On the nexus between sovereign ratings and financial stability: Fresh insights from Tunisia

Abstract

In this paper, we attempt to analyze the causal relationship between the financial stability and sovereign rating for Tunisia. To do so, we adopt two-step methodology. We first construct a Financial Stability Index (FSI). Second, we use two models based on different control variables to examine the causal nexus between the FSI and Tunisian sovereign ratings. We construct the FSI using the 11 listed banks during the period 2007-2016. The empirical results show that there are two different phases: phase of financial stability (from 2007 to 2010) and phase of financial instability (from 2011 to 2016) with a significant fall due to indebtedness and inflation’s increase. Afterwards, we show that the financial stability significantly affects the sovereign ratings. Such analysis of the causal nexus could be interesting from a policy perspective.