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Version: 09 Oct. 2023 “Understanding sovereign credit ratings”
Table of contents

I. MODULE 1: GENERALITIES ON SOVEREIGN CREDIT RATINGS ................3

1.1. Definition of sovereign credit rating ....................................................................... 3
1.2. Key concepts in sovereign credit ratings ................................................................. 3
1.3. International and regional credit rating agencies in Africa .................................... 4
1.4. Credit rating scales (by agency) .............................................................................. 9
1.5. Factors affecting sovereign credit ratings .............................................................. 16
1.6. Role and usefulness of credit ratings in capital markets ....................................... 18
1.7. The link between ratings and credit risk premiums ............................................... 19
1.8. Key takeaways ....................................................................................................... 19
1.9. References ............................................................................................................. 20
I. MODULE 1: GENERALITIES ON SOVEREIGN CREDIT
RATINGS
This first module provides the reader with a general overview of sovereign credit ratings, the
definition and characteristics of sovereign credit ratings, and a presentation of the main credit
rating agencies (CRAs). It explains the meaning of rating scales and compares the scales of
the different rating agencies. It provides an overview of factors affecting sovereign credit
ratings and explains the usefulness of sovereign credit ratings and the linkage between ratings
and credit risk premiums.

1.1. Definition of sovereign credit rating

A credit rating is a forward-looking opinion about an obligor's overall creditworthiness.

A sovereign credit rating is an assessment of a sovereign solvency in relation to its
financial commitments. It is an overall assessment of a country’s creditworthiness and
indicates the level of risk associated with lending to a particular country.

When evaluating the creditworthiness of a country, credit rating agencies (CRAs) consider
various factors such as the political environment, public finances, economic status, and
risk vulnerability… to assign an appropriate credit rating.

Obtaining a good credit rating is important for a country that wants to access funding in
capital markets. Also, countries with good credit ratings can attract more investors at
favorable terms, including lower borrowing costs.

1.2. Key concepts in sovereign credit ratings

It is important to understand some key concepts in the sovereign credit rating process.

- Private and public ratings

Credit ratings are said to be public when they are monitored and published on the rating
agency's website, making them accessible to market participants. These ratings are in the
public domain and are subject to specific dissemination requirements by regulatory
authorities.
Private ratings are not published. They are communicated to the rated entity, its agents, the
applicant, or a limited number of third parties, in the form of a confidential rating letter and
rating report. It is important to emphasize that the analytical approach is exactly the same for
private and public ratings, the only real difference lies in the disclosure of the result of the
analysis carried out by the rating agency.

- Solicitation and participation

The solicitation and participation status of a credit rating must be disclosed by CRAs for the
sake of market transparency.
Solicitation is defined around the compensation a rating agency receives or expects to
receive for its services. A rating is 'solicited' when a CRA receives or expects to receive
monetary compensation from a third party for its services. In the case of an unsolicited
credit rating, the rating agency does not receive or expect to receive any remuneration for
assigning or maintaining the rating. In short, an unsolicited rating is at the expense of the
rating agency. Typically, CRAs choose to issue and maintain an unsolicited rating if they
believe the rating is of interest to the market/investors or for the CRA's own purposes.

Participation status indicates the level of active engagement between the rated entity and the
rating agency's analysis teams during the rating process. Participation is not directly linked to
solicitation status. Thus, a solicited rating may be assigned even if the rated entity or its
agents do not participate in the rating process. Conversely, an issuer may choose to
participate in the rating process without having solicited a rating. An issuer's participation is
not a sine qua non condition for the awarding of a rating if the CRA considers that publicly
available information on the issuer is sufficient.

- Rating scales

A rating scale is a system of letters and numbers used to classify complex assessments in a
way that can be easily and instantly assimilated by investors.
The categories "AAA" to "BBB" are commonly referred to as "investment grade" and the
categories "BB" to "D" are called "speculative". The terms "investment grade" and
"speculative grade" are market conventions and do not imply any recommendation or
endorsement of any specific security for investment purposes by the rating agencies.

- Rating modifiers

Two types of modifiers are used to indicate the potential direction of a long-term rating:
rating outlook and rating watch.

The rating outlook indicates the potential direction of a rating over a 12 to 24-month
horizon. The rating outlook indicates financial or other trends which have not yet reached a
level sufficient to warrant rating action, but which could cause such action if they were to
persist.
A rating outlook is said to be 'Stable' if there is no indication that the rating is likely to change
over a period of 12 to 24 months. A 'Positive' rating outlook indicates an improving trend. A
'Negative' rating outlook indicates a downward trend.

The rating watch indicates that there is an increased likelihood of a rating change and the
likely direction of that change. Rating watch is 'Uncertain' if the rating may be revised
upwards, downwards or remain at its current level. Positive' indicates that a rating could be
revised upwards or confirmed at its current level. Negative' indicates that a rating could be
revised downwards or confirmed at its current level.

