The impact of sovereign credit ratings on renewable energy policy development in Africa

Purpose This study presents novel empirical evidence on the complex relationship between sovereign credit ratings and the development of renewable energy policies across African countries. The aim is to clarify how these ratings influence renewable energy investment and address gaps in understanding this relationship in developing regions. Design/methodology/approach We employ a nonlinear panel data approach, specifically the Panel Smooth Transition Regression (PSTR) model, to investigate the relationship across 32 African countries from 2000 to 2020. Findings Our analysis reveals a nonlinear, inverted-U-shaped relationship: countries with lower sovereign credit ratings (below 7.93 notches) see higher investment in renewable energy as improved creditworthiness lowers financing costs. In contrast, countries with higher ratings tend to reallocate investment toward sectors with short-term financial returns, thereby reducing renewable energy capacity. The threshold effect shows that the benefits of improving ratings for renewable energy development vary significantly across rating levels. Research limitations/implications These findings are significant for policymakers, development finance institutions, and investors seeking to accelerate Africa's renewable energy transition. The implications extend to other developing regions where credit ratings affect investment flows. Policymakers must mitigate the potential crowding-out effect for sovereign states that exceed the critical threshold through targeted incentives and green financing frameworks. Originality/value This study is the first to examine the impact of sovereign credit ratings on renewable energy financing in Africa. It connects to the existing economic literature by providing insights into the interaction between sovereign risk and renewable energy policy, using advanced econometric techniques to identify previously unexplored threshold effects.