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Published February 28, 2013, the report noted that research on the links between FDI and sovereign ratings in SSA is now possible by comparing the experiences of the increasing number of rated African sovereigns and those which remain unrated.
The universe of rated sovereigns in SSA has grown from just one, South Africa, in 1994, to 20 in 2012, the rating agency observed.
In the early 2000s, new sovereign ratings in SSA were sponsored by development partners who saw the potential for sovereign ratings to promote transparency, improved governance and development, said Fitch.
According o Fitch, since 2006, given the increased investor interest in the region, seven SSA countries have requested ratings before they subsequently were able to issue international bonds for the first time.
Fitch’s econometric estimates suggest that sovereign ratings have “contributed to net FDI flows in SSA between 1995 and 2011, adding on average the equivalent of 2% of GDP in FDI every year into rated countries.”
It attributed the positive impact of sovereign ratings on FDI to a number of factors – a signal effect, whereby the sovereign rating tells investors that a country is open to foreign capital and under scrutiny by a rating agency; an information effect, which reduces adverse selection for solid performers in SSA; an identification between sovereign and country risk, whereby investors may use ratings to assess risks in the private sector; and a positive effect on economic policy, as rated countries aim to improve their ratings and avoid downgrades.
Fitch stated that the marked increase in net FDI to SSA in the past 15 years (from an average $6 billion every year from 1995 to 1998 to $35 billion from 2007 to 2011) reflects the boom in commodity prices and mineral discoveries in SSA and more recently the growth in consumer spending.
By Ekow Quandzie