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Article
Publication date: 13 May 2021

Supriyo De, Sanket Mohapatra and Dilip Ratha

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…

Abstract

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.

Details

Studies in Economics and Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 6 November 2019

Jianan He and Dirk Schiereck

The purpose of this paper is to examine the information spillover of sovereign rating changes on the market valuation of bank stocks in Africa.

Abstract

Purpose

The purpose of this paper is to examine the information spillover of sovereign rating changes on the market valuation of bank stocks in Africa.

Design methodology

First, the authors apply event study methodology to evaluate the stock market reaction of African bank stocks on the announcement of sovereign rating changes. Second, the cross sections of the abnormal returns are examined by multivariate regression analyses. Third, the findings are proved for robustness.

Findings

The authors investigate how 37 African banks react to 203 African sovereign rating announcements from the three leading credit rating agencies over the period 2010-2016 and find that negative announcements trigger the significant positive stock reactions of African banks, especially contributed by banks in the non-reviewed African countries. These unusual reactions can be explained by the low integration and the severe information asymmetry of African capital markets. The authors further locate the influencing factors of banks’ reactions and show that rating downgrades magnify the abnormal effects while the membership of the African Free Trade Zone mildens the stock market reactions.

Research limitations/implications

Limitations are given by the limited sample size. There are only limited numbers of publicly listed African banks with sufficient trading data.

Practical implications

The paper argues for a critical dependency of African bank equity valuation in the case of sovereign debt rating changes in neighbor countries. This observation is important for the risk assessment of African banking assets.

Originality/value

The paper is the first to examine stock market reactions on sovereign rating announcements for the evaluation of capital market integration in Africa. It thereby underlines the usefulness of this simply to apply approach as an instrument for ongoing examining the progress in capital market development in emerging countries.

Details

The Journal of Risk Finance, vol. 20 no. 5
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 14 May 2020

Misheck Mutize and McBride Peter Nkhalamba

This study is a comparative analysis of the magnitude of economic growth as a key determinant of long-term foreign currency sovereign credit ratings in 30 countries in…

Abstract

Purpose

This study is a comparative analysis of the magnitude of economic growth as a key determinant of long-term foreign currency sovereign credit ratings in 30 countries in Africa, Europe, Asia and Latin America from 2010 to 2018.

Design/methodology/approach

The analysis applies the fixed effects (FE) and random effects (RE) panel least squares (PLS) models.

Findings

The authors find that the magnitude economic coefficients are marginally small for African countries compared to other developing countries in Asia, Europe and Latin America. Results of the probit and logit binary estimation models show positive coefficients for economic growth sub-factors for non-African countries (developing and developed) compared to negative coefficients for African countries.

Practical implications

These findings mean that, an increase in economic growth in Africa does not significantly increase the likelihood that sovereign credit ratings will be upgraded. This implies that there is lack of uniformity in the application of the economic growth determinant despite the claims of a consistent framework by rating agencies. Thus, macroeconomic factors are relatively less important in determining country's risk profile in Africa than in other developing and developed countries.

Originality/value

First, studies that investigate the accuracy of sovereign credit rating indicators and risk factors in Africa are rare. This study is a key literature at the time when the majority of African countries are exploring the window of sovereign bonds as an alternative funding model to the traditional concessionary borrowings from multilateral institutions. On the other hand, the persistent poor rating is driving the cost of sovereign bonds to unreasonably high levels, invariably threatening their hopes of diversifying funding options. Second, there is criticism that the rating assessments of the credit rating agencies are biased in favour of developed countries and there is a gap in literature on studies that explore the whether the credit rating agencies are biased against African countries. This paper thus explores the rationale behind the African Union Decision Assembly/AU/Dec.631 (XXVIII) adopted by the 28th Ordinary Session of the African Union held in Addis Ababa, Ethiopia in January 2017 (African Union, 2017), directing its specialized governance agency, the African Peer Review Mechanism (APRM), to provide support to its Member States in the field of international credit rating agencies. The Assembly of African Heads of State and Government highlight that African countries are facing the challenges of credit downgrades despite an average positive economic growth. Lastly, the paper makes contribution to the argument that the majority of African countries are unfairly rated by international credit rating agencies, raising a discussion of the possibility of establishing a Pan-African credit rating institution.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 21 August 2017

Haoshen Hu

This paper aims to investigate the impact of sovereign rating signals on domestic banks’ stock returns in a European context.

