FFD4 Seville: Developing countries challenge credit rating agency power

At the Fourth International Conference on Financing for Development (FfD4) in Seville, Spain, a side event co-hosted by the South Centre and International Development Economics Associates Ltd (IDEAs) on July 2, 2025 brought together leading voices from the Global South to examine the influence of sovereign credit rating agencies (CRA) on developing countries.

The panel titled Reform of the International Debt Architecture: A Developing Country Perspective of Credit Rating Agencies and Financing for Sustainable Development explored how credit rating mechanisms shape cost of capital, fiscal space and a country’s ability to pursue the United Nations-mandated sustainable development goals.

The session was moderated by CP Chandrasekhar, an executive committee member at IDEAs, who laid out the historical flaws within the credit rating system. He highlighted at the outset that CRAs have long been seen as institutionally problematic because of the implicit conflict of interest: The ratings are paid for by the very entities issuing the financial instruments. This raises serious questions about the objectivity and reliability of sovereign credit ratings.

He referenced the post-2008 financial crisis era, where major rating agencies were penalised (including a $1.4 billion settlement by Standard & Poor or S&P) for wrong ratings, yet little has changed in their methodology since. “What role, if any, should these institutions have when it comes to sustainable development goals (SDGs) and climate finance?” he asked, setting the tone for a critical discussion on systemic reform needed in the CRAs.

Carlos Correa, executive director of the South Centre, underlined the central role of CRAs in determining the cost of borrowing and defining what fiscal space is available for public investment in developing countries. He also noted the importance of reforming CRAs in the context of reforming debt architecture on the whole, and it being a matter of justice and equity.

The methodologies used by these agencies, he mentioned, are pro-cyclical (moving in sync with economic cycles), opaque and, in many cases, biased. He added that the oligopolistic nature of the CRA industry makes meaningful reform difficult, as just three agencies dominate credit ratings for hundreds of countries around the world. He highlighted the emergence of AfCRA (African credit rating agency) as a step towards reduced dependency on a narrow set of ratings.

Charles Abugre of IDEAs provided concrete examples from Africa, citing Moody's downgrade of the African Export-Import Bank (Afreximbank), even while playing critical roles in trade finance and private sector development, a case that highlighted both misjudgment and potential bias by the CRAs. Similar concerns were raised about Kenya, which narrowly avoided a downgrade thanks in part to growing support for local African rating platforms. “African countries' key challenge is dependency on external markets and currencies based in metropolitan areas over which they have very little influence,” Abugre stated. He underlined that regional rating agencies would likely remain secondary opinions unless global regulatory structures evolve.

Yuefen Li, senior advisor at the South Centre, highlighted dominance by the “Big Three” CRAs being the major problem in the credit rating market, even more important than the methodology used by them. She explained how the “Big Three” agencies, S&P, Moody’s and Fitch, collectively hold 96 per cent of the global market share. Their dominance stems not just from acquisition of small players in the market, but also from regulatory barriers to competition in major economies like the United States, where being classified as a ‘Nationally Recognized Statistical Rating Organization’ (NRSRO) effectively excludes newcomers. 

“This monopoly introduces systemic risk,” she said, noting that these private entities determine the destiny of nations which lead to global repercussions. 

She concluded by emphasising the need for regulations to make these agencies accountable, transparent and include factors like climate change into their framework.

Jayati Ghosh, an Indian development economist and a professor of Economics at the University of Massachusetts Amherst in the United States, expanded the conversation by examining the post-COVID fiscal landscape. While many high-income countries on average drastically increased their debt-to-GDP ratios during the pandemic, they experienced almost no penalty from CRAs — only an increase of less than 1 basis point in their spreads. That is their borrowing costs barely increased by less than 0.01 per cent. In contrast, low-income countries (LICs), which had been more fiscally cautious due to fear of capital flight, saw major downgrades. In some cases, their spreads increased by 7-11 percentage points despite responsible spending.

Ghosh emphasised the need for a global public credit rating agency, free from any conflict of interest and also noted that FfD4 should have had more emphasis on this issue, and that even in the outcome document of the conference, the text calling for a global public rating agency was watered down. She referenced the Jubilee Debt Commission Report’s recommendations for stronger regulation and accountability.

This timely side event made one thing clear that reforming the credit rating system is no longer just a financial issue but a matter of development justice. As FfD4 came to a close, panellists urged countries to go beyond surface-level changes and push for structural reforms that ensure fair, transparent and development-oriented access to finance.