Understanding the sovereign credit ratings of emerging markets

Orhan Erdem and Yusuf Varlı

Emerging Markets Review, 2014, vol. 20, issue C, 42-57

Abstract: This paper identifies the macroeconomic factors behind the sovereign credit ratings of global emerging markets assigned by Standard and Poor's (S&P). The financial integration and globalization of capital markets have facilitated the capital inflows/outflows among countries. Sovereign credit ratings have served as a signal for countries' economic, financial and political situations. Ratings are very important in the sense that they attract capital inflow and investments. This is especially vital for emerging markets. Although the rating agencies do not explicitly reveal their methodologies, it is possible to guess the effects of several variables on ratings by using various econometric models. Concerning the heavy criticisms on rating agencies' performances, we wish to examine the sovereign credit ratings within a specific country-category. In this essay, we study the effects of macroeconomic factors on the sovereign ratings of emerging markets. Using several approaches, we find that the most relevant factors are Budget Balance/GDP, GDP per capita, Governance Indicators and Reserves/GDP. Moreover, our model predicts up to 93% of all credit rating levels. Interestingly, we obtain that S&P's evaluation of the sovereign credit rating for Turkey performs poorly, especially in the highest rating levels.

Keywords: Sovereign credit ratings; Standard and poor's; Macroeconomic indicators; Panel data; Ordered response models; Emerging markets (search for similar items in EconPapers)
JEL-codes: C23 C25 E44 F34 H63 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:20:y:2014:i:c:p:42-57

DOI: 10.1016/j.ememar.2014.05.004

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