The Determinants of Sovereign Credit Ratings: Indonesia and Its Neighborhood Countries 1998-2016

Akhmad Solikin,Gerry Michel

doi:10.22236/agregat_vol3/is1pp46-57

Abstract

The aim of this research is to study the determinants of sovereign credit ratings of Indonesia andits neighborhood countries in the period of 1998-2016. Using secondary data and analyzed usingordered probit, it is found that every credit rating agency has its own variables influencing to itspublished credit ratings.In general, for Indonesia and its neighborhood countries, the variables withsignificant and positive relationship are fiscal balance and current account deficit to GDP, freedomindex, and GDP per capita; while the variables with significant and negative relationship are externaldebt to GNI and real exchange rate. Gross domestic savings to GDP influences credit ratings inboth ways. Interestingly, inflation does not affect the credit ratings. Indonesia and neighborhoodgovernments could use this information to manage their macroeconomic indicators in order to getfavorable ratings from credit rating agencies.

Highlights

Sovereign credit ratings are very important due to globalization of market and cross border investments
Using secondary data and analyzed using ordered probit, it is found that every credit rating agency has its own variables influencing to its published credit ratings.In general, for Indonesia and its neighborhood countries, the variables with significant and positive relationship are fiscal balance and current account deficit to GDP, freedom index, and GDP per capita; while the variables with significant and negative relationship are external debt to GNI and real exchange rate
There are seven independent variables used in this study, i.e. (1) coefficient for fiscal balance and current account deficit to GDP (CATGDP), (2) inflation as calculated from GDP deflator (DEF), (3) External debt to gross national income (EXDGNI), (4) freedom index (FHI), (5) gross domestic product per capita (GDPPC), (6) real exchange rate (REXR), and gross domestic saving to GDP (SAVGDP)

Summary

INTRODUCTION

Sovereign credit ratings are very important due to globalization of market and cross border investments. Sovereign credit ratings affect economy of a country in terms of cost of debt and foreign direct investment. The results of several previous studies on determinants of sovereign credit ratings are still ambiguous and inconsistent in different country studies. In the period of 1998 to 2016, S&P’s had not given investment grade rating for Indonesia. The addition of neighborhood countries, i.e. Malaysia, Philippines, and Thailand has two goals: (1) to compare determinants of credit ratings for Indonesia and for those of three Indonesia’s neighborhood countries and (2) to fulfill minimum requirement of small sample since Indonesia data alone will not suffice. The research question is: What are determinants of sovereign credit ratings in Indonesia and its neighborhood countries? This research interested in macroeconomic determinants, i.e. fiscal balance and current account deficit, external debt, freedom index, GDP per capita, real exchange rates, inflation and gross domestic savings.

Obligation cannot meet

CATGDP is computed as the ratio of

CATGDP DEF

FHI GDPPC REXR

Findings

CONCLUSION