What Investors Keep Getting Wrong About Africa

Africa faces a persistent “risk premium” in global markets, not always because of poor fundamentals, but because of perception. Even reforming countries are treated as high-risk. Ghana, after defaulting in 2022, returned with stronger fiscal rules and transparency measures, yet still faced borrowing costs of 8–11%. Compare that to Argentina’s 7% coupon on a 100-year bond, despite nine defaults. This isn’t isolated. Sub-Saharan African countries routinely pay 3–4 percentage points more than their peers with similar credit ratings. The IMF confirms that SSA nations pay up to twice as much in spreads as non-African countries with identical risk profiles. Why? Structural biases, low liquidity, and investor over-generalization. The consequences are real: limited access to affordable capital, stalled reforms, and slower growth. To move forward, Africa must not only push for fairer treatment but also build internal systems that let it define its investment terms, not just accept others.

When Risk Becomes a Barrier, Not a Metric

Despite strong reforms and improving fundamentals, African countries continue to face borrowing costs that are significantly higher than those of peers with similar or even weaker economic profiles. The explanation lies less in data and more in perception, a pattern that has become both self-reinforcing and costly. Take Ghana, for instance. After defaulting on its Eurobond in 2022, the country moved quickly to implement key reforms. Its debt-to-GDP ratio fell from 92% to 67%, it passed a Fiscal Responsibility Act, committed to transparency, and adopted equal creditor treatment clauses. But when it returned to markets, investors demanded spreads of nearly 9%. In contrast, Argentina, with a much longer history of defaults, raised money at lower rates. Ukraine, despite being at war, still accessed capital on better terms. Something else is clearly at play. That “something” is a structural bias baked into global risk models. Investors and credit rating agencies often group African nations into a single “high-risk” category, ignoring their differences. According to the African Development Bank, this clustering adds an average of 3.0 percentage points to Africa’s borrowing costs, a cost not linked to actual risk. Cameroon’s Eurobond rate, for example, jumped from 5.95% in 2021 to 10.75% in 2024, despite no real increase in default risk. Reformers are especially penalized. Côte d’Ivoire cut contract enforcement delays through judicial reform in 2023, but because international indices are updated infrequently, this progress isn’t yet reflected in its ratings. Part of the problem lies in what these models overlook. Africa’s demographic strength over 60% of its 1.4 billion people are under 25, is often framed as a risk instead of a growth driver.

Nigeria’s tech sector, which contributed to GDP growth in 2024, offers similar promise. Yet credit ratings remain far below what the data would justify. Nigeria’s fintech sector is projected to grow in 2025. Despite this, African startups attract less venture capital than their Asian peers, despite higher returns. The problem isn’t potential, it’s recognition. Climate progress is also misjudged. Models often penalize countries for relying on fossil fuels but ignore efforts to transition. Mozambique’s gas investments reduced emissions by 18% since 2022, yet it still scores lower on ESG metrics than Gulf States with far weaker transition plans. Angola’s debt metrics now outperform Argentina’s, but it still pays more to borrow. The economic cost of these perception gaps is staggering. African countries spend around billions each year on interest payments, money that could fund roads, schools, or hospitals. Credit downgrades, many of which are based on outdated or biased models, have cost the continent over $70 billion in lost capital and excess interest since 2015. The private sector suffers too: in some countries, business loans come with rates that stifle entrepreneurship. African institutions are beginning to push back. Kenya’s 2025 Eurobond includes a clause that automatically lowers interest rates if governance targets are met. Ecobank now adjusts loan pricing based on participation in the African Continental Free Trade Area. Fintech firms like Uganda’s Numida use mobile money data to help small businesses build credit, achieving repayment rates over 90%. These are early signs of a shift. IMF research suggests that if African countries deepen their financial markets, improve transparency, and are assessed more fairly, up to 85% of the current risk premium could be eliminated. That would unlock over $50 billion annually, not in aid, but in savings. Money that belongs to African countries but is currently lost to the biases of global finance.