Abstract

Purpose

This paper aims to investigate the impact of sovereign rating signals on domestic banks’ stock returns in a European context.

Design/methodology/approach

The author uses an event study technique to measure short-term bank stock abnormal returns that result from domestic positive or negative sovereign rating events. Then, test results from the univariate event studies are further scrutinised with the bank- and sovereign-related factors related to cross-sectional variations in abnormal bank returns.

Findings

The univariate results show that positive sovereign rating events do not lead to significant bank stock price reactions, while negative events are associated with negative share price effects on domestic banks. The multivariate regression results for the subsample of negative rating events show that the degrees of contagion effects depend on which credit rating agency issues the signal, on whether the events are preceded by other negative sovereign rating signals, and in some cases on the sovereign’s initial rating level and on the bank’s liquidity ratio, profitability level and size.

Originality/value

The study improves the test procedures used by Caselli et al. (2016) and sheds light on the bank valuation effect induced by massive negative sovereign rating signals during the crisis period. The results highlight the share price effect of sovereign events and address political implications of introducing risk weights for sovereign debts.

Details

The Journal of Risk Finance, vol. 18 no. 4
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 18 May 2015

Finn Marten Körner and Hans-Michael Trautwein

The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union…

Abstract

Purpose

The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union membership for sovereign risks. It is frequently argued that CRAs have acted procyclically in their rating of sovereign debt in the European Monetary Union (EMU), underestimating sovereign risk in the early years and over-rating the lack of national monetary sovereignty since the onset of the Eurozone debt crisis. Yet, there is little direct evidence for this so far. While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union.

Design/methodology/approach

While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. This paper examines the major CRAs’ methodologies for rating sovereign debt and test their sovereign credit ratings for a monetary union bonus in good times and a malus, akin to the “original sin” problem of emerging market countries, in bad times.

Findings

Using a newly compiled dataset of quarterly sovereign bond ratings from 1990 until 2012, the panel regression estimation results find strong evidence that EMU countries received a rating bonus on euro-denominated debt before the European debt crisis and a large penalty after 2010.

Practical implications

The crisis has brought to light that EMU countries’ euro-denominated debt may not be considered as local currency debt from a rating perspective after all.

Originality/value

In addition to quantifying the local currency bonus and malus, this paper shows the fundamental problem of rating sovereign debt of monetary union members and provide approaches to estimating it over time.

Details

The Journal of Risk Finance, vol. 16 no. 3
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 12 June 2017

Zuziwe Ntsalaze, Gideon Boako and Paul Alagidede

The purpose of this paper is to examine the impact of sovereign credit ratings on corporations in South Africa by assessing whether the sovereign rating assigned to South…

Abstract

Purpose

The purpose of this paper is to examine the impact of sovereign credit ratings on corporations in South Africa by assessing whether the sovereign rating assigned to South Africa by credit rating agencies acts as a ceiling/constraint for credit ratings assigned to corporations that operate within the country. The question of whether sovereign ratings are significant in determining corporate ratings was also explored.

Design/methodology/approach

To test the hypothesis regarding the rating of corporates relative to sovereigns, a longitudinal panel design was followed. The analysis employed fixed effects and generalized method of moments techniques.

Findings

The main findings are that sovereign ratings both act as a ceiling for corporate ratings and are important determinants of corporate ratings in South Africa. The findings however indicated that company specific variables (accounting variables) are not significant in explaining credit risk ratings assigned to corporates.