1.3. International and regional credit rating agencies in Africa

The three largest rating agencies are Standard & Poor’s (S&P) Global Ratings, Moody’s
Investors Service, and Fitch Ratings. In Africa, there are local/regional credit rating
agencies operating alongside these three main CRAs. Although there are other credit rating
agencies, these agencies exert the highest influence on capital markets and over market
decision-makers.
1.3.1. Standard & Poor’s (S&P) Global Ratings

“Standard & Poor's grew out of two companies: Poor's Publishing, a publisher of railroad
industry guidebooks officially founded in 1868, and the Standard Statistics Bureau, founded
in 1906, which published financial data on companies. In 1923, it released its first stock
market indicator, which contained 233 companies. Poor's Publishing, meanwhile, issued its
first rating in 1916. The two firms merged in 1941, to create Standard & Poor's. The
McGraw-Hill Cos. purchased S&P in 1966. In 2012, Standard & Poor’s combined its index
operations with Dow Jones Indices (which McGraw-Hill owned) to become the leader in
stock market indexes. In 2016, McGraw Hill Financial rebranded itself as S&P Global. S&P
Global divisions include S&P Global Ratings, S&P Global Market Intelligence, S&P Dow
Jones Indices, and S&P Global Platts. The company has more than 1,500 credit analysts and
more than 1 million credit ratings have been issued on governments, corporations, the
financial sector, and securities.”1

S&P Global Ratings is a part of S&P Global Inc., a prominent financial services company.
S&P Global Ratings primarily evaluates the creditworthiness of debt issuers, including
sovereigns, corporations, and other entities that raise capital through debt instruments such as
bonds. The agency assigns credit ratings to these issuers and their debt securities to help
investors make informed investment decisions.

S&P Global Ratings has a global reach and provides credit ratings for entities and debt
securities in many countries around the world. Its services cover a wide range of sectors,
including corporate, sovereign, municipal, and structured finance. Their extensive coverage
allows investors to assess credit risk across different markets and asset classes.

As of today, there are 24 African countries rated by S&P Global Ratings (see table below).

Table 1: African countries’ rating

S&P Moody's Fitch

Botswana BBB+ A3
Mauritius BBB- Baa3
Morocco BB+ Ba1 BB+
South Africa BB- Ba2 BB-
Ivory Coast BB- Ba3 BB-
Namibia B1 BB-
Senegal B+ Ba3
Seychelles BB-
Benin B+ B1 B+
Rwanda B+ B2 B+
Uganda B B2 B+
Lesotho B
Swaziland B3
Tanzania B2 B+
Zambia SD Ca RD

1
Source: https://www.investopedia.com/terms/s/sp.asp#citation-5
 Egypt B Caa1 B
Kenya B B3 B
Togo B B3
Angola B- B3 B-
Cameroon SD Caa1 B
Cape Verde B- B-
Gabon N/A Caa1 B-
Madagascar B-
Niger Caa2
Nigeria B- Caa1 B-
Congo B- B3
Tunisia N/A Caa2 CCC-
Burkina Faso CCC+
Mozambique CCC+ Caa2 CCC+
Republic of the Congo B- Caa2 CCC+
Ethiopia CCC Caa3 CCC-
Mali Caa2
Ghana SD Ca RD
Source: https://tradingeconomics.com/country-list/rating?continent=africa (consulted on 7 October 2023)

1.3.2. Moody’s Investors Service

Moody's Corporation, often referred to as Moody's, is an American business and financial

services company. It is the holding company for Moody's Investors Service (MIS), an
American credit rating agency, and Moody's Analytics (MA), an American provider of
financial analysis software and services.

“Moody's was founded by John Moody in 1909 to produce manuals of statistics related to
stocks and bonds and bond ratings. Moody's was acquired by the Dun & Bradstreet
Corporation in 1962. In 2000, Dun & Bradstreet spun off Moody's Corporation as a separate
company that was listed on the NYSE under MCO. In 2007, Moody's Corporation was split
into two operating divisions: Moody's Investors Service, the rating agency, and Moody's
Analytics, which focuses on providing economic research regarding risk, performance and
financial modeling, as well as consulting, training and software services.”2

Moody's Investors Service rates debt securities in several market segments related to
public and commercial securities in the bond market. These include government, municipal,
and corporate bonds; managed investments such as money market funds, fixed-income
funds, and hedge funds; financial institutions including banks and non-bank finance
companies; and asset classes in structured finance.

Moody's assigns ratings to both issuers and specific financial instruments, and these ratings
are usually made public.

2
Source:
https://en.wikipedia.org/wiki/Moody%27s_Corporation#:~:text=Moody%27s%20was%20founded%20by%20Jo
hn,by%20Dun%20%26%20Bradstreet%20in%201962.
As of today, there are 28 African countries rated by Moody’s (see table above).

1.3.3. Fitch Ratings

Fitch Ratings, commonly referred to as Fitch, “was launched in New York by three
investors, John Knowles Fitch (1880–1943), Henry P. Clancy, and Fabian Levy. Their most
successful product was the Fitch Bond Book, a compendium of user-friendly bond data which
was delivered directly to investors. It was also known as the “Fitch Investors Service”.”3
Over the years, it evolved into a leading credit rating agency, providing credit assessments
and credit risk analysis to help market participants make informed investment decisions. In
the 1924, Fitch introduced the AAA through D rating system, which is now the most used
rating system in the credit rating industry.4

Fitch Ratings provides forward-looking credit opinions (“ratings”) on investments, which

reflect their likelihood of default. The credit ratings provided by Fitch are utilized by
investors, intermediaries (such as investment banks), issuers of debt, businesses, and
corporations.

Fitch Ratings offers a wide range of credit rating services across various sectors and asset
classes, including sovereign ratings, corporate ratings, structured finance ratings, municipal
ratings…

Today, Fitch Ratings employs over 2,000 individuals and runs 38 global offices, being one of
the largest credit rating agencies in the world.

