DETERMINANTS OF SOVEREIGN CREDIT RATINGS: THE CASE OF INDONESIA AND PEER GROUP COUNTRIES

Abstract

This paper aims to identify the predominant determinants of sovereign credit ratings in Indonesia and its peer countries from 2004 to 2019 by considering GDP per capita, official reserve, government debt, Current Account Balance, Credit Default Swap (CDS), and Sovereign Credit Rating used by the three major rating agencies. CDS is considered a newly proposed variable with predicting capacity as a measure of default. Sovereign credit ratings, which are forward-looking measures of the probability of default provided by rating agencies, are being criticized for their predictive capacity with the incorporation of historical data and information in their assessment. Therefore, this study also explores the possible effect of a newly proposed variable with predicting capacity, the CDS, as a pure measure of default. The correlations among the variables were analyzed with Panel Vector Autoregressive (PVAR) as all variables were treated as endogenous and interdependent. The empirical results demonstrate that among the variables tested, GDP Per Capita, Government Debt, and CDS, as a newly proposed variable, have statistically stronger relationships with the sovereign credit rating. The authority that manages the engagement with rating agencies is expected to develop a more focused strategy when taking this aspect into account. Keywords: Financial Market, Rating Agencies, Risk, Panel VAR, Sovereign Rating DOI： https://doi.org/10.35741/issn.0258-2724.58.1.78