The Effect of Risk Rating Agencies Decisions on Economic Growth and Investment in a Developing Country: The Case of South Africa

Daniel Francois Meyer and Lerato Mothibi
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Daniel Francois Meyer: School of Public Management, Governance and Public Policy, College of Business and Economics, University of Johannesburg, Auckland Park 2006, South Africa
Lerato Mothibi: School of Economic Sciences, North-West University, Private Bag X6001, Potchefstroom 2520, South Africa

JRFM, 2021, vol. 14, issue 7, 1-17

Abstract: Over the last decade, the South African economy has endured prevailing economic challenges, including weak economic growth, unreliable electricity supply, rising fiscal deficits, declining investment inflows and the inexorable rise in government debt alongside the expected impact of the coronavirus pandemic. Credit ratings have significantly evolved, making them key elements in the modern financial markets because of their creditworthiness opinions, as many investors across the globe rely heavily on their opinions. A quantitative research approach was followed using data from 1994Q1 to 2020Q2. The analysis entailed a descriptive and econometric analysis where two models were estimated using the autoregressive distributed lag (ARDL) model. The findings reveal long-run relationships between economic growth (GDP), risk rating index, foreign direct investment (FDI), exchange rate, gross fixed capital formation and lending rates. The results also reveal a bi-directional causality between economic growth and the rating index and between FDI and the rating index. This study’s findings suggest that investments and economic growth in the country need to be stimulated significantly to impact risk rating agencies decisions. Policymakers need to redirect resources towards effective and efficient capital-forming initiatives and development projects to improve the country’s sovereign risk rating to re-ignite growth.

Keywords: autoregressive distributed lag; economic growth; foreign direct investment; sovereign risk rating; South Africa (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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