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Title: Understanding Sovereign Ratings and Their Implications for Emerging Economies

Author

Listed:
  • Rahul S Chauhan

    (Chicago Booth School of Business)

  • Ilisa Goenka

    (CERGE-EI)

  • Kaushalendra Kishore

    (Centre for Advanced Financial Research and Learning (CAFRAL))

  • Nirupama Kulkarni

    (Centre for Advanced Financial Research and Learning (CAFRAL))

  • Kavya Ravindranath

    (George Washington University)

  • Gautham Udupa

    (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.

Suggested Citation

  • Rahul S Chauhan & Ilisa Goenka & Kaushalendra Kishore & Nirupama Kulkarni & Kavya Ravindranath & Gautham Udupa, 2023. "Title: Understanding Sovereign Ratings and Their Implications for Emerging Economies," Working Papers 023618, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:023618
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