The Determinants of Sovereign Credit Ratings in Africa: A Regional Perspective

Pretorius, Marinda; Botha, Ilsé

doi:10.1007/978-3-319-48454-9_36

Cited by 5 publications

(6 citation statements)

References 20 publications

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“…Similarly, for S&P, the current real GDP has to grow by at least five times for the current sovereign credit rating to be upgraded by one notch. These findings concur with the opinion in Olabisi and Stein (2015) and Pretorius and Botha (2017) that the high GDP ratios in Africa are not significant determinants in the sovereign credit rating equation. Table 11 presents results of sovereign credit rating determinants estimates for other developing countries in Asia, Latin America and Europe.…”

Section: Empirical Findingssupporting

confidence: 90%

“…With particular focus on economic growth, if the coefficients of the economic growth in the estimated logit and probit models are significantly different for the three sets of data, then the credit rating methodology is inconsistent. It is further hypothesised that, if the (Afonso et al, 2011a, b;Cantor and Packer, 1996;Pretorius and Botha, 2017;Reusens and Croux, 2015), the analysis begins by log-differencing the time series data for all the variables. In standard statistical analysis as described by a random walk model, the log-difference of time series variables data is usually stationary, completely random and not auto-correlated as it stabilises the mean by removing changes in the level of a time series, eliminate trend and seasonality.…”

Section: Methodsmentioning

confidence: 99%

“…None of them focus exclusively on the determinants of sovereign credit rating risk factors in Africa. Olabisi and Stein (2015), Pretorius and Botha (2017) and Mutize and Gossel (2018) are the only studies that focused on Africa sovereign credit rating determinants. Olabisi and Stein (2015) apply simple ordinary least squares (OLS) on sovereign bonds issued in 13 sub-Saharan Africa between 2006 and 2014 to investigate if African countries are paying higher bond interests than normal.…”

Section: Literature Reviewmentioning

confidence: 99%

“…They further identify a two-way relationship between non-performing loans and sovereign ratings. Pretorius and Botha (2017) apply panel data models on sovereign credit ratings of 28 African countries over a period of five years, from 2007 to 2012 and find that the main determinants of sovereign credit ratings in Africa are the external balance, inflation, debt-to-GDP, the fiscal balance, income per capita, GDP growth, international reserves-to-imports IJOEM 16,4 and foreign exchange reserves-to-GDP. However, there are general contestations that the allocation of weight coefficients on these risk indicators in African countries is inconsistent with the other countries elsewhere (Mutize, 2019;Pelz, 2019).…”

Section: Literature Reviewmentioning

confidence: 99%

“…In this paper, based on previous studies in the literature (Afonso et al, 2011a, b;Cantor and Packer, 1996;Pretorius and Botha, 2017;Reusens and Croux, 2015) and Moody's Investor Services (2013) document, the variables in Table 5 below are used to analyse economic growth as a key factor in determining sovereign credit ratings and where the data was obtained. From all the risk sub-factors applied by the two major rating agencies, this analysis focuses these key primary sub-factors which are universally applied in their rating formulas.…”

Section: Datamentioning

confidence: 99%

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A comparative study of economic growth as a key determinant of sovereign credit ratings in Africa

