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

Abstract

Often there is underinvestment by rating agencies for developing countries with detrimental consequences. Investors will both be totally unaware of this underinvestment and base their decisions on inefficient credit ratings or they will have to supplement the credit ratings with additional information (Ferri, J Appl Econ 7:77–98, 2004). The importance of obtaining a sovereign credit rating from an agency is still underrated in some developing economies and even more so in Africa. Less than half of the African countries have a formal sovereign credit rating even though Africa has been identified as an emerging investment destination. Africa is a very unique continent and African countries are at various development stages and are classified by the World Bank according to income groups. Literature on the determinants of sovereign credit ratings in Africa is scarce. Therefore, the purpose of this research is to determine what the determinants are for sovereign credit ratings in Africa and whether these determinants differ between regions and income groups. A sample of 27 countries’ determinants of sovereign credit ratings is compared between 2007 and 2014. Sovereign credit rating variables are classified as categorical variables, and conventional econometric methods used in identifying the determinants are not always appropriate for a model with a categorical-dependent variable. The ordered response panel data model which allows for a categorical-dependent variable and a panel framework that accounts for unobserved country heterogeneity will be employed in addition to the standard panel models. The results indicated that the determinants of sovereign credit ratings differ between African regions and income groups. The Southern African region’s determinants were mostly in line with findings in literature. The developmental indicators, including variables such as regulation and corruption, as determinants of sovereign credit ratings were the most significant determinants across most income groups.