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Shadow sovereign ratings for unrated developing countries

Author

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  • Ratha, Dilip
  • De, Prabal
  • Mohapatra, Sanket

Abstract

The authors attempt to predict sovereign ratings for developing countries that do not have risk ratings from agencies such as Fitch, Moody's, and Standard and Poor's. Ratings affect capital flows to developing countries through international bond, loan, and equity markets. Sovereign rating also acts as a ceiling for the foreign currency rating of sub-sovereign borrowers. As of the end of 2006, however, only 86 developing countries have been rated by the rating agencies. Of these, 15 countries have not been rated since 2004. Nearly 70 developing countries have never been rated. The results indicate that the unrated countries are not always at the bottom of the rating spectrum. Several unrated poor countries appear to have a"B"or higher rating, in a similar range as the emerging market economies with capital market access. Drawing on the literature, the analysis presents a stylized relationship between borrowing costs and the credit rating of sovereign bonds. The launch spread rises as the credit rating deteriorates, registering a sharp rise at the investment grade threshold. Based on these findings, a case can be made in favor of helping poor countries obtain credit ratings not only for sovereign borrowing, but for sub-sovereign entities'access to international debt and equity capital. The rating model, along with the stylized relationship between spreads and ratings can be useful for securitization and other financial structures, and for leveraging official aid for improving borrowing terms in poor countries.

Suggested Citation

  • Ratha, Dilip & De, Prabal & Mohapatra, Sanket, 2007. "Shadow sovereign ratings for unrated developing countries," Policy Research Working Paper Series 4269, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4269
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    References listed on IDEAS

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    Cited by:

    1. Balima, Wenéyam Hippolyte & Combes, Jean-Louis & Minea, Alexandru, 2017. "Sovereign debt risk in emerging market economies: Does inflation targeting adoption make any difference?," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 360-377.
    2. Das, Udaibir S. & Papaioannou, Michael G. & Trebesch, Christoph, . "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets," Chapters in Economics, University of Munich, Department of Economics.
    3. Suhas Ketkar & Dilip Ratha, 2009. "Innovative Financing for Development," World Bank Publications, The World Bank, number 6549, June.
    4. Canuto, Otaviano & Mohapatra, Sanket & Dilip Ratha, 2011. "Shadow Sovereign Ratings," World Bank - Economic Premise, The World Bank, issue 63, pages 1-6, August.
    5. Mohapatra,Sanket & Nose,Manabu & Ratha,Dilip K., 2016. "Impacts of sovereign rating on sub-sovereign bond ratings in emerging and developing economies," Policy Research Working Paper Series 7618, The World Bank.
    6. Purificación Parrado-Martínez & Antonio Partal-Ureña & Pilar Gómez Fernández-Aguado, 2016. "Banking Soundness Indicators and Sovereign Risk in Time of Crisis: The Case of the European Union," The World Economy, Wiley Blackwell, vol. 39(8), pages 1172-1193, August.
    7. Ratha, Dilip & De, Prabal K. & Mohapatra, Sanket, 2011. "Shadow Sovereign Ratings for Unrated Developing Countries," World Development, Elsevier, vol. 39(3), pages 295-307, March.
    8. Marc Flandreau & Juan Flores & Norbert Gaillard & Sebastian Nieto-Parra, 2011. "The Changing Role of Global Financial Brands in the Underwriting of Foreign Government Debt (1815-2010)," IHEID Working Papers 15-2011, Economics Section, The Graduate Institute of International Studies.
    9. Hassan & Eliza Wu, 2015. "Sovereign credit ratings, growth volatility and the global financial crisis," Applied Economics, Taylor & Francis Journals, vol. 47(54), pages 5825-5840, November.
    10. Ahmat Jidoud, 2015. "Remittances and Macroeconomic Volatility in African Countries," IMF Working Papers 15/49, International Monetary Fund.
    11. Purificacion Parrado-Martinez & Antonio Parta Ureña & Pilar Gomez Fernandez-Aguado, 2014. "Usefulness of Financial Soundness Indicators for risk assessment: The case of EU member countries," Working Papers 14.01, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
    12. Aktug, R. Erdem & Nayar, Nandkumar (Nandu) & Vasconcellos, Geraldo M., 2013. "Is sovereign risk related to the banking sector?," Global Finance Journal, Elsevier, vol. 24(3), pages 222-249.
    13. 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.
    14. Ratha, Dilip & Mohapatra, Sanket & Plaza, Sonia, 2008. "Beyond aid : new sources and innovative mechanisms for financing development in Sub-Saharan Africa," Policy Research Working Paper Series 4609, The World Bank.
    15. Ratha, Dilip & Mohapatra, Sanket & Scheja, Elina, 2011. "Impact of migration on economic and social development : a review of evidence and emerging issues," Policy Research Working Paper Series 5558, The World Bank.

    More about this item

    Keywords

    Economic Theory&Research; Country Strategy&Performance; Financial Intermediation; External Debt; Inequality;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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