An Analysis of Sovereign Credit Ratings Impact on Financial Development in South Africa

Purpose: The study analyses the effects of sovereign credit ratings on financial development in South Africa. This became important considering that the country has been receiving negative ratings of late. Design/Methodology/Approach: Quarterly data for the period 1994-2017 was analysed using the Auto-Regressive Distributed Lag (ARDL) cointegration model and its associated statistics. The Error Correction Model (ECM) was implemented to augment the results of ARDL analysing the short run dynamics. The model was chosen given the order of integration of the variables. Financial development was selected since it influences financial conditions and financial sector stability. Findings: The statistical results revealed that sovereign ratings positively influence financial variables that is in other words higher ratings are found to contribute positively to the growth of the financial development sector. Negative ratings are likely to affect the financial system as due to low access to external funding and exodus of investors, financial development is halted or decreased. Implications/Originality/Value: The results suggest that authorities need to consider the factors which are targeted by rating agencies and ensure that they perform as expected. Governments should focus on raising sovereign ratings and avoiding downgrades to boost financial development.

An Analysis of the Informational Value of Sovereign Credit Ratings

The sovereign credit ratings (SCRs) have been an integral part in the global financial system in asset allocation and price discovery. The zero bound policy rate (ZBPR) and quantitative easing programme (QEP) rolled out by the four key central banks as antidotes to the global financial crisis (GFC) would have altered the assumed premise on SCRs relevancy. This preliminary study is crafted for a validation on whether the SCRs informational value on sovereign bond yields (SBYs) and sovereign credit default swap spreads (SCDSSs) was indeed affected when ZBPR and QEP were in effect. A sample of 32 countries with observations spanning from 2008 to 2017 to encompass the period of ZBPR and QEP in effect was used for analysis. The empirical results show that SCRs informational value was indeed rendered irrelevant on SBYs price discovery since 2008 and the effect on SCDSSs came in later from 2012 onwards.

Sovereign credit ratings, relative risk ratings and private capital flows: evidence from emerging and frontier markets

Purpose Relative risk ratings measure the degree by which a country’s sovereign rating is better or worse than other countries (Basu et al., 2013). However, the literature on the impacts of sovereign ratings on capital flows has not covered the role of relative risk ratings. This paper aims to examine the effect of relative risk ratings on private capital flows to emerging and frontier market economies is filled. In the analysis, the effect of relative risk ratings to that of absolute sovereign ratings in influencing private capital flows are compared. Design/methodology/approach This paper examines the influence of sovereign credit ratings and relative risk ratings on private capital flows to 26 emerging and frontier market economies using quarterly data for a 20-year period between 1998 and 2017. A dynamic panel regression model is used to estimate the relationship between ratings and capital flows after controlling for other factors that can influence capital flows such as growth and interest rate differentials and global risk conditions. Findings The analysis finds that while absolute sovereign credit ratings were an important determinant of net capital inflows prior to the global financial crisis in 2008, the influence of relative risk ratings increased in the post-crisis period. The post-crisis effect of relative ratings appears to be driven mostly by portfolio flows. The main results are robust to an alternate measure of capital flows (gross capital flows instead of net capital flows), to the use of fixed gross domestic product weights in calculating relative risk ratings and to the potential endogeneity of absolute and relative ratings. Originality/value This study advances the literature on being the first attempt to understand the impact of relative risk ratings on capital flows and also comparing the impact of absolute sovereign ratings and relative risk ratings on capital flows in the pre- and post-global financial crisis periods. The findings imply that emerging and frontier markets need to pay greater attention to their relative economic performance and not just their sovereign ratings.

Failed Attempt to Break Up the Oligopoly in Sovereign Credit Rating Market after Financial Crises

For decades, the credit rating market has been dominated by three major agencies (Moody's, S&P and Fitch Ratings). Their oligopolistic dominance is especially strong in sovereign credit ratings industry, where they hold a collective global share of more than 99%. Global financial crisis and the Eurozone sovereign debt crisis exposed serious flaws in rating process and forced public authorities to act. This study investigates effectiveness of new regulations adopted in the United States and in the European Union after financial crises in terms of reducing oligopolistic dominance of the “Big Three” in sovereign credit ratings market. The study applies descriptive statistical analysis of economic indicators describing concentration rate in a market, as well as content analysis of legal acts and case study methodology. Analysis shows that the Dodd-Frank reform and new European rules on supervision of credit rating agencies were not effective enough and did not lead to the increased competition in the market. The evidence from this study is explained using two alternative perspectives – economic theory of natural oligopoly and hegemonic stability theory coming from international relations field.