As of today, there are 23 African countries rated by Fitch (see table above).

1.3.4. Other rating agencies (local and regional)

In this section, we focus on local/regional credit rating agencies based in Africa. These
regional agencies rated mainly local currency debts. Depending on their regulatory oversight,
the ratings issued by these local/regional agencies will be considered in the calculation of
prudential ratios within their jurisdictions, mainly for local currency-issued debt obligations.
One of the main challenges of these local/regional CRAs is the lack of international
recognition by the international investors’ community. Usually, international investors in
global capital markets will rely more on ratings assigned by one of the three main CRAs for
their investment decision choice, particularly when it comes to international bonds and
Eurobonds markets.

Bloomfield

Founded in 2007, Bloomfield Investment Corporation is a credit risk assessment agency that
operates in West and Central Africa. It is based in Abidjan, Côte d'Ivoire, with a presence in
Douala, Cameroon. The company offers various services, including financial ratings,
economic and financial intelligence, counterparty risk management solutions for SMEs, as
well as seminars and training. Bloomfield is under the regulatory oversight of the Financial

3
Source: https://www.fitchratings.com/about-us#company-history
4
Source: https://corporatefinanceinstitute.com/resources/fixed-income/fitch-ratings/
Market Authority of the West African Monetary Union (WAMU) (AMF-UMOA). The
agency covers the eight WAEMU (West African Economic and Monetary Union) countries.
Over recent years, the agency made attempts to penetrate the CEMAC (Economic and
Financial Community for Central African States) region.

Bloomfield Ratings, a branch of Bloomfield Investment Corporation, is responsible for

financial ratings using methodologies tailored to the local environment. The ratings assess the
default risk of entities (companies, banks, public institutions, or countries) that borrow from
the market or banks, thereby classifying borrowers based on their risk quality.

GCR Ratings5

GCR (Global Credit Ratings), established in 1996 as part of Duff & Phelps, has become
Africa's top rating agency, with the majority of ratings on the continent. It has a strong
presence in several African countries, including Mauritius, South Africa, Nigeria, Kenya, and
Senegal, boasting the largest rating team in Africa. GCR's ratings are crucial for Africa's
financial markets, offering valuable insights across various sectors.

Moody's Corporation acquired a 51% stake in GCR in May 2022, aiming to enhance its role
in African markets. Additionally, African Women Chartered Accountants Investment
Holdings (AIH) acquired a 20% stake in GCR South Africa, while other institutional
shareholders include the Carlyle Group and DEG/KFW Group.

GCR is licensed as a rating agency in multiple markets, including Mauritius with the
Financial Services Commission, South Africa with the Financial Sector Conduct Authority,
Kenya with the Capital Markets Authority, Nigeria with the Securities and Exchange
Commission, and the Financial Markets Authority of the West African Monetary Union
(AMF-UMOA) in the West African Monetary Union. GCR is also recognized as an eligible
External Credit Assessment Institution (ECAI) by the Bank of Mauritius and the South
African Reserve Bank.

The company offers credit ratings, research, financial analysis as well as methodologies to
financial institutions, insurance agencies, institutional investors, and corporate enterprises,
helping them assess the credibility of other entities easily.

Agusto & Co.

Agusto & Co. was founded by Mr. Olabode Agusto in 1992, as a business information
company with the view of gathering and providing information on selected African
economies and industries—the firm assigns risk ratings to issuers and issues presented in
Nigeria and on the African continent. In 2001, Agusto & Co. was licensed and is currently
regulated by Nigeria’s Securities & Exchange Commission (SEC). In 2013, the company was
approved and registered as a credit rating agency by the capital market authorities of Kenya
and Rwanda.6

5
Sources: https://gcrratings.com/about-us-2/ and https://pitchbook.com/profiles/company/169774-84#overview
6
https://www.agusto.com/about-us/
On 17 February 20227, the Climate Bonds Standard Board awarded Agusto & Co the
Approved Verifier status. This certification confers Agusto & Co an Approved Verifier status
to perform verification of green bonds, projects, and assets in Africa. As an Approved
Verifier, Agusto & Co. can assess project eligibility under the Climate Bonds Standard
criteria and issue pre-issuance and post-issuance verifier reports.

CARE Ratings (Africa) Private Limited (CRAF)8

CRAF is incorporated in Mauritius and is the first credit rating agency to be licensed by the
Financial Services Commission of Mauritius on May 7, 2015. It is also recognized by the
Bank of Mauritius as an External Credit Assessment Institution (ECAI) as of May 9, 2016.
CRAF provides credit ratings and related services in Mauritius and has plans to venture into
other African countries.

CARE Ratings (Africa) Private Limited is a subsidiary of CARE Ratings Limited (CARE
Ratings) based in India. As of March 31, 2017, CRAF’s shareholders are CARE Ratings
Limited (CARE Ratings), the African Development Bank (AfDB) and MCB Equity Fund
(MEF) & SBM (NFC) Holdings Limited (SNHL).

In Mauritius, CRAF provides ratings for various instruments such as bonds, debentures,
commercial papers, bank deposits, structured finance, and other debt instruments besides the
bank facilities including term loans, working capital limits, non-funded exposures
(guarantees/letters of credits), etc.

