The African Export-Import Bank (Afreximbank) has joined a pan-African governance unit in criticising Fitch Ratings’ downgrade to the multilateral development bank’s credit rating.
Fitch announced on June 4 it was downgrading Afreximbank to BBB+, the lowest investment grade rating and one notch above junk, after reassessing its credit risk as “high” and its risk management policies as “weak”.
The agency cites concerns that non-performing sovereign loans in Ghana and Zambia might be included in restructuring efforts alongside commercial creditors. The multilateral development bank (MDB) is owed around US$750mn by Ghana and US$45mn by Zambia, and also has exposure to Malawi and South Sudan.
Fitch says restructuring “would put pressure on our assessment of the bank’s policy importance and heighten the risk associated with its strategy”, and believes Afreximbank’s non-performing loan ratio should be recorded at 7.1% rather than the 2.3% reported.
Afreximbank has argued it should be treated as a preferential creditor and excluded from restructuring, which is the norm for larger development financiers like the International Monetary Fund and World Bank.
However, in Ghana and Zambia it is facing resistance from government officials and other creditors, who argue that because it typically charges higher interest rates and pays dividends to shareholders it should not have priority over commercial lenders.
In a statement issued on June 10, Afreximbank says Fitch’s decision “is hinged on the erroneous view” that its establishing treaty “can be violated by the bank without consequences”.
That treaty, which was executed by 53 African states, requires that the MDB does not participate in debt restructuring negotiations, it says.
The downgrade has also attracted criticism from the African Peer Review Mechanism (APRM), an arrangement established in 2003 by African Union states to monitor governance performance.
The APRM says in a June 9 statement that treating sovereign exposures as equivalent to commercial loans is “flawed”.
“Doing so reflects a misunderstanding of the governance architecture of African financial institutions and the nature of intra-African development finance,” it says.
“Fitch has misinterpreted the invitation extended by Ghana, South Sudan and Zambia to Afreximbank to discuss the loan repayments as signalling an intention to default and/or to lift the preferred creditor status.”
Downgrading MDBs’ credit ratings could raise their cost of financing and make development financing “more expensive for Africa as a whole”, Samaila Zubairu, chair of the Alliance of African Multilateral Financial Institutions, warned earlier this month.
Zaynab Hoosen, senior Africa analyst at intelligence advisory Pangea-Risk, says the development is “concerning”.
“If Afreximbank must pay more to borrow as a result of perceived increased risk, it is likely to pass on higher rates to African sovereign borrowers and could scale back the volume of new loans,” she tells GTR.
Fellow South-focused institution Trade and Development Bank (TDB) is also battling for preferential creditor status in Malawi and Zambia, where governments owe it US$323mn and US$555mn respectively.
TDB’s case in Zambia is complicated further by the involvement of trade finance loans.
Although such loans are normally exempt from any restructuring, TDB’s decision to extend repayment terms have prompted creditors to argue they should be brought into the wider restructuring process.
Fitch revised TDB’s rating outlook from stable to negative in September last year, again citing concerns that sovereign debt restructuring “could lead to significant credit losses for the bank”.
