Modelling Sovereign Ratings in Indonesia: Analysis the Driving Factors Using the Panel Data Regression

Abstract

Sovereign ratings serve as a concise reflection of a country's creditworthiness. They wield significant influence over various aspects of the economy, particularly affecting the interest rates at which governments can borrow when issuing new debt. This study aims to examine the impact of Real Gross Domestic Product (RGDP), General Government Debt (GGD), Current Account Balance (CAB), Net International Investment Position (NIIP), Foreign Exchange Reserves (FER), Credit Default Swap (CDS), and General Government Revenue (GGR) on sovereign ratings in Indonesia. The sample comprises four countries categorized in the same peer groupsas high-quality, medium-grade, and speculative investments with the data provided  from 2004 to 2022. The research employs a panel data regression model. The results indicate that RGDP, Inflation, GGD, and CAB do not demonstrate statistical significance in their association with sovereign ratings, suggesting limited influence. In contrast, the FER variable exerts significant positive impacts and NIIP and FER variables exert significant negative impacts, underscoring their relevance in rating assessments. Conversely, despite its negative correlation, the CDS variable lacks statistical significance. Conversely, the CDS variable, despite its negative correlation, lacks statistical significance. Remarkably, when considering all variables collectively—RGDP, GGD, CAB, NIIP, FER, and CDS—they collectively wield a substantial influence on sovereign ratings, emphasizing the necessity of a comprehensive approach in comprehending these ratings.