One of the flagship priorities of South Africa’s G20 presidency is advancing debt relief and fairer sovereign credit ratings for lower-income countries. This agenda is not only about financial housekeeping, it is about enabling developing economies to access affordable finance, sustain growth, and invest in climate-resilient development pathways.
At the heart of the debate lies a technical but critical issue: debt sustainability analysis (DSA) and sovereign credit ratings. These two mechanisms largely determine how much it costs for countries to borrow, when they qualify for relief, and how the international financial system perceives their economic health. Yet both are shaped by assumptions and biases that often disadvantage the Global South.
Understanding Debt Sustainability
Debt sustainability refers to a country’s ability to meet its current and future debt obligations without resorting to arrears or destabilising adjustments. Institutions like the IMF and World Bank assess this through Debt Sustainability Analyses (DSAs).
DSA Inputs: growth projections, primary balances, interest rates, and exchange rate assumptions.
DSA Outputs: classification of debt as sustainable, sustainable but at risk, or unsustainable.
Policy Implications: These outcomes inform access to concessional finance, triggers for restructuring, and conditions attached to IMF/World Bank programmes.
Challenges with Current DSA Frameworks:
Pro-cyclicality: DSAs tend to penalise countries during downturns, raising borrowing costs when economies are already under strain.
Climate Blindness: Standard models underweight climate risks and the need for investment in resilience.
Overemphasis on austerity: DSAs often assume fiscal consolidation is the only route to sustainability, ignoring developmental or growth-enhancing spending.
Sovereign Credit Ratings: The Gatekeepers of Finance
While DSAs set the stage, sovereign credit rating agencies (CRAs), primarily the “Big Three” (Moody’s, S&P Global, and Fitch), act as the gatekeepers of international capital markets. Their ratings influence:
Cost of borrowing: A one-notch downgrade can increase yields by 100–150 basis points.
Investor appetite: Institutional investors are restricted by mandates that exclude sub-investment grade assets.
Debt restructuring outcomes: Creditors use ratings as benchmarks in negotiations.
Some of the issues on credit rating are:
Bias against lower-income countries: Empirical research shows that countries in Africa, for example, are often rated below what fundamentals justify.
Opaque methodologies: Limited transparency in how qualitative political risk factors are weighed.
Rating cliff effects: Downgrades often occur pro-cyclically, worsening crises rather than preventing them.
A window for reform: South Africa’s G20 Presidency
South Africa’s 2025 G20 presidency provides a rare opportunity to align debt sustainability frameworks and sovereign ratings with developmental and climate justice imperatives. Key proposals under discussion include:
Reforming DSAs:
Integrating climate resilience and just transition financing needs into debt sustainability metrics.
Using state-contingent debt instruments (SCDIs) that automatically adjust terms during shocks.
Credit Rating Reforms:
This is about advocating for greater transparency in rating methodologies.
Encouraging competition and support for regional rating agencies to counteract systemic bias.
Promoting the use of alternative risk assessments, such as UNDP’s Creditworthiness Assessment Initiative.
Debt Relief Mechanisms:
Strengthening the Common Framework for Debt Treatments with enforceable timelines.
Expanding Multilateral Development Bank (MDB) guarantees to reduce risk premia.
Creating a platform for sovereign credit rating accountability, ensuring ratings reflect real fundamentals rather than prejudice.
Why does this matter for developing and lower-Income countries?
The stakes are high: Over 60% of low-income countries are already at high risk of, or are currently in, debt distress, with debt service obligations increasingly crowding out vital spending on health, education, and climate resilience. At the same time, biased credit ratings are costing African countries billions of dollars every year in additional interest payments, deepening financial strain and limiting resources for sustainable development.
Fairer assessments and relief mechanisms would free fiscal space for investments in renewable energy, just transitions, and social protection, which are priorities that align with both developmental justice and climate justice.
Call to Action:
Debt sustainability and fair credit ratings are not technical side-issues, they are structural determinants of development and climate outcomes. South Africa’s G20 presidency has placed debt relief and sovereign rating reform at the centre of global economic governance.
For the Global South, this is a moment to demand:
DSAs that reflect real developmental needs.
Ratings that are free from bias and pro-cyclicality.
Debt relief mechanisms that enable, rather than constrain, the pursuit of sustainable futures.
Fairer credit ratings and debt relief are not charity, they are a precondition for global financial stability and a just energy transition.
Author: Khulekani Magwaza