Abstract
The study examines the effects of sovereign ratings of Financial Stability (FS) using South Africa’ quarterly data from 1999 to 2018. Financial stability is important for confidence in the system responsible for managing risk and creation of wealth while linking deficit and surplus units within an economy. Anything that affects this confidence, such as credit ratings, reduces or increases the availability of funds in the financial sector, hampering growth and development. South Africa, as an emerging market with an unpredictable political stability, is vulnerable to sovereign rating downgrades. Negative expectations or speculating actions towards downgrades can negatively affect the macroeconomic variables, leading to financial instability and disturbances in the fiscal or monetary framework. The paper is aimed at identifying the macroeconomic factors that influence FS, with a focus on the significance of the Sovereign Credit Ratings (SCR). Previous studies failed to contextualise and model the relationship between SCR and FS. The analysis used stepwise linear regression model as well as the Structural Vector Auto-Regression (SVAR) Model to assess the impact of unexpected shocks. The Principal Component Analysis (PCA) was used to create the indices for Sovereign Credit Rating (SCRI) and Rating Outlook (ORI). FS was split into four categories—system, conditions, confidence and the government bond index—as a measure of the performance of sovereign bonds. SCRI and other economic indicators were used to check variation in each of the FS categories. The results showed that foreign debt and gross domestic product (GDP) were the most influential determinants in most FS categories, whilst SCRI had very little impact. The other variables of concern on FS include interest rates, GDP growth, unemployment, balance of payments and household debt.