Research limitations/implications

This study only looked at the rating activity done by Standard and Poor’s (S&P). A possible further study could explore the hypothesis tested in this research using data from multiple rating agencies and contrast the results across different agencies. Future studies could also look at crisis periods and how the transfer risk discussed in this paper manifests during the transfer period.

Practical implications

The results have implications for the borrowing costs incurred by corporates in South Africa when participating in the international debt market. The implication is that if the sovereign is poorly rated, the corporates may be limited in their ability to secure investor funding at competitive rates from the international financial markets. Thus, should South Africa be downgraded to non-investment grade by S&P, the implications may be that South African corporates on average may suffer the same fate.

Originality/value

Extant literature predominantly utilizes foreign currency ratings. To the extent that this study uses local currency ratings, it adds a new dimension in the body of related studies.

Details

African Journal of Economic and Management Studies, vol. 8 no. 2
Type: Research Article
ISSN: 2040-0705

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Article
Publication date: 20 November 2020

Gabriel Caldas Montes and Julyara Costa

Since sovereign ratings provided by credit rating agencies (CRAs) are a key determinant of the interest rates a country faces in the international financial market and…

Abstract

Purpose

Since sovereign ratings provided by credit rating agencies (CRAs) are a key determinant of the interest rates a country faces in the international financial market and once sovereign ratings may have a constraining impact on the ratings assigned to domestic banks or companies, some studies have focused on identifying the determinants of sovereign credit risk assessments provided by CRAs. In particular, this study estimates the effect of fiscal credibility on sovereign risk using four different comprehensive credit rating (CCR) measures obtained from CRAs' announcements and two different fiscal credibility indicators.

Design/methodology/approach

We build comprehensive credit rating (CCR) measures to capture sovereign risk. These measures are calculated using sovereign ratings, the rating outlooks and credit watches issued by the three main credit rating agencies (S&P, Moody's and Fitch) for long-term foreign-currency Brazilian bonds. Based on monthly data from 2003 to 2018, we use different econometric estimation techniques in order to provide robust results.

Findings

The results indicate that fiscal credibility exerts both short- and long-run effects on sovereign risk perception, and macroeconomic fundamentals are important long-run determinants.

Practical implications

Since fiscal credibility reflects the government's ability to maintain budgetary balance and sustainable public debt, the government should keep its commitment to responsible fiscal policies so as not to deteriorate expectations formed by financial market experts about the fiscal scenario and, thus, to achieve better credit assessments issued by CRAs with respect to sovereign debt bonds. Sovereign credit rating assessment is a voluntary practice. It is up to the country whether they want to apply for a rating assessment or not. Thus, without a sovereign rating, one must find an alternative to measure the sovereign risk of a country. In this sense, an important practical implication that this study provides is that fiscal credibility can be used as a leading indicator of sovereign risk perceptions obtained from CRAs or even as a proxy for sovereign risk.

Originality/value

This paper is the first to verify how important the expectations of financial market experts in relation to the fiscal effort required to keep public debt at a sustainable level (i.e. fiscal credibility) are to sovereign risk perception of credit rating agencies. In this sense, the study is the first to address this relation, and thus it contributes to the literature that seeks to understand the determinants of sovereign ratings in emerging countries.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 4 December 2019

Saji Thazhugal Govindan Nair

This paper, using the model suggested by Cantor and Pecker (1996), aims to explore the relations between sovereign ratings and bond yield spreads in emerging markets.

Abstract

Purpose

This paper, using the model suggested by Cantor and Pecker (1996), aims to explore the relations between sovereign ratings and bond yield spreads in emerging markets.

Design/methodology/approach

The ordinary least square regression procedure administered on the most recent sovereign ratings of 46 countries demonstrates how the macroeconomic information embody in the sovereign rating scores predict their bond yield spreads relative to the yield on US Treasury bond.

