public and private sectors together rely heavily on funds from abroad. Current account deficits that persist result in growth in foreign indebtedness, which may become unsustainable over time.
f. External debt A higher debt burden should correspond to a higher risk of default. The weight of the burden increases as a country’s foreign currency debt rises relative to its foreign currency earnings (exports).
g. Economic development Although the level of developmentis already measured by per capita income variable, the rating agencies appear to factor a threshold effect into the relationship between economic development and risk. That is, once countries reach a certain income or level of development, they may be less likely to default.
h. Default history – Other things being equal, a country that has defaulted on debt in the recent past is widely perceived as a high credit risk. Both theoretical considerations of the role of reputation in sovereign debt and related empirical evidence indicate that defaulting sovereigns suffer a severe decline in their standing with creditors.

Upon considering the variables listed above and applying them in deciding the suitability or preparedness of the States to raise debt, it is advised that credit agencies to be thorough in their findings, meticulous in use of data and with local physical presence in the States to obtain raw data and States to also improve on the quality and credibility of data provided to the credit rating agencies as insufficient or poor data might affect their chances and the rating agency will issue a credit rating report to the sovereign based on the available data. The rating report will be passed over to the arranger and investors of the debt to determine whether the State will get the necessary funding or not.

The role of Credit Rating Agencies in Sovereign Debt Restructuring

In 2006, African countries began accessing the international debt market to secure loans for their development funding and debt restructuring. The debt instrument of choice has since been the Eurobond, with twenty-one African countries having issued Eurobonds. A Eurobond is a local bond denominated in a different currency than the local one of the countries where the bond has been issued.

The appeal of Eurobonds has been the relatively low interest rates in advanced countries after the 2008 global financial crisis which made investing in African bonds more attractive when compared to the higher interest rates associated with bilateral and multilateral creditors. African countries led by Egypt, South Africa and Nigeria are estimated to have issued bonds worth more than $155 billion between 2000-2019.

Considering that the aim of sovereign States in issuing Eurobonds is to use borrowed funds to repurchase both local and international debt, rating agencies are at the heart of this complex process. The rating agencies provide information vital to the investors, existing creditors and the sovereign itself during the negotiation process leading up to the restructuring.

The general roles played by these rating agencies have been summarized as follows:

a. Credit Ratings as Negotiation Tools:

Sovereign debt restructuring negotiations are complex and Credit Rating Agencies serve a very important role in these negotiations. A state debtor with a good credit rating can leverage on same to gain more favorable terms such as a lower interest rate. Creditors also rely on credit reports during negotiation to decide whether the terms of the restructuring will be favorable or not.

b. Credit Ratings influence on decisions:

The significant influence of credit ratings on the decision of creditors cannot be overemphasized. Where credit ratings present a position that a debtor might default on its debts, creditors will be more willing to participate in debt relief programs. The alternative will be to enter protracted legal battles which may even erode any prospects of recovering their investments.

c. The part played by Credit Ratings in Legal Agreements:

Ratings serve as reference points for trigger events in legal agreements and can alter the terms of repayment or interest rates. Legal counsel is required to analyze the reasons for the rating and consider them in drafting the legal agreements. These triggers help both parties anticipate and manage the evolving dynamics of debt. An example is where credit obligations are accelerated in the event of a downgrade in a sovereign’s credit rating.

d. Credit Rating as a measure of a Sovereign’sCreditworthiness:

Furthermore, like an individual, a sovereigns credit rating affects its reputation in international financial markets. A sovereign with a good sovereign rating projects an image of stability and an ability to repay its debts. This assists the country in attracting foreign investment which will aid its economic growth.

A sovereign with a low credit rating increases the costs of issuing debt instruments in the international financial markets and where the sovereign is perceived as unstable or untrustworthy it may in some cases prevent it from being able to access funds required for its economic growth and development.


In conclusion, it is evident that credit rating agencies wield considerable influence in shaping the outcome of debt restructuring negotiations on the African continent and with this power comes great responsibility and a requirement of fairness in their rating decisions.

Credit rating agencies are a key part of the sovereign debt restructuring process, as the rating information they provide is of immense importance to both the sovereign debt issuer and the investors in that they ease the process of negotiation.

To improve their analysis, global rating agencies based outside the continent should consider setting up physical offices in Africa, with local analysts who would be better positioned to analyze the variables that constitute the key determining factors in arriving at a credit rating for a sovereign.

On the part of the sovereign States, there is an obligation forthem to improve on the integrity of the data provided during the rating process as this will enable the rating agencies to arrive at a proper and objective credit score that will enhance their chances of obtaining funding.