Determinants of sovereign rating in Sub-Saharan African countries: 2000-2018

Abstract

The issuing of international sovereign bonds by SSA countries has increased significantly since 2000. These bonds are used for deficit financing, benchmarking and public debt management. The bonds are vital sources of finance, next to loans and donor financing. What determines the ability of SSA countries to issue sovereign bonds, and what explains the spreads of these bonds in the international capital market? The author attempts to answer these questions by reviewing econometric case studies on sovereign rating criteria, key checklist factors for sovereign rating by Fitch and Standard & Poor’s, current sovereign ratings of SSA countries by S&P’s, the African Developments Bank’s risk ratings of SSA countries, a list of SSA sovereign bond issues, and worldwide Africa Sovereign Eurobond yield in 2018, and by analyzing the advantages and disadvantages of sovereign bonds in SSA as compared with loans and donor financing. Using an analytical approach, the author comprehensively details the main determinants of the sovereign credit ratings of SSA countries from 2000 to 2018. The main factors for assessing SSA countries’ sovereign risks are political, legal and regulatory risks, the structure of the economy, the condition of public finances, the effectiveness of internal monetary policy, and external financial position. According to S&P’s 2017, out of 17 SSA sovereigns, 15 are of speculative grade and 2 are of investment grade. Irrespective of their low sovereign rating status, however, the value of SSA countries’ outstanding sovereign bonds grew from less than $1 billion in 2008 to over $18 billion by 2014. Further sales of African sovereign bonds amounted to $10.7 billion by March 2018. Africa offers the highest yield rates in the world for sovereign Eurobonds. Africa’s debt yield in 2018 is 6% on average, compared with 5.5% for emerging markets and just 4% for developing nations in the Asia-Pacific region.