Sovereign Credit Ratings: A Friend or Foe to Financial Development of African Countries?

This study examined the impact of sovereign credit rating on financial development. Using a sample of 21 African countries from 1995 to 2019, the empirical result indicates a significant and positive link between sovereign credit rating and financial development that is, higher credit ratings are associated with lower borrowing costs, increased access to capital, and increased investor confidence. The study further finds that (1) sovereign credit ratings improve the financial institutions and markets of the selected countries; (2) the magnitude of the impact of credit rating on financial development is greater for countries with very high financial development; and (3) there is bidirectional causality between credit rating and financial development. The empirical results are remarkably robust to different measures of sovereign credit rating (Fitch and S&P), local currency debt ratings, sub‐categories of financial development (financial market and institution), and various estimators such as the two‐step system GMM, JKS Granger non‐causality, and the Machado and Silva quantile regression. In order to improve the financial depth and access funding from local and international markets to finance the sustainable development goals and Agenda 2063, the study recommends that African countries implement the necessary policies to obtain better ratings.