Even before the COVID-19 Pandemic, the Global South was struggling with unsustainable debt. Low-income countries witnessed a , and in 63 developing countries over the same period, average governmental expenditure on . While the entire world was for the global pandemic, the Global South . In response, the G20 established the (DSSI), suspending billions of dollars’ worth of interest repayments on the debt – both "private" and "official" – of the most vulnerable countries.
Despite good intentions, participated in the Initiative (even though private creditors are now increasingly powerful, and the largest holders of debt in developing countries, particularly in Africa). While the concept of "comparable treatment" was raised, with the DSSI encouraging private creditors to share the burden alongside official creditors, credit rating agencies warned that if a borrower were to request this comparable treatment of a private creditor, . The result: the DSSI achieved only half of the $12 billion service payment suspensions it had initially targeted.
The G20 subsequently developed the "", a mechanism to speed up restructurings for sovereign borrowers and enforce "comparability of treatment". However, credit rating agencies that participating in a programme that forces private creditors to face the prospect of losses would likely automatically trigger a default rating for a sovereign borrower. Consequently, there have been only four applicants to the Common Framework, three of whom were already in default at the time of application, with the other unrated.
The experiences of both the DSSI and the Common Framework have demonstrated not only how unworkable modern debt treatment options have become, but also the influential role that credit rating agencies now play in the modern debt treatment equation.
The experiences of both the DSSI and the Common Framework have demonstrated not only how unworkable modern debt treatment options have become, but also the influential role that credit rating agencies now play in the modern debt treatment equation. In a world dominated by private creditors, Global South countries – many still novices in the global financial arena – face two critical challenges. First, private creditors, and more specifically, non-bank institutional investors, are constrained by the "" relationship, meaning they have to, both by law and practice, prioritize their principal over the debtor. Since private creditors use credit ratings as signals to support the agent/principal relationship, credit rating agencies are synergistically attached to the fortunes of private creditors; as private creditors become more influential (as holders of developing world debt), so too do credit rating agencies.
Second, the imposition of liability – a response to the Global Financial Crisis – has crystalized an historic predilection within credit rating agencies to avoid liability at all costs. From the credit rating agencies’ perspective, the law is clear: they have a mandate to warn investors, and they must do so at the earliest opportunity and whenever creditors have their investments and returns threatened. Both of these challenges are intensified where information asymmetry, lack of understanding or limited previous transactional exposure are at play.
Turning up the heat
This "" has focused attention on the increasingly important in the global economy. The G77, the G20 and the G24, as well as senior leaders at the International Monetary Fund, the World Bank and the United Nations have all called for reform. The United Nations Independent Expert on Debt and Human Rights has also within credit rating agencies – ranging from conflicts of interest to oligopoly and a lack of transparency. There are additional concerns about potential bias within rating processes and limited representation of low-income countries.
In Africa, where the debt burden is greatest, the , a unit within the African Union mandated to support Member States with credit rating-related issues, has frequently pointed to the shortcomings of the leading credit rating agencies; others have referred to an “” whereby international investors have an incorrect, and unjustifiably negative, perception of risk in Africa. A 2023 United Nations Development Programme (UNDP) argued that credit ratings based on less subjective methodological inferences could save African sovereign borrowers up to $75 billion in debt repayments.
Capacity-building: a potential, UN-led solution?
There have been a variety of solutions to resolve the credit rating impasse, including global regulations, a global public credit rating agency and changes to methodologies. Yet, there’s another complementary solution that has received less attention: capacity-building. Given that many Global South countries are relatively new to global capital markets and may lack the experience required to navigate complex credit rating processes, capacity-building initiatives could fill an important gap. They could be critical for relatively young countries entering into a financial system that is older and more mature; particularly now when traditional debt treatment strategies are no longer viable and many reforms relevant to credit rating agencies are being ignored.
There have been some positive moves in this direction. The APRM at the onset of the COVID-19 pandemic, and just last week the African Union launched its . Although limited, experience on the ground has shown that targeted credit rating-related capacity-building interventions are well received. Various methods, including informational workshops, information provision, and even role-playing with credit rating experts have been utilized to build a knowledge base.
But these efforts remain insufficient – falling short of what is needed to fundamentally break the credit rating impasse. The limited scale of current efforts also points towards a bigger role for the United Nations. Although not entirely inattentive to capacity-building needs – UNDP Africa, for instance, on credit rating processes and injects former credit rating analysts into partner countries – experience suggests the global body could do more.
The United Nations has the ability and experience to convene the international community and build consensus on issues of critical global importance and could therefore be uniquely placed to host a credit rating capacity-building entity for the Global South.
The United Nations has the ability and experience to convene the international community and build consensus on issues of critical global importance and could therefore be uniquely placed to host a credit rating capacity-building entity for the Global South. It has the necessary infrastructure to translate international agreements into action on the ground; as well as two organs already well-placed to take on this role: the United Nations Department of Economic and Social Affairs (UN DESA) and United Nations Trade and Development (UNCTAD).
Capacity-building on economic issues is one of the core objectives of , and has a precise infrastructure set up for broader capacity-building objectives, including a digitalized offering which could be transformed for the training of credit rating-related knowledge. To take on a leading capacity-development role in the often-exclusionary game of credit ratings, the United Nations will need to focus on skill enhancement, organizational strategies for governmental departments, training exercises and programmes and communities of practice. But any entity taking on this role would also need to be resourced sufficiently and host a varied and multicultural knowledge base; and to ensure impactful, meaningful and actionable knowledge transfer across the Global South, its expertise would need to be secured from beyond the largest credit rating agencies (as well as the United States and the European Union).
Credit rating sector-specific knowledge tailored to the Global South has the potential to level the playing field. South Africa’s assumption of the G20 Presidency – a first for an African State and a platform the country’s leaders have said they will use to promote development priorities in the Global South – comes at an opportune moment to alter the relationship between credit rating agencies and heavily-indebted developing countries. We would all be wise to heed the words of South Africa’s most respected statesman, Nelson Mandela, who once declared: Education is the most powerful weapon which you can use to change the world.
Suggested citation: Cash Daniel., "Capacity-building: a solution to the "credit rating impasse"," 糖心Vlog破解版-CPR (blog), 2025-03-05, 2025, /cpr/blog-post/capacity-building-solution-credit-rating-impasse.