The Cost of Perception

When investor perception misaligns with economic reality, the consequences ripple far beyond financial spreadsheets. In Africa’s case, this disconnect has real, measurable effects, slowing infrastructure development, stifling innovation, and delaying job creation at a time when the continent’s youth population is rapidly expanding.  High borrowing costs mean governments must allocate more of their budgets to interest payments rather than roads, schools, or health systems. Countries with stable reform records and improving debt metrics still find themselves priced out of concessional markets, pushed instead toward costlier commercial loans. This mispricing doesn’t just reduce fiscal flexibility, it creates a cycle where rising costs validate false risk assumptions, locking nations out of fair capital access even when they perform well. In the private sector, these elevated sovereign costs trickle down. African startups often raise capital at punishingly high costs or give up significant equity early. Even when they outperform peers in other emerging markets, they struggle to attract funding on equal terms. For example, fintechs in Nigeria and Kenya, some with growth rates and returns that rival global benchmarks, face borrowing rates of 20–30% or worse. This pricing discourages innovation and limits scale. Entrepreneurs are forced to make trade-offs: grow slower, raise less, or give up control before traction. The human cost is harder to quantify but just as real. Infrastructure gaps remain unresolved, not for lack of vision, but for lack of affordable capital. Young people ready to work face a stagnant job market not because ideas or ambition are scarce, but because capital is. In a continent where over 60% of the population is under 25, the penalty of misperception is not just economic, it's generational. If perception continues to outweigh performance, Africa will keep losing billions each year to avoidable premiums. And more critically, it will keep losing time, one of its most valuable and non-renewable resources.

Levers for Change

To reduce Africa’s unjustifiably high cost of capital, a wave of homegrown solutions is emerging, rooted in better data, fairer instruments, and institutions designed by Africans for African contexts. These approaches aren’t abstract theories. They are practical attempts to fix a system that has long priced African economies based on perception rather than performance. One key solution is the creation of African-led credit assessments. The African Credit Rating Agency (AfCRA), endorsed by the African Union, is challenging the dominance of global rating agencies that have consistently overlooked reform progress and applied one-size-fits-all models. By incorporating local policy shifts and economic realities into its benchmarks, AfCRA’s early pilots have already shown results; locally rated bonds in East Africa attracted more bids and narrower spreads, reducing borrowing costs by up to 90 basis points. Another core strategy involves fixing how risk is measured at the micro level. In many African economies, millions of businesses operate informally and remain “unbankable” under traditional credit models. But tools like Numida in Uganda are changing that. By using mobile money history and digital footprints to assess creditworthiness, this platform offers an alternative to paperwork-heavy banking systems. They also reduce default rates and increase lending to SMEs, without pricing in a “risk” premium that doesn’t reflect reality. Reform-linked instruments are also gaining traction. Kenya’s 2025 Eurobond includes clauses that reduce interest rates if specific governance reforms are met. These terms reward progress in real time, rather than making countries wait for multi-year credit rating reviews. Institutions like the African Development Bank are also stepping in with conditional guarantees, de-risking large infrastructure projects and reducing financing costs by over 2 percentage points in some cases. Efforts to deepen local currency bond markets are helping to shield African borrowers from external shocks. Nigeria’s naira-denominated debt now makes up nearly 70% of its sovereign portfolio, helping to stabilize repayment costs amid currency volatility. At the regional level, platforms like the Pan-African Payment and Settlement System (PAPSS) are also boosting liquidity and making cross-border finance easier. Combined, these solutions address borrowing costs and tackle the root biases that created them. With more accurate risk models, smarter instruments, and stronger regional coordination, Africa is building a path to fairer finance on its terms.

Fixing the Cost of Capital

Africa’s high cost of capital stems less from actual risk and more from outdated global frameworks that misread the continent’s progress. Reforms, youth-driven innovation, and strong economic fundamentals are often ignored, while biases in credit ratings and investor heuristics inflate borrowing costs by 3–5 percentage points. This distortion limits infrastructure financing, stifles startups, and slows job creation despite Africa’s proven potential. Change is underway. Reform-linked bonds, AI-driven credit scoring, and African-led risk models challenge conventional norms. These solutions, backed by local data and performance incentives, offer a more accurate way to price risk and unlock fairer access to capital. Correcting these perception gaps isn’t just about financial fairness, it’s about enabling development. If investors and institutions update their models to reflect reality, Africa could save billions annually, redirecting those funds to growth. Africa doesn’t need rebranding.