The Determinants of Sovereign Credit Ratings: Indonesia and Its Neighborhood Countries 1998-2016
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Submitted
December 30, 2018
Published
March 22, 2019
Keywords:
-
Indonesia, Ordered Probit, Rating Agency, Sovereign Credit Rating
Abstract
The aim of this research is to study the determinants of sovereign credit ratings of Indonesia and
its neighborhood countries in the period of 1998-2016. Using secondary data and analyzed using
ordered probit, it is found that every credit rating agency has its own variables influencing to its
published credit ratings.In general, for Indonesia and its neighborhood countries, the variables with
significant and positive relationship are fiscal balance and current account deficit to GDP, freedom
index, and GDP per capita; while the variables with significant and negative relationship are external
debt to GNI and real exchange rate. Gross domestic savings to GDP influences credit ratings in
both ways. Interestingly, inflation does not affect the credit ratings. Indonesia and neighborhood
governments could use this information to manage their macroeconomic indicators in order to get
favorable ratings from credit rating agencies.
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References
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Restrepo, F. (2017). The real effects of
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sovereign credit ratings on foreign direct
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Turkey. Journal of Applied Finance &
Banking, 4(2), 91–109.
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Sovereign credit ratings: A primer.
New York: Standard & Poor.
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Policy, 33(4), 668–677. http://doi.
org/10.1111/coep.12098
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Yip, A. Y. N. (2006). Determinants
of sovereign ratings: A comparison
of case-based reasoning and ordered
probit approaches. Global Finance
Journal, 17(1), 136–154. http://doi.
org/10.1016/j.gfj.2006.06.001
Cai, P., Gan, Q., & Kim, S.-J. (2018). Do
sovereign credit ratings matter for
foreign direct investments? Journal
of International Financial Markets,
Institutions and Money, 55, 50–64. http://
doi.org/10.1016/j.intfin.2018.01.003
Calcagno, P. T., & Benefield, J. D. (2013).
Economic freedom, the cost of public
borrowing, and state bond ratings.
Journal of Financial Economic
Policy, 5(1), 72–85. http://doi.
org/10.1108/17576381311317790
Cantor, R., & Packer, F. (1996). Determinants
and impacts of sovereign credit ratings.
The Journal of Fixed Income, 6(3), 76–
91.
Chodnicka, P. (2015). Credit rating
determinants for European countries.
Global Journal of Management and
Business Research: C Finance, 15(9),
1–35.
Gujarati, D. (2011). Econometrics by
example. New York: Palgrave
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Basic econometrics (5th ed.). Boston:
McGraw-Hill/Irwin.
Hanusch, M., Hassan, S., Algu, Y.,
Soobyah, L., & Kranz, A. (2016). The
ghost of a rating downgrade: What
happens to borrowing costs when
a government loses its investment
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Practice Discussion Paper (Vol. 13).
Washington.
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M. (2011). Macroeconomics. Boston:
Pearson.
Kabadayi, B., & í‡elik, A. A. (2015).
Determinants of sovereign rating in
emerging countries: A qualitative,
dependent variable panel data analysis.
International Journal of Economics
and Financial Issues, 5(3), 656–662.
Kalloub, M., Kapusuzoglu, A., & Ceylan,
N. B. (2018). The impact of Basel III
adoption by G20 members on their credit
ratings. Eurasian Journal of Economics
and Finance, 6(1), 47–55. http://doi.
org/10.15604/ejef.2018.06.01.005
Melki, A., Ftiti, Z., & Ben Arab, M. (2017).
Study of sovereign credit rating
determinants with Bayesian approach.
In 34th Symposium on Money, Banking
and Finance. Paris: Université Paris
Ouest Nanterre La Défense.
Mellios, C., & Paget-Blanc, E. (2006).
Which factors determine sovereign
credit ratings? The European Journal
of Finance, 12(4), 361–377. http://doi.
org/10.1080/13518470500377406
Miller, T., & Kim, A. B. (2017). Index of
Economic Freedom 2017. Washington:
The Heritage Foundation.
Mora, N. (2006). Sovereign credit ratings:
Guilty beyond reasonable doubt?
Journal of Banking and Finance, 30(7),
2041–2062. http://doi.org/10.1016/j.
jbankfin.2005.05.023
PaÄebutaitÄ—, A. (2011). Key determinants
of Lithuania's sovereign credit rating.
Ekonomika, 90(1), 73–84.
Pretorius, M., & Botha, I. (2017).
Determinants of sovereign credit ratings
in Africa: A regional perspective.
Advances in Applied Economic
Research. Springer Proceedings in
Business and Economics, 549–563
Restrepo, F. (2017). The real effects of
credit ratings: The sovereign ceiling
channel. The Journal of Finance,
72(1), 249–290. http://doi.org/10.1111/
jofi.12434.
Arefjevs, I., & Braslins, G. (2013).
Determinants of sovereign credit
ratings: Example of Latvia. In New
Challenges of Economic and Business
Development (pp. 67–76). Riga:
University of Latvia.
Bayar, Y., & Kilic, C. (2014). Effects of
sovereign credit ratings on foreign direct
investment inflows: Evidence from
Turkey. Journal of Applied Finance &
Banking, 4(2), 91–109.
Beers, D. T., & Cavanaugh, M. (1998).
Sovereign credit ratings: A primer.
New York: Standard & Poor.
Belasen, A. R., Hafer, R. W., & Jategaonkar,
S. P. (2015). Freedom and state bond
ratings. Contemporary Economic
Policy, 33(4), 668–677. http://doi.
org/10.1111/coep.12098
Bissoondoyal-Bheenick, E., Brooks, R., &
Yip, A. Y. N. (2006). Determinants
of sovereign ratings: A comparison
of case-based reasoning and ordered
probit approaches. Global Finance
Journal, 17(1), 136–154. http://doi.
org/10.1016/j.gfj.2006.06.001
Cai, P., Gan, Q., & Kim, S.-J. (2018). Do
sovereign credit ratings matter for
foreign direct investments? Journal
of International Financial Markets,
Institutions and Money, 55, 50–64. http://
doi.org/10.1016/j.intfin.2018.01.003
Calcagno, P. T., & Benefield, J. D. (2013).
Economic freedom, the cost of public
borrowing, and state bond ratings.
Journal of Financial Economic
Policy, 5(1), 72–85. http://doi.
org/10.1108/17576381311317790
Cantor, R., & Packer, F. (1996). Determinants
and impacts of sovereign credit ratings.
The Journal of Fixed Income, 6(3), 76–
91.
Chodnicka, P. (2015). Credit rating
determinants for European countries.
Global Journal of Management and
Business Research: C Finance, 15(9),
1–35.
Gujarati, D. (2011). Econometrics by
example. New York: Palgrave
Macmillan.
Gujarati, D. N., & Porter, D. C. (2009).
Basic econometrics (5th ed.). Boston:
McGraw-Hill/Irwin.
Hanusch, M., Hassan, S., Algu, Y.,
Soobyah, L., & Kranz, A. (2016). The
ghost of a rating downgrade: What
happens to borrowing costs when
a government loses its investment
grade credit rating?MFM Global
Practice Discussion Paper (Vol. 13).
Washington.
Hubbard, R. G., O'Brien, A. P., & Rafferty,
M. (2011). Macroeconomics. Boston:
Pearson.
Kabadayi, B., & í‡elik, A. A. (2015).
Determinants of sovereign rating in
emerging countries: A qualitative,
dependent variable panel data analysis.
International Journal of Economics
and Financial Issues, 5(3), 656–662.
Kalloub, M., Kapusuzoglu, A., & Ceylan,
N. B. (2018). The impact of Basel III
adoption by G20 members on their credit
ratings. Eurasian Journal of Economics
and Finance, 6(1), 47–55. http://doi.
org/10.15604/ejef.2018.06.01.005
Melki, A., Ftiti, Z., & Ben Arab, M. (2017).
Study of sovereign credit rating
determinants with Bayesian approach.
In 34th Symposium on Money, Banking
and Finance. Paris: Université Paris
Ouest Nanterre La Défense.
Mellios, C., & Paget-Blanc, E. (2006).
Which factors determine sovereign
credit ratings? The European Journal
of Finance, 12(4), 361–377. http://doi.
org/10.1080/13518470500377406
Miller, T., & Kim, A. B. (2017). Index of
Economic Freedom 2017. Washington:
The Heritage Foundation.
Mora, N. (2006). Sovereign credit ratings:
Guilty beyond reasonable doubt?
Journal of Banking and Finance, 30(7),
2041–2062. http://doi.org/10.1016/j.
jbankfin.2005.05.023
PaÄebutaitÄ—, A. (2011). Key determinants
of Lithuania's sovereign credit rating.
Ekonomika, 90(1), 73–84.
Pretorius, M., & Botha, I. (2017).
Determinants of sovereign credit ratings
in Africa: A regional perspective.
Advances in Applied Economic
Research. Springer Proceedings in
Business and Economics, 549–563
Authors
Solikin, A., & Michel, G. (2019). The Determinants of Sovereign Credit Ratings: Indonesia and Its Neighborhood Countries 1998-2016. Agregat: Jurnal Ekonomi Dan Bisnis, 3(1), 46–57. Retrieved from https://journal.uhamka.ac.id/index.php/agregat/article/view/2847
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