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Has files: YesSubject: search.filters.subject.Sovereign credit ratings

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    The Impact of Sovereign Credit
    (2011-06-06) Ntswane, Lesley
    This event study investigates the impact of sovereign credit ratings action on the foreign exchange rate in South Africa. The study uses the mean adjusted return model to establish the impact sovereign credit rating announcements by three rating agencies on the South African Rand against the American Dollar daily exchange rate and volatility between 1994 and 2007. While previous studies, especially after the notable depreciation and subsequent recovery of the South African Rand, in 1998 and 2001-2002, have tried to identify the determinants of the Rand exchange rate, none of the studies has taken sovereign credit rating actions into account. The results from this study have shown that sovereign credit rating announcements by Standard and Poor’s have a statistically significant impact on the South African Rand exchange rate against the American Dollar. The impact was however not only positive during an upgrade as previously found in a similar study on foreign exchange rate, but negative excess returns were also computed during the event window period. Rating action announcements by Fitch and Moody’s on the other hand, do not have any significant impact on the on the South African Rand exchange rate against the American Dollar. The sovereign credit rating announcements were, however, found to have insignificant impact on the foreign exchange rate volatility during the event window period. The study also found that sovereign credit ratings announcements have no significant impact on the gap between nominal exchange rate and the PPP equilibrium exchange rate. This may be a confirmation that sovereign rating action is not one of the factors that influence the speed towards mean reversion to close the arbitrage created by price differences in the long-run exchange rate measure through PPP. What also stood out in this study was that in the period when the South African Rand experienced the highest depreciation against the American dollar in 2001, none of the rating agencies issued prior negative announcements. In fact the iii South African rating was raised after the recovery of the Rand between 2002 and 2003. The findings from this study, however, open an opportunity for further studies. South Africa’s rating announcements between 1994 and 2007 provides only positive sovereign rating announcements. Previous studies have shown that the rating announcements had a significant effect on bond and stock prices where an announcement was a downgrade and especially for below investment grade rated securities. In addition to that, the only time an effect was noticed for an upgrade was when a rated sovereign moved from below investment to investment grade. Significant negative exchange rate reaction has also been found during a downgrade, for below investment sovereigns. This may explain the lower significant level impact on the exchange rate in the investment graded South Africa. It would be interesting to see a mix of rating announcements especially for developing economies such as South Africa. This presents an opportunity for further studies on the impact of sovereign credit ratings on exchange rates in developing economies and especially those that have experienced large currency depreciation in recent times
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    The relationship between
    (2011-05-31) Mwiinga, Killian
    Stock markets in Africa are small, underdeveloped and generally undercapitalised by world standards. Until recently they have been perceived as too risky to invest in by external investors. The “old” perception of Africa as a “single country/block” is slowly receding and countries are starting to be viewed as individuals, while not necessarily overlooking the issue of the contagion effects of any regional business risks. As has been observed, there has been generally improved market performance in stock markets on the African continent in terms of historical average annual returns represented by market capitalisation, market liquidity and number of domestic listed companies over the period 1997 to 2007. However, this could be due to many factors. For countries to be attractive to external investors it is necessary to have investor-friendly policies that protect their investments while creating an environment that allows competition. In so doing, it is important to evaluate the macro-economic and micro-economic policies that the respective countries on the continent have. The sovereign credit ratings of countries are based on economic fundamentals whose rating affects the ratings of many companies or businesses in that particular country. The purpose of this study was to gain insight into whether a relationship exists between sovereign credit ratings and the performance of stock markets on the African continent with respect to market capitalisation, market liquidity and the number of domestic listed companies. As it would appear that the information in this study has not been documented previously for the African continent it may be regarded as a formative evaluation and addition to the body of knowledge of the relationship between sovereign credit ratings and stock market performance in Africa. The statistical analysis methodology was undertaken using Spearman’s rank correlation method, which uses a t-test statistic within a 95 % confidence interval to test the strength of this relationship and, based on this result, a conclusion could be made. The findings of the research are intended to iii help countries in Africa evaluate their policies so that they become more attractive to investors. A window period of five (5) years, (1999 to 2003), was used to analyse the data set for sovereign credit ratings. A similar, four (4)-year window period (2000 to 2003) was used for the comparison of the stock market indicators (market capitalisation, market liquidity and number of domestic listed companies). It was not possible to align the two window periods selected for the research as all the data sets published lack information for certain years. However, it was felt that as a trend – rather than an absolute correlation – was being sought, the validity of the research would not be unduly jeopardised. The result of the findings in this research was that there exists no relationship between sovereign credit ratings and the performance of the stock markets on the African continent with respect to market capitalisation, market liquidity and number of domestic listed companies. It became clear that the performance of African stock markets was influenced by factors other than an improvement or worsening in the macro- and micro-economic fundamentals of a country. The question remains: “What influences the performance of the stock markets on the African continent?” This is an important area for further research. The World Bank, through its implementing partner, the United Nations Development Programme, needs to review its current programme to promote stock markets on the African continent to see what areas require additional focus for this project to receive the attention needed. Alternatively, it could be that it is still premature to do so, considering that in 2007 only 20 countries had stock markets.