Publication: Shadow Sovereign Ratings for Unrated Developing Countries
Date
2007-06
