Abstract
The development of subnational credit-rating methodologies affords benefits for subnationals, the sovereign and its citizens. Trusted credit ratings facilitate access to financial markets and above-average ratings allow for the negotiation of better collateral and guarantee agreements, as well as for funding of, for example, infrastructure projects at superior (lower) interest rates. This paper develops the quantitative section of a credit-rating methodology for South African subnationals. The unique characteristics of South African data, their assembly, and the selection of dependent and independent variables for the linear-regression model chosen, are discussed. The methodology is then applied to the provincial Department of Health using linear regression modelling.
Highlights
Subnational governments are those tiers of government and public entities whose authority is subordinate to the sovereign or national government
South African subnationals are defined as provincial governments and provincial departments for the purpose of this paper
With this work in place, we present only a reminder of the salient background, and, instead, investigate the requisite data and propose a possible coherent methodology for credit-rating subnationals with direct application to a South African provincial department
Summary
Subnational governments are those tiers of government and public entities whose authority is subordinate to the sovereign or national government. One observation is the five broad factors into which the information used by the three largest international credit-rating agencies to assess the creditworthiness of subnationals can be grouped (Liu & Tan, 2009:5) Another is the difference in the importance of quantitative and qualitative information for developed and developing countries. In a developed country, the quantitative and qualitative information will be important, as opposed to the situation in developing countries where the quantitative information only equates to 30 per cent of a credit rating and the qualitative information to 70 per cent of a credit rating (Moody’s 2007:34) Both of these observations apply for the remainder of this paper.
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