Sovereign Africa Ratings (SAR)9

SAR was launched in September 2022 by a group of investors and is based in South Africa.
The agency also published its first credit rating report on South Africa, grading it “BBB” with
a stable outlook in the long term, and “B+” with a stable outlook in the short term. SAR’s
credit rating model comprises 82 variables, which also translate into risk determinants,
including fiscal, economic, environment, governance, climate change, and wealth generated
by natural resources aspects.

SAR is a direct response to the criticism faced by the three big rating agencies when it comes
to the lack of transparency in their methodologies.

1.4. Credit rating scales (by agency)

1.4.1. S&P Global Ratings

Issue credit ratings can be either long-term or short-term. Short-term issue credit ratings are
generally assigned to those obligations with an original maturity of no more than 365 days. A
long-term issue credit rating is assigned to an obligation with an original maturity of greater
than 365 days.

7
https://www.climatebonds.net/resources/press-releases/2022/02/climate-bonds-standard-board-award-agusto-
co-approved-verifier (consulted on 7 October 2023).
8
http://www.careratingsafrica.com/about-us.php
9
Source: https://www.engineeringnews.co.za/article/africas-first-credit-ratings-agency-launched-2022-09-26
The long-term issuer credit ratings scale of Standard & Poor’s is:

Long-Term Issuer Credit Ratings*

Category Definition

An obligor rated 'AAA' has an extremely strong capacity to meet its financial commitments.
AAA
'AAA' is the highest issuer credit rating assigned by S&P Global Ratings.
An obligor rated 'AA' has a very strong capacity to meet its financial commitments. It differs
AA
from the highest-rated obligors only to a small degree.
An obligor rated 'A' has a strong capacity to meet its financial commitments but is somewhat
A more susceptible to the adverse effects of changes in circumstances and economic conditions
than obligors in higher-rated categories.
An obligor rated 'BBB' has adequate capacity to meet its financial commitments. However,
BBB adverse economic conditions or changing circumstances are more likely to weaken the
obligor's capacity to meet its financial commitments.
Obligors rated 'BB', 'B', 'CCC', and 'CC' are regarded as having significant speculative
BB, B, CCC, characteristics. 'BB' indicates the least degree of speculation and 'CC' the highest. While such
and CC obligors will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposure to adverse conditions.
An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors.
However, it faces major ongoing uncertainties and exposure to adverse business, financial, or
BB
economic conditions that could lead to the obligor's inadequate capacity to meet its financial
commitments.
An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently
has the capacity to meet its financial commitments. Adverse business, financial, or economic
B
conditions will likely impair the obligor's capacity or willingness to meet its financial
commitments.
An obligor rated 'CCC' is currently vulnerable and is dependent upon favorable business,
CCC
financial, and economic conditions to meet its financial commitments.
An obligor rated 'CC' is currently highly vulnerable. The 'CC' rating is used when a default
CC has not yet occurred but S&P Global Ratings expects default to be a virtual certainty,
regardless of the anticipated time to default.
An obligor is rated 'SD' (selective default) or 'D' if S&P Global Ratings considers there to be
a default on one or more of its financial obligations, whether long- or short-term, including
rated and unrated obligations but excluding hybrid instruments classified as regulatory
capital or in nonpayment according to terms. A 'D' rating is assigned when S&P Global
Ratings believes that the default will be a general default and that the obligor will fail to pay
SD and D
all or substantially all of its obligations as they come due. An 'SD' rating is assigned when
S&P Global Ratings believes that the obligor has selectively defaulted on a specific issue or
class of obligations but will continue to meet its payment obligations on other issues or
classes of obligations on time. A rating on an obligor is lowered to 'D' or 'SD' if it is
conducting a distressed debt restructuring.
*Ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within the rating categories.
Source: S&P Global Ratings Definitions

These ratings are grouped into two categories:

• Investment grade (AAA to BBB-): describes bonds and other debt securities that
were deemed suitable for financial institutions by both bank regulators and market
 participants. Nowadays, this term is more broadly applied to denote issuers and
issues with relatively strong creditworthiness and credit quality.
• Speculative grade (BB+ to D): also called non-investment grade typically refers
to debt securities where the issuer currently possesses the ability to repay but faces
significant uncertainties. These uncertainties may arise from adverse business or
financial circumstances that could impact credit risk.

The short-term ratings scale of Standard & Poor’s is:

Short-Term Issuer Credit Ratings

Category Definition

An obligor rated 'A-1' has a strong capacity to meet its financial commitments. It is rated in the
highest category by S&P Global Ratings. Within this category, certain obligors are designated with
A-1
a plus sign (+). This indicates that the obligor's capacity to meet its financial commitments is
extremely strong.
An obligor rated 'A-2' has a satisfactory capacity to meet its financial commitments. However, it is
A-2 somewhat more susceptible to the adverse effects of changes in circumstances and economic
conditions than obligors in the highest rating category.
An obligor rated 'A-3' has adequate capacity to meet its financial obligations. However, adverse
A-3 economic conditions or changing circumstances are more likely to weaken the obligor's capacity to
meet its financial commitments.
An obligor rated 'B' is regarded as vulnerable and has significant speculative characteristics. The
obligor currently has the capacity to meet its financial commitments; however, it faces major
B
ongoing uncertainties that could lead to the obligor's inadequate capacity to meet its financial
commitments.
An obligor rated 'C' is currently vulnerable to nonpayment that would result in an 'SD' or 'D' issuer
C rating and is dependent upon favorable business, financial, and economic conditions to meet its
financial commitments.
An obligor is rated 'SD' (selective default) or 'D' if S&P Global Ratings considers there to be a
default on one or more of its financial obligations, whether long- or short-term, including rated and
unrated obligations but excluding hybrid instruments classified as regulatory capital or in
nonpayment according to terms. A 'D' rating is assigned when S&P Global Ratings believes that
SD and D the default will be a general default and that the obligor will fail to pay all or substantially all of its
obligations as they come due. An 'SD' rating is assigned when S&P Global Ratings believes that
the obligor has selectively defaulted on a specific issue or class of obligations but will continue to
meet its payment obligations on other issues or classes of obligations on time. A rating on an
obligor is lowered to 'D' or 'SD' if it is conducting a distressed debt restructuring.
Source: S&P Global Ratings Definitions