Mutize

Nkhalamba²

2020

IJOEM

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PurposeThis study is a comparative analysis of the magnitude of economic growth as a key determinant of long-term foreign currency sovereign credit ratings in 30 countries in Africa, Europe, Asia and Latin America from 2010 to 2018.Design/methodology/approachThe analysis applies the fixed effects (FE) and random effects (RE) panel least squares (PLS) models.FindingsThe authors find that the magnitude economic coefficients are marginally small for African countries compared to other developing countries in Asia, Europe and Latin America. Results of the probit and logit binary estimation models show positive coefficients for economic growth sub-factors for non-African countries (developing and developed) compared to negative coefficients for African countries.Practical implicationsThese findings mean that, an increase in economic growth in Africa does not significantly increase the likelihood that sovereign credit ratings will be upgraded. This implies that there is lack of uniformity in the application of the economic growth determinant despite the claims of a consistent framework by rating agencies. Thus, macroeconomic factors are relatively less important in determining country's risk profile in Africa than in other developing and developed countries.Originality/valueFirst, studies that investigate the accuracy of sovereign credit rating indicators and risk factors in Africa are rare. This study is a key literature at the time when the majority of African countries are exploring the window of sovereign bonds as an alternative funding model to the traditional concessionary borrowings from multilateral institutions. On the other hand, the persistent poor rating is driving the cost of sovereign bonds to unreasonably high levels, invariably threatening their hopes of diversifying funding options. Second, there is criticism that the rating assessments of the credit rating agencies are biased in favour of developed countries and there is a gap in literature on studies that explore the whether the credit rating agencies are biased against African countries. This paper thus explores the rationale behind the African Union Decision Assembly/AU/Dec.631 (XXVIII) adopted by the 28th Ordinary Session of the African Union held in Addis Ababa, Ethiopia in January 2017 (African Union, 2017), directing its specialized governance agency, the African Peer Review Mechanism (APRM), to provide support to its Member States in the field of international credit rating agencies. The Assembly of African Heads of State and Government highlight that African countries are facing the challenges of credit downgrades despite an average positive economic growth. Lastly, the paper makes contribution to the argument that the majority of African countries are unfairly rated by international credit rating agencies, raising a discussion of the possibility of establishing a Pan-African credit rating institution.

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Section: Empirical Findingssupporting

confidence: 90%

Section: Methodsmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Section: Datamentioning

confidence: 99%

See 3 more Smart Citations

A comparative study of economic growth as a key determinant of sovereign credit ratings in Africa

Mutize

Nkhalamba²

2020

IJOEM

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Upgrading and Downgrading Developing Countries’ Sovereign Ratings: Does Governance Matter?

Mim

Nouira

Rault

2023

Governance in the Developing World

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Effects of fiscal credibility on sovereign risk: evidence using comprehensive credit rating measures

Montes

Costa

2020

IJOEM

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PurposeSince sovereign ratings provided by credit rating agencies (CRAs) are a key determinant of the interest rates a country faces in the international financial market and once sovereign ratings may have a constraining impact on the ratings assigned to domestic banks or companies, some studies have focused on identifying the determinants of sovereign credit risk assessments provided by CRAs. In particular, this study estimates the effect of fiscal credibility on sovereign risk using four different comprehensive credit rating (CCR) measures obtained from CRAs' announcements and two different fiscal credibility indicators.Design/methodology/approachWe build comprehensive credit rating (CCR) measures to capture sovereign risk. These measures are calculated using sovereign ratings, the rating outlooks and credit watches issued by the three main credit rating agencies (S&P, Moody's and Fitch) for long-term foreign-currency Brazilian bonds. Based on monthly data from 2003 to 2018, we use different econometric estimation techniques in order to provide robust results.FindingsThe results indicate that fiscal credibility exerts both short- and long-run effects on sovereign risk perception, and macroeconomic fundamentals are important long-run determinants.Practical implicationsSince fiscal credibility reflects the government's ability to maintain budgetary balance and sustainable public debt, the government should keep its commitment to responsible fiscal policies so as not to deteriorate expectations formed by financial market experts about the fiscal scenario and, thus, to achieve better credit assessments issued by CRAs with respect to sovereign debt bonds. Sovereign credit rating assessment is a voluntary practice. It is up to the country whether they want to apply for a rating assessment or not. Thus, without a sovereign rating, one must find an alternative to measure the sovereign risk of a country. In this sense, an important practical implication that this study provides is that fiscal credibility can be used as a leading indicator of sovereign risk perceptions obtained from CRAs or even as a proxy for sovereign risk.Originality/valueThis paper is the first to verify how important the expectations of financial market experts in relation to the fiscal effort required to keep public debt at a sustainable level (i.e. fiscal credibility) are to sovereign risk perception of credit rating agencies. In this sense, the study is the first to address this relation, and thus it contributes to the literature that seeks to understand the determinants of sovereign ratings in emerging countries.

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The Determinants of Sovereign Credit Ratings in Africa: A Regional Perspective

Cited by 5 publications

References 20 publications

A comparative study of economic growth as a key determinant of sovereign credit ratings in Africa

A comparative study of economic growth as a key determinant of sovereign credit ratings in Africa

Upgrading and Downgrading Developing Countries’ Sovereign Ratings: Does Governance Matter?

Effects of fiscal credibility on sovereign risk: evidence using comprehensive credit rating measures

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