Sovereign Credit Ratings, Relative Risk Ratings, and Private Capital Flows

Supriyo De, Sanket Mohapatra and Dilip Ratha ()

No 9401, Policy Research Working Paper Series from The World Bank

Abstract: This paper examines the influence of sovereign credit ratings and relative risk ratings onprivate capital flows to 26 emerging and frontier market economies, using quarterly data for 1998-2017. A dynamicpanel regression model is used to estimate the relationship between ratings and capital flows after controlling forother factors that can influence capital flows, such as growth and interest rate differentials and global riskconditions. The analysis finds that while absolute ratings were an important determinant of net capital inflows priorto the global financial crisis in 2008, the influence of relative risk ratings increased in the post-crisis period,which was characterized by easy monetary policies and global liquidity, on the one hand, and greater caution anddiscretion on the part of investors on the other. The post-crisis effect of relative ratings appears to be drivenmostly by portfolio flows. These findings imply that emerging and frontier markets need to pay greater attentionto their relative economic performance and not just their sovereign ratings. Tracking changes in relative ratingscould help predict macroeconomic disturbances resulting from volatile portfolio capital movements.

Keywords: Investment and Investment Climate; Emerging Markets; Macroeconomic Management; Financial Structures (search for similar items in EconPapers)
Date: 2020-09-17
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