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Do Economic Growth, Human Development and Political Stability favour sovereign Creditworthiness of a Country? A Cross Country Survey on Developed and Developing Countries

Listed author(s):
  • Bundala, Ntogwa

One of the challenges face a country or firm when deciding to lend a foreign country or firm is how to appraise the creditworthiness of that firm or country? It is experienced and commonly use of credit ratings established by Credit Rating Agencies (Moody’s, Standard and Poor’s and Pitch) as the yardstick for sovereign creditworthiness appraisal, these will be the secondary or an appeal instrument for appraising creditworthiness. This study established local based factors that will be used as pre-requites factors or benchmark for lending decisions of a country or a firm. The level of economic growth, human development and political instability of a country borrowing found to affect the ability of paying its debt obligations. The study used cross country survey strategy for generalization purpose. Twenty countries used from both developed and developing, ten countries from most risk and another ten countries from least risk countries. The multivariate multiple regressions model used to analyzed data with the aid Minitab 16.1 software. The findings of the study are that, GDP per capita, GDP growth, government budget, current account balance and inequality-adjusted index are negatively related to the probability of a country to dishonor its debt obligations. The unemployment rate, inflation rate and political instability index found to be positively support the probability of a country to dishonor its debt obligations. It is recommended that countries lending a foreign country or firm based on abroad should adhere to these pre-requisite factors for creditworthiness appraisal. These factors should be used as basic guidelines for assessing the probability of default of a country in lending decisions.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47626.

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Date of creation: 08 Nov 2012
Publication status: Published in International Journal of Advances in Management and Economics Issue No.1.Vol. 1(2013): pp. 32-46
Handle: RePEc:pra:mprapa:47626
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  1. Kipouros ANAGNOSTIS, 2011. "FDI and Impacts of Country Risk – Factors affecting the Influx of FDI in Emerging Economies," Scientific Bulletin - Economic Sciences, University of Pitesti, vol. 10(2), pages 89-97.
  2. Afonso, António & Furceri, Davide & Gomes, Pedro, 2012. "Sovereign credit ratings and financial markets linkages: Application to European data," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 606-638.
  3. António Afonso & Pedro Gomes & Philipp Rother, 2011. "Short‐ and long‐run determinants of sovereign debt credit ratings," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 16(1), pages 1-15, January.
  4. Julio Nogués & Martín Grandes, 2001. "COUNTRY RISK: Economic Policy, Contagion Effect or Political noise?," Journal of Applied Economics, Universidad del CEMA, vol. 4, pages 125-162, May.
  5. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2011. "How Sovereign Is Sovereign Credit Risk?," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 75-103, April.
  6. António Afonso & Ludger Schuknecht & Vito Tanzi, 2005. "Public sector efficiency: An international comparison," Public Choice, Springer, vol. 123(3), pages 321-347, June.
  7. Mora, Nada, 2006. "Sovereign credit ratings: Guilty beyond reasonable doubt?," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 2041-2062, July.
  8. Erdem, Orhan & Varli, Yusuf, 2014. "Understanding the sovereign credit ratings of emerging markets," Emerging Markets Review, Elsevier, vol. 20(C), pages 42-57.
  9. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
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