Abstract
Problem statement: Credit risk rating is a commonly used measure to determine the credit risk of various countries. Companies such as Moody’s, Standard and Poor’s, and Fitch usually carry out these ratings. This research was conducted with the aim of establishing whether credit rating agencies are biased against developing economies when assigning credit rating risks. The motivation for this research is to provide insight into the state of bias by the credit rating agencies towards sub-Saharan African countries. The results may act as a source of insight to policymakers to recommend fair practice in credit ratings to ensure that developing countries such as the sub-Saharan countries are not unfairly rated.
Method: The methodology used in the research was a literature review that implemented both interpretivist philosophy and data analysis. Using these paradigms enabled the researcher to account for both objective data and multiple realities based on researcher’s varied opinions. The databases from which articles were extracted were Scopus and Web of Science (WoS). Several search terms were used to extract articles from these databases. After screening the articles, a total of 30 articles met the inclusion criteria that required studies focusing only on developing countries, specifically South Africa, to be analysed.
Data analysis: Data analysis involved thematic analyses of these secondary sources, emerging themes and concepts.
Results: The findings reveal the emergence of three themes: credit agencies rating using determinants that are biased against emerging economies; procyclicality of credit rating agencies that are unfavourable to developing countries such as South Africa; and the general bias of credit ratings against South Africa. The lower institutional quality of developing countries was used as a metric for lower credit ratings by most agencies such as S&P, Moody, and Fitch.
Conclusion and recommendations: It is concluded that credit rating agencies are more likely to be biased in rating developing economies, on the basis of their economic state and political factors. It is recommended that further research be conducted to determine the impacts of bias in credit ratings on the cost of debt for developing countries.