1.4.2. Moody’s Investors Service

Moody's has established two global credit rating scales: the long-term rating scale and the
short-term rating scale. Long-term ratings are for obligations with maturities over 11
months, while short-term ratings are for obligations under 13 months.

Ratings assigned on Moody’s global long-term and short-term rating scales are forward-
looking opinions of the relative credit risks of financial obligations issued by non-financial
corporates, financial institutions, structured finance vehicles, project finance vehicles, and
public sector entities. Moody’s defines credit risk as the risk that an entity may not meet its
contractual financial obligations as they come due and any estimated financial loss in the
event of default or impairment.

The contractual financial obligations addressed by Moody’s ratings are those that call for,
without regard to enforceability, the payment of an ascertainable amount, which may vary
based upon standard sources of variation (e.g., floating interest rates), by an ascertainable
date. Moody’s rating addresses the issuer’s ability to obtain cash sufficient to service the
obligation, and its willingness to pay. Moody’s ratings do not address non-standard sources
of variation in the amount of the principal obligation (e.g., equity-indexed), absent an express
statement to the contrary in a press release accompanying an initial rating.

Long-term ratings are assigned to issuers or obligations with an original maturity of 11

months or more and reflect both on the likelihood of a default or impairment on contractual
financial obligations and the expected financial loss suffered in the event of default or
impairment.

Short-term ratings are assigned to obligations with an original maturity of 13 months or

less and reflect both on the likelihood of a default or impairment on contractual financial
obligations and the expected financial loss suffered in the event of default or impairment.

Moody’s issues ratings at the issuer level and instrument level on both the long-term scale
and the short-term scale. Typically, ratings are made publicly available although private
and unpublished ratings may also be assigned.

Global long-term rating scale:

• Aaa: Obligations rated Aaa are judged to be of the highest quality, subject to the
lowest level of credit risk.
• Aa: Obligations rated Aa are judged to be of high quality and are subject to very
low credit risk.
• A: Obligations rated A are judged to be upper-medium grade and are subject to
low credit risk.
• Baa: Obligations rated Baa are judged to be medium-grade and subject to
moderate credit risk and as such may possess certain speculative characteristics.
• Ba: Obligations rated Ba are judged to be speculative and are subject to substantial
credit risk.
• B: Obligations rated B are considered speculative and are subject to high credit
risk.
• Caa: Obligations rated Caa are judged to be speculative of poor standing and are
subject to very high credit risk.
• Ca: Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
• C: Obligations rated C are the lowest rated and are typically in default, with little
prospect for recovery of principal or interest.

For example, on September 8, 2023, Ghana had a long-term rating in the foreign currency of
Ca, meaning that bonds issued by Ghana had a high probability of default.
Moody's uses numerical modifiers 1, 2, and 3 for rating classifications from Aa to Caa:
• Modifier 1: means the obligation is at the higher end of its category,
• Modifier 2: signifies a mid-range ranking,
• Modifier 3: suggests a lower-end ranking within that category.

For example, on September 8, 2023, Côte d’Ivoire had a long-term rating in foreign currency
of Ba3.

Global short-term rating scale:

• P-1: Ratings of Prime-1 reflect a superior ability to repay short-term obligations.
• P-2: Ratings of Prime-2 reflect a strong ability to repay short-term obligations.
• P-3: Ratings of Prime-3 reflect an acceptable ability to repay short-term
obligations.
• NP: Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.

The following table presents the long-term ratings consistent with different short-term ratings
when such long-term ratings exist.

Table 2: Linkage between Global Long-Term and Short-Term Rating Scales

Global Short-Term Rating Scale Global Long-Term Rating Scale

Prime-1 Aaa, Aa1, Aa2, Aa3, A1, A2. A3
Prime-2 A3, Baa1, Baa2
Prime-3 Baa2, Baa3
Not Prime Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C

1.4.3. Fitch Ratings

Long-term ratings:

The rating scale of Fitch is as follows:

• AAA: Highest Credit Quality. ‘AAA’ ratings denote the lowest expectation of default
risk. They are assigned only in cases of exceptionally strong capacity for payment of
financial commitments. This capacity is highly unlikely to be adversely affected by
foreseeable events.
• AA: Very High Credit Quality. ‘AA’ ratings denote expectations of very low default
risk. They indicate a very strong capacity for payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
• A: High credit quality. 'A' ratings denote expectations of low default risk. The
capacity for payment of financial commitments is considered strong. This capacity
may, nevertheless, be more vulnerable to adverse business or economic conditions
than is the case for higher ratings.
 • BBB: Good credit quality. 'BBB' ratings indicate that expectations of default risk are
currently low. The capacity for payment of financial commitments is considered
adequate, but adverse business or economic conditions are more likely to impair this
capacity.
• BB: Speculative. 'BB' ratings indicate an elevated vulnerability to default risk,
particularly in the event of adverse changes in business or economic conditions over
time; however, business or financial flexibility exists that supports the servicing of
financial commitments.
• B: Highly speculative. 'B' ratings indicate that material default risk is present, but a
limited margin of safety remains. Financial commitments are currently being met;
however, the capacity for continued payment is vulnerable to deterioration in the
business and economic environment.
• CCC: Substantial credit risk. Very low margin for safety. Default is a real possibility.
• CC: Very high levels of credit risk. Default of some kind appears probable.
• C: Near default. A default or default-like process has begun, or for a closed funding
vehicle, payment capacity is irrevocably impaired. Conditions that are indicative of a
‘C’ category rating for an issuer include:
- The issuer has entered into a grace or cure period following non-payment of a
material financial obligation;
- The formal announcement by the issuer or their agent of a distressed debt
exchange; and
- A closed financing vehicle where payment capacity is irrevocably impaired such
that it is not expected to pay interest and/or principal in full during the life of the
transaction, but where no payment default is imminent.
• RD: Restricted default. 'RD' ratings indicate an issuer that in Fitch's opinion has
experienced an uncured payment default or distressed debt exchange on a bond, loan,
or other material financial obligation, but has not entered into bankruptcy filings,
administration, receivership, liquidation, or other formal winding-up procedure, and
has not otherwise ceased operating.
• D: Default. 'D' ratings indicate an issuer that in Fitch's opinion has entered into
bankruptcy filings, administration, receivership, liquidation, or other formal winding-
up procedure or that has otherwise ceased business and debt is still outstanding.

Short-term ratings:

These ratings apply to obligations with short-term maturities (up to 13 months). Fitch uses
specific codes to indicate the quality of short-term credit:
• F1: The highest quality, reflecting a strong ability to make timely payments.
• F2: Good credit quality with a solid capacity for on-time payments.
• F3: Adequate credit quality with a satisfactory ability for timely payments.
• B: Speculative credit quality, suggesting limited capacity for on-time payments and
heightened vulnerability to economic changes.
• C: High risk of short-term default, where default is a real possibility.
 • RD: Indicates an entity that has defaulted on some commitments but still meets
others, typically for entity ratings.
• D: Signifies a broad-based default event for an entity or a short-term obligation.

Fitch uses modifiers like "+" or "–" to indicate the relative position of a rating within its
major rating categories. For example, in the long-term category, within the 'AA' category,
there are three specific levels: 'AA+', 'AA', and 'AA–'. These suffixes are not used for ratings
higher than 'AAA' or ratings below the 'CCC' category. In the short-term rating category 'F1',
a '+' can be added.

Figure 1: Fitch ratings scale

Source: Fitch Ratings - Rating Definitions

1.4.4. Comparison of the rating scales of the 3 rating agencies

Table 3: Comparison of the rating scales of the 3 rating agencies

Moody's S&P Fitch

Long Short Long Short Long Short Explanation of the ratings Category
term term term term term term
ratings ratings ratings ratings ratings ratings
Aaa AAA AAA Highest credit quality /Prime
Aa1 P-1 AA+ AA+
Investment grade

A-1+ F1+
Aa2 AA AA High-quality/High grade
Aa3 AA− AA−
A1 A+ A+
A-1 F1 Upper-medium grade Good
A2 A A credit quality / Upper-medium
grade
A3 P-2 A− A-2 A− F2
Baa1 BBB+ BBB+
Below-medium grade /
Lower medium grade
Baa2 BBB BBB
P-3 A-3 F3
Baa3 BBB− BBB−

Ba1 BB+ BB+

Speculative/Speculative grade
Ba2 BB BB
B B
Ba3 BB− BB−

Speculative grade
B1 Not B+ B+
Prime/ Highly speculative/Highly
B2 Non B B
speculative
B3 prime B− B−
Caa1 CCC+ High risk
Caa2 CCC CCC Ultra speculative
Caa3 CCC− C C
Default with some hope to
Ca CC CC
recover
C/CI/R C
C
SD RD Selective default
D D
D D D Default
Source: Compilation of author from various sources.

1.5. Factors affecting sovereign credit ratings

Ratings are derived from agency-specific templates or scorecards. In general, the main risk
factors considered come from the following dimensions:
• Macroeconomic performance of the country: real GDP growth rate, volatility of
GDP growth, GDP per capita, inflation, external position
• Sustainability of public finances and debt: budget deficit, public debt, debt service
• Quality of institutions and governance: quality of institutions, civil society and
justice
• Risk vulnerability: political risk, government liquidity risk, banking sector risk,
external vulnerability risk
• Socio-political environment, business environment, and ESG (environmental,
social and governance).
The sub-sections below give a general overview of the factors used by each of the three
CRAs. More discussions on the factors and the methodologies are done in module 2.

1.5.1. S&P sovereign credit rating framework

S&P uses the following five key areas to determine a sovereign’s creditworthiness:

1. The institutional assessment reflects the view of how a government's institutions and
policymaking affect a sovereign's credit fundamentals by delivering sustainable public
finances, promoting balanced economic growth, and responding to economic or
 political shocks. It also reflects the view of the transparency and accountability of
data, processes, and institutions; a sovereign's debt repayment culture; and potential
external and domestic security risks.

