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Sovereign Credit Ratings and Spreads in Emerging Markets; Does Investment Grade Matter?

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  • Laura Jaramillo
  • Michelle Michelle Tejada

Abstract

Sovereign investment grade status is often associated with lower spreads in international markets. Using a panel framework for 35 emerging markets between 1997 and 2010, thispaper finds that investment grade status reduces spreads by 36 percent, above and beyond what is implied by macroeconomic fundamentals. This compares to a 5-10 percent reduction in spreads following upgrades within the investment grade asset class, and no impact formovements within the speculative grade asset class, ceteris paribus. While global financial conditions play a central role in determining spreads, market sentiment improves with lower external public debt to GDP levels and higher domestic growth rates.

Suggested Citation

  • Laura Jaramillo & Michelle Michelle Tejada, 2011. "Sovereign Credit Ratings and Spreads in Emerging Markets; Does Investment Grade Matter?," IMF Working Papers 11/44, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:11/44
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=24677
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    References listed on IDEAS

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    1. Torsten Sløk & Mike Kennedy, 2004. "Factors Driving Risk Premia," OECD Economics Department Working Papers 385, OECD Publishing.
    2. Martín González-Rozada & EduardoLevy Yeyati, 2008. "Global Factors and Emerging Market Spreads," Economic Journal, Royal Economic Society, vol. 118(533), pages 1917-1936, November.
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    Cited by:

    1. Miyajima, Ken & Mohanty, M.S. & Chan, Tracy, 2015. "Emerging market local currency bonds: Diversification and stability," Emerging Markets Review, Elsevier, vol. 22(C), pages 126-139.
    2. repec:wsi:jicepx:v:03:y:2012:i:02:n:s1793993312500111 is not listed on IDEAS
    3. Erdal Özmen & Özge Doğanay Yaşar, 2015. "Emerging Markets Sovereign Bond Spreads, Credit Ratings and Global Financial Crisis," ERC Working Papers 1510, ERC - Economic Research Center, Middle East Technical University, revised Nov 2015.
    4. repec:eee:riibaf:v:41:y:2017:i:c:p:235-238 is not listed on IDEAS
    5. repec:rnp:ecopol:ep1708 is not listed on IDEAS
    6. Erdem, Orhan & Varli, Yusuf, 2014. "Understanding the sovereign credit ratings of emerging markets," Emerging Markets Review, Elsevier, vol. 20(C), pages 42-57.
    7. Johannes Fedderke, 2013. "Promotion and Relegation between Country Risk Classes as Maintained by Country Risk Rating Agencies," Working Papers 376, Economic Research Southern Africa.
    8. Enrico Laghi & Michele Di Marcantonio & Eugenio D'Amico, 2014. "Estimating credit default swap spreads using accounting data, market quotes and credit ratings: the European Banks Case," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2014(2-3-4), pages 59-81.
    9. Alexandru MINEA & Jean-Louis COMBES & Weneyam Hippolyte BALIMA, 2015. "Sovereign Debt Risk in Emerging Countries: Does Inflation Targeting Adoption Make Any Difference?," Working Papers 201504, CERDI.
    10. Csontó, Balázs, 2014. "Emerging market sovereign bond spreads and shifts in global market sentiment," Emerging Markets Review, Elsevier, vol. 20(C), pages 58-74.
    11. Patrycja Chodnicka & Katarzyna Niewinska, 2015. "Financial Risk in Polish Companies During the Global Economic Crisis of 2007–2008 with Particular Emphasis on Evaluation of the Use of Reserve Debt Capacity (Ryzyko finansowania polskich przedsiebiors," Problemy Zarzadzania, University of Warsaw, Faculty of Management, vol. 13(55), pages 197-219.
    12. Basu, Kaushik & De, Supriyo & Ratha, Dilip & Timmer, Hans, 2013. "Sovereign ratings in the post-crisis world : an analysis of actual, shadow and relative risk ratings," Policy Research Working Paper Series 6641, The World Bank.
    13. Özmen, Erdal & Doğanay Yaşar, Özge, 2016. "Emerging market sovereign bond spreads, credit ratings and global financial crisis," Economic Modelling, Elsevier, vol. 59(C), pages 93-101.
    14. LaGarda, Guillermo & Prat, Jordi & Solera, Marco & Beverinotti, Javier, 2016. "Debt and Credit Quality in Central America, Panama, and the Dominican Republic," MPRA Paper 74163, University Library of Munich, Germany.

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