Findings

The research finds that the assigned rating scores do not herald the complete elites of the macroeconomic conditions in emerging markets, and there is more incremental information in the publicly available macroeconomic variables, which is much useful in predicting bond yield spreads than that embedded into the sovereign ratings.

Practical implications

The outcomes of the research have strategic implications for global investors and policymakers. The use of credit rating scores along with the macroeconomic fundamentals in emerging economies produces better predictions than the benchmark predictions solely based on the rating scores suggested by the previous research.

Originality/value

This study is the first one to address the issues related to sovereign ratings and bond yield spread in developing and emerging markets using the most recent ratings during the period of the economic recoveries, following the global financial crisis of 2008.

Details

Journal of Financial Economic Policy, vol. 12 no. 2
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 13 May 2020

Ilse Botha and Marinda Pretorius

The importance of obtaining a sovereign credit rating from an agency is still underrated in Africa. Literature on the determinants of sovereign credit ratings in Africa is…

Abstract

Purpose

The importance of obtaining a sovereign credit rating from an agency is still underrated in Africa. Literature on the determinants of sovereign credit ratings in Africa is scarce. 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.

Design/methodology/approach

A sample of 19 African countries' determinants of sovereign credit ratings are compared between 2007 and 2014 using a panel-ordered probit approach.

Findings

The findings indicated that the determinants of sovereign credit ratings differ between African regions and income groups. The developmental indicators were the most significant determinants across all income groups and regions. The results affirm that the identified determinants in the literature are not as applicable to African sovereigns, and that developmental variables and different income groups and regions are important determinants to consider for sovereign credit ratings in Africa.

Originality/value

The results affirm that the identified determinants in the literature are not as applicable to African sovereigns, and that developmental variables and different income groups and regions are important determinants to consider for sovereign credit ratings in Africa. Rating agencies follow the same rating assignment process for developed and developing countries, which means investors will have to supplement the allocated credit rating with additional information. Africa can attract more investment if African countries obtain formal, accurate sovereign credit ratings, which take the characteristics of the continent into consideration.

Details

African Journal of Economic and Management Studies, vol. 11 no. 4
Type: Research Article
ISSN: 2040-0705

Keywords

Content available
Article
Publication date: 17 August 2018

Rick van de Ven, Shaunak Dabadghao and Arun Chockalingam

The credit ratings issued by the Big 3 ratings agencies are inaccurate and slow to respond to market changes. This paper aims to develop a rigorous, transparent and robust…

Abstract

Purpose

The credit ratings issued by the Big 3 ratings agencies are inaccurate and slow to respond to market changes. This paper aims to develop a rigorous, transparent and robust credit assessment and rating scheme for sovereigns.

Design/methodology/approach

This paper develops a regression-based model using credit default swap (CDS) data, and data on financial and macroeconomic variables to estimate sovereign CDS spreads. Using these spreads, the default probabilities of sovereigns can be estimated. The new ratings scheme is then used in conjunction with these default probabilities to assign credit ratings to sovereigns.

Findings

The developed model accurately estimates CDS spreads (based on RMSE values). Credit ratings issued retrospectively using the new scheme reflect reality better.

Research limitations/implications

This paper reveals that both macroeconomic and financial factors affect both systemic and idiosyncratic risks for sovereigns.

Practical implications

The developed credit assessment and ratings scheme can be used to evaluate the creditworthiness of sovereigns and subsequently assign robust credit ratings.

Social implications

The transparency and rigor of the new scheme will result in better and trustworthy indications of a sovereign’s financial health. Investors and monetary authorities can make better informed decisions. The episodes that occurred during the debt crisis could be avoided.

Originality/value

This paper uses both financial and macroeconomic data to estimate CDS spreads and demonstrates that both financial and macroeconomic factors affect sovereign systemic and idiosyncratic risk. The proposed credit assessment and ratings schemes could supplement or potentially replace the credit ratings issued by the Big 3 ratings agencies.

Details

The Journal of Risk Finance, vol. 19 no. 5
Type: Research Article
ISSN: 1526-5943

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