Ten African countries have been downgraded since the COVID-19 pandemic started – Angola, Botswana, Cameroon, Cape Verde, Democratic Republic of the Congo, Gabon, Nigeria, South Africa, Mauritius and Zambia.

These decisions were based on expectations that their fiscal situations would deteriorate and their health systems would be severely strained by the pandemic. However, some are concerned that they were premature and unjustified.

Since international rating agencies have tremendous power to influence market expectations and investors’ portfolio allocation decisions, crisis-induced downgrades undermine macroeconomic fundamentals. Once downgraded, like a self-fulfilling prophecy, even countries with strong macroeconomic fundamentals deteriorate to converge with model-predicted ratings. Investors respond by raising the cost of borrowing or by withdrawing their capital, aggravating a crisis situation.

Downgrades deep into junk impose a wave of other problems, worse than COVID-19. They cut sovereign bond value as collateral in central bank funding operations and drive interest rates high. Sovereign bond values are grossly discounted, at the same time escalating the cost of interest repayment instalments, ultimately contributing to a rise in the cost of debt. A wave of corporate downgrades also follows because of the sovereign ceiling concept – a country’s rating generally dictates the highest rating assigned to companies within its borders.

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