Title: Understanding Sovereign Ratings and Their Implications for Emerging Economies

Rahul S Chauhan, Ilisa Goenka, Kaushalendra Kishore, Nirupama Kulkarni, Kavya Ravindranath and Gautham Udupa
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Rahul S Chauhan: Chicago Booth School of Business
Ilisa Goenka: CERGE-EI
Kaushalendra Kishore: Centre for Advanced Financial Research and Learning (CAFRAL)
Kavya Ravindranath: George Washington University

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: The rating methodologies of the big three credit rating agencies—S&P, Moody’s, and Fitch—are scrutinised and evaluated. The factors driving sovereign ratings are examined using a regression framework and machine learning techniques with a panel of 162 countries covering ratings from 2000 to 2018. Across all models, institutional quality is the most significant factor driving sovereign ratings, suggesting that building more vital institutions can lower a sovereign’s borrowing costs by improving sovereign ratings. Additionally, only sustainable GDP growth propelled by strong structural reforms and productive investment increase CRA ratings. The findings suggest that the over-reliance of market participants on CRA ratings to assess sovereign creditworthiness may be unwarranted, particularly during crisis periods.

Date: 2023-06-03
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Published in Economic & Political Weekly

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Persistent link: https://EconPapers.repec.org/RePEc:ris:cafral:023618

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