Abstract
The study examines determinants of Financial Stability (FS) using South Africa’ quarterly data from 1999 to 2018. FS is so broad that it is difficult to define, quantify and clearly identify its determinants. The paper is aimed at identifying the factors influencing FS and specifically the significance of 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 namely 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 categories of FS. The results showed that foreign debt and gross domestic product (GDP) were the most influential determinants on most categories of FS, whilst SCRI had very little impact. The other variables of concern on FS includes interest rates, GDP growth, unemployment, balance of payments and household debt.