The Procyclicality of African Sovereign Credit Ratings

Abstract

Credit rating agencies are supposed to have a long-term outlook when assigning credit ratings to sovereign states. It is unwarranted to assign high (low) ratings to sovereigns that are experiencing momentary successes (impediments). Ratings should therefore be assigned without taking the business cycle into account. If the business cycle is taken into account in the process of rating assignments, ratings are assigned procyclically. This paper empirically investigates the behaviour of rating agencies when assigning sovereign ratings for African countries. It makes use of ordered probit models which control for macroeconomic factors to determine if Standard and Poor’s, Fitch, Moody’s and a South African based research entity, NKC African Economics take the business cycle into account in their rating processes. The results show that three of the four agencies act in a procyclical manner to a certain extent when assigning ratings to African countries.