Impact of sovereign ratings changes on interest rates in emerging markets
The array of existing studies have focused on the effect of changes to sovereign ratings on bond prices, equity prices, spreads, default swaps, economic growth, investments, etc. This paper seeks to fill the gap in literature; it aims to quantify the effects that changes to sovereign credit ratings have on interest rates in emerging market economies. With the use of a system GMM model, we find that an upgrade of one notch in foreign currency sovereign credit ratings leads to a 0.35% decrease in interest rates. A one notch upgrade therefore, has minimal impact on interest rates. Whereas a one notch downgrade in ratings leads to a 0.51% increase in interest rates. The results are robust after accounting for endogeneity, use of alternate specification, macroeconomic factors that affect interest rates and sovereign ratings revisions. We conclude that changes in long term foreign currency sovereign credit ratings impact on interest rate through the risk premium which decreases (increases) after an upgrade (downgrade). The effects are larger for a downgrade than that experienced following an upgrade. Future studies can consider the use of additional control variables for: financial liberalization, financial crisis, investor protection and quality of institutions.
A research report submitted in partial fulfilment of the requirement for the degree of Masters of Management in Finance and Investments. Witwatersrand Business School, University of the Witwatersrand, Johannesburg, 2018
Chibamba, George Kapolyo (2018) Impact of sovereign ratings changes on interest rates in emerging markets, University of the Witwatersrand, Johannesburg, <http://hdl.handle.net/10539/26287>