Essays on sovereign credit ratings in Africa

Ph.D. (Finance)Abstract: The investment potential of countries is normally reflected in their sovereign credit ratings. However, if a country does not have a formal credit rating or if a rating does not reflect the true potential of a country, investors will not make optimal investment decisions, which will be to the detriment of sovereigns as well. This scenario is unfortunately the reality of a great deal of African sovereigns. The majority of African sovereigns do not have a formal credit rating yet and the quality of already rated African countries is questionable. This has a substantial negative influence on much needed investment inflows to the continent (Kim and Wu, 2008). Moreover, Africa is plagued by certain weaknesses such as Ebola, HIV/Aids, armed conflicts, corruption, poverty and droughts; all of which create uncertainty and increase the risk for potential African investors. However, Africa is classified as the second most attractive investment destination in the world (World Bank, 2015a); therefore, attaining a formal sovereign credit rating can be beneficial to sovereigns on this continent. Sovereign credit ratings can aid in the development of financial markets in a country: unlocking the growth potential through optimising the use of resources and channelling savings and investment (Kim and Wu, 2008). The responsibility to uphold a sovereign rating may aid in improving capital flows to developing countries in Africa. The market is dominated by only three major global agencies, which might indicate some underinvestment in the ratings of less developed countries. Investors are unaware of this underinvestment by rating agencies and base their decisions on inefficient credit ratings or they will have to supplement given credit ratings with additional information. African countries do not need any credit ratings: they need accurate ratings that mirror the actual potential of the continent. This means that credit rating agencies have to fully ‘invest’ in the rating assignment process of African sovereigns. The initiating research question for this study was to determine if credit rating agencies invest enough time and effort into determining accurate sovereign credit ratings of African countries, so that it is a true reflection of the economic, financial and political milieu of the continent. In order to answer this research question, the first and second..