2. The economic assessment incorporates the view of: - The country's income levels as
measured by its GDP per capita, indicating broader potential tax and funding bases
upon which to draw, which generally support creditworthiness; - Growth prospects;
and - Its economic diversity and volatility.

3. A country's external assessment, which refers to the transactions and positions of all
residents (public- and private-sector entities) vis-à-vis the rest of the world, is
primarily driven by the view of: - The status of a sovereign's currency in international
transactions; - The country's external liquidity, which provides an indication of the
economy's ability to generate the foreign exchange necessary to meet its public- and
private-sector obligations to non-residents; and - The country's external position,
which shows residents' assets and liabilities (in both foreign and local currency)
relative to the rest of the world.

4. The fiscal assessment reflects the view of the sustainability of a sovereign's deficits
and its debt burden. This measure considers fiscal flexibility, long-term fiscal trends
and vulnerabilities, debt structure and funding access, and potential risks arising from
contingent liabilities. Given the many dimensions that this assessment captures, the
analysis is divided into two segments, "fiscal performance and flexibility" and "debt
burden."

5. The monetary assessment considers the view of the monetary authority's ability to
fulfill its mandate while sustaining a balanced economy and attenuating any major
economic or financial shocks. The monetary assessment is derived by analyzing: -
The exchange rate regime, which influences a sovereign's ability to coordinate
monetary policy with fiscal and other economic policies to support sustainable
economic growth; and - The credibility of monetary policy as measured, among other
factors, by inflation trends over an economic cycle and the effects of market-oriented
monetary mechanisms on the real economy, which is largely a function of the depth
and diversification of a country's financial system and capital markets.

1.5.2. Moody’s rating methodology

Moody’s uses the following qualitative and quantitative factors that are likely to affect rating
outcomes:
• Economic strength includes growth dynamics; the scale of the economy; and
national income;
• Institutional and governance strength includes quality of institutions and policy
effectiveness;
• Fiscal strength includes debt burden and debt affordability;
• Susceptibility to event risk includes political risk; government liquidity risk; banking
sector risk; and external vulnerability risk.
 • ESG considerations are integrated into each of the above-mentioned dimensions of
the analysis.

1.5.3. Fitch sovereign risk analytical pillars

Fitch’s approach to sovereign rating analysis is an assessment of the following four analytical
pillars, which inform the creditworthiness of the sovereign:
• Structural features of the economy that render it more or less vulnerable to shocks,
including the risks posed by the financial sector, political risk, and governance
factors;
• Macroeconomic performance, policies, and prospects, including growth prospects,
economic stability, and the coherence and credibility of policy;
• Public finances, including budget balances, the structure and sustainability of public
debt and fiscal financing, and the likelihood of the crystallization of contingent
liabilities;
• External finances, including the sustainability of current account balances and
capital flows, and the level and structure of external debt (public and private).

In addition, the agency seeks to reflect relevant environmental, social, and governance
(ESG) factors into its sovereign ratings, as it does for all factors that it believes are relevant
and material for creditworthiness.

1.6. Role and usefulness of credit ratings in capital markets

In addition to issuing bonds in external debt markets, another common motivation for
countries to obtain a sovereign credit rating is to attract external investments. Many countries
seek ratings from the largest and most prominent credit rating agencies to encourage
investor’s confidence. Investors use sovereign credit ratings as a way to assess the riskiness
of a particular country's bonds.

Credit ratings play a pivotal role in financial markets, serving as a critical tool for various
stakeholders, including investors, issuers, and regulators. Credit rating agencies (CRAs) are
instrumental in this process, providing valuable information and assessments that facilitate
the smooth functioning of capital markets.

The role and utility of credit ratings are:

• Provide information and assessment for investors: One of the primary functions of
credit ratings is to provide investors with a quick and standardized assessment of the
creditworthiness of various financial instruments and entities. This information helps
investors make informed decisions about where to allocate their capital. For example,
an individual looking to invest in sovereign bonds can easily compare the credit
ratings of different sovereign issuers to gauge the level of risk associated with each
investment. For instance, a AAA-rated bond is considered less risky compared to a
BB-rated bond, which may offer higher returns but comes with greater credit risk.
• Issuer access to capital markets: Governments rely on credit ratings to access the
capital markets. A strong credit rating can lower the cost of borrowing and make it
easier for entities to raise funds. For example, a highly rated sovereign can issue
 bonds at a lower interest rate, reducing its financing costs. Conversely, an issuer with
a lower credit rating may struggle to attract investors and may need to offer higher
yields to compensate for the added risk.
• Help regulators to regulate: Regulators often use credit ratings as a key component
in their oversight of financial markets. Ratings help establish minimum credit quality
standards for certain types of investments and institutions. For example, in the
aftermath of the 2008 financial crisis, regulators implemented reforms that required
banks to hold capital based on the credit ratings of their assets. This change aimed to
ensure that banks maintain adequate capital buffers against potential losses.
• Structured products and collateral assessment: The rapid growth of structured
financial products, such as mortgage-backed securities (MBS) and collateralized debt
obligations (CDOs), has created a demand for credit assessments of underlying
collateral assets. For example, during the housing bubble leading up to the 2008
financial crisis, CRAs assigned high credit ratings to MBS and CDOs, which were
based on risky subprime mortgages. These optimistic ratings contributed to a
misperception of risk, ultimately leading to the crisis when the housing market
collapsed.
• Structuring Special Purpose Vehicles (SPVs): CRAs are often involved in
designing the specific structure of Special Purpose Vehicles (SPVs) used in
securitization transactions. This includes determining the credit enhancements and
tranching of securities. For example, in a mortgage-backed security, CRAs work with
financial institutions to structure tranches with different levels of credit risk. These
tranches are then sold to investors with varying risk appetites, providing an efficient
way to allocate risk in the market.

