THE RELATIONSHIP BETWEEN SOVEREIGN CREDIT RATINGS AND CAPITAL FLOWS: A CASE OF SOUTH AFRICA

Abstract

The current study analyses the relationship between sovereign credit ratings and capital flow represented by Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) in South Africa. South Africa has been receiving negative sovereign credit ratings lately. Time series quarterly data from 1994-2017 is collected and analysed using the Auto-Regressive Distributed Lag (ARDL) and the Error Correction Model (ECM). The ratings analysed are from Standard and Poor’s rating agency. The results demonstrate that higher ratings are associated with higher financial flows. In other words, when a country is rated high, investors perceive such a country to be a safe heaven and believe that their investments will be safe. The results show that sovereign ratings influence foreign financial flows. These study outcomes imply that authorities need to consider all factors which are targeted by rating agencies and ensure that they perform as expected.