Assessing the impact of COVID-19 induced rating downgrades on Eurobond yields in Africa

Abstract

There was an outcry from policymakers over sovereign credit rating downgrades of African countries during the unprecedented COVID-19 lockdown periods. This study investigates whether sovereign downgrades during the time African countries were hit by COVID-19 had an impact on sovereign bond yields. Applying an event study analysis on the Eurobonds yields of 4 African countries that were downgraded during this period shows that there is significant evidence of excess volatility around the downgrade event and a net increase in yields within the rating event window. The results align to the view that rating agencies negatively impact macroeconomic conditions through their procyclical ratings. Hence, ratings should be regulated and controlled during crises times to avoid the procyclical impact of ratings.