1.7. The link between ratings and credit risk premiums

Credit risk premiums are the additional yield that investors demand for holding sovereign
bonds to compensate for their riskiness level. Thus, investors expect higher compensation for
taking on more risk. Lower-rated sovereign bonds are inherently riskier due to a higher
likelihood of default. When a sovereign credit rating is downgraded, the credit risk premium
on its debt typically increases. This means that the sovereign will have to offer higher interest
rates to attract investors, which can lead to higher borrowing costs. Conversely, an upgrade in
credit rating can reduce the credit risk premium, resulting in lower borrowing costs for the
sovereign.

The link between credit ratings and credit risk premiums has profound implications for
investors, borrowers, and the broader economy. For sovereigns, maintaining a good credit
rating is crucial for accessing capital at favorable terms (maturity and cost). It can also
influence their ability to invest in growth opportunities and manage their financial health. On
the other hand, investors rely on credit ratings to make informed investment decisions,
balancing risk and return in their portfolios.

1.8. Key takeaways

- A credit rating is a forward-looking opinion about an obligor's overall
creditworthiness.
 - The three largest rating agencies are Standard & Poor’s (S&P) Global Ratings,
Moody’s Investors Service, and Fitch Ratings. In Africa, there are local/regional
credit rating agencies operating alongside these three main CRAs.
- A total of 33 countries are rated by one of the three largest rating agencies.
- Ratings are grouped into two categories: Investment grade and speculative grade
also called non-investment grade.
- In general, the main risk factors considered come from the following dimensions:
Macroeconomic performance of the country, Sustainability of public finances and
debt, Quality of institutions and governance, Risk vulnerability and Socio-political
environment, business environment, and ESG (environmental, social and
governance).
- Credit ratings
o provide information and assessment for investors;
o is a prerequisite to issuer access to capital markets;
o help regulate the market;
o contribute to assess the risk associate to Structured and collateral
instruments.
- The link between credit ratings and credit risk premiums has profound
implications for investors, borrowers, and the broader economy.

1.9. References
Gratcheva, Ekaterina M., Gurhy, Bryan, Skarnulis, Andrius, Stewart, Fiona E., & Wang,
Dieter (2022). Credit Worthy: ESG Factors and Sovereign Credit Ratings. World Bank
Group. Available at:
https://documents1.worldbank.org/curated/en/812471642603970256/pdf/Credit-Worthy-
ESG-Factors-and-Sovereign-Credit-Ratings.pdf
Luitel, Prabesh, & Vanpée, Rosanne (2018). How do sovereign credit ratings help to
financially develop low-developed countries? European Capital Markets Institute, ECMI
Working Paper no 8. Available at:
http://aei.pitt.edu/94989/1/ECMIWPNo8_Luitel%26Vanpee_sovereign_credit_ratings.pdf
Semet, Raphaël, Roncalli, Thierry, & Stagnol, Lauren (2021). ESG and Sovereign Risk -
What is Priced in by the Bond Market and Credit Rating Agencies? Working Paper.
Available at: http://www.thierry-roncalli.com/download/WP_Sovereign_ESG.pdf
Stocker, Marshall L. (2022). Emerging Markets Debt: Determinants of Sovereign Bond
Quality and Returns. Morgan Stanley Investment Management, Investment Insight (August
2022). Available at:
https://www.morganstanley.com/im/publication/insights/articles/article_emdsovereignbond.p
df
UNDP (2023). Reducing the Cost of Finance for Africa: The Role of Sovereign Credit
Ratings. UNDP, Regional Bureau for Africa, Strategy, Analysis and Research Team.
Available at: https://www.undp.org/africa/publications/lowering-cost-borrowing-africa-role-
sovereign-credit-ratings

Useful web links:

• S&P: INTRO TO CREDIT RATINGS.
https://www.spglobal.com/ratings/en/about/intro-to-credit-ratings
• S&P - Guide to Credit Rating Essentials.
https://www.spglobal.com/ratings/_division-assets/pdfs/guide-to-credit-rating-
essentials.pdf
• S&P - How We Rate Sovereigns. https://www.spglobal.com/ratings/_division-
assets/pdfs/021519_howweratesovereigns.pdf
• S&P Global Ratings Definitions.
https://www.spglobal.com/ratings/en/research/articles/190705-s-p-global-ratings-
definitions-504352
• Moody’s Investors Service: Rating Symbols and Definitions.
https://ratings.moodys.com/api/rmc-documents/53954
• Fitch Ratings – Rating Definitions. https://www.fitchratings.com/research/fund-
asset-managers/rating-definitions-24-04-2023
• Fitch Ratings - Sovereign Rating Criteria.
https://www.fitchratings.com/research/sovereigns/sovereign-rating-criteria-06-04-
2023
• https://gcrratings.com/about-us-2/
• https://pitchbook.com/profiles/company/169774-84#overview
• https://www.agusto.com/about-us/
• http://www.careratingsafrica.com/about-us.php
• https://www.engineeringnews.co.za/article/africas-first-credit-ratings-agency-
launched-2022-09-26