Analysis of determinants of Morocco's sovereign financial rating

Abstract

This study examines the determinants of the sovereign financial rating granted by the credit rating agency S&P to Morocco, the dependent variable. Using an ARDL model and monthly data covering the period 1998-2019, our study suggested that the Moroccan’s sovereign rates, is determined by nine variables, namely: economic growth, depth of the financial system, inflation, accountability, control of corruption, budget balance, total central government debt, central government external debt and net foreign assets. The relationship between the variables is generally a short-term relationship, with the exception of the variables representing public finances. Crossing the threshold separating the two grades, i.e. moving from "speculative" to "investment" requires greater effort than what is normally required to move just along the path of "speculative grade".

Our results can guide economic policy decisions in terms of the choice of sectors and factors that should primarily benefit from government efforts. Thus, given its long-term relationship and its predominance in the S&P’s process of awarding sovereign rating, public finance factors must occupy the central place in economic policy, if Morocco wishes to consolidate its positioning at the Investment Grade, while moving away from the threshold separating it from speculative grade.

To our best knowledge, there are no academic studies that have attempted to examine the determinants of Morocco's sovereign rating. Also, from a methodological point of view, previous empirical studies have not had the opportunity to use an ARDL model to examine this type of relationship, i.e.: financial rating vs its determinants in the case of a specific country. Thus, our study can help demystify sovereign financial rating and its impact on the decision-making process relating to economic policies. This study can be repeated by having recourse to logistic regression methods in order to overcome the shortcomings linked to the non-linear and discontinuous nature of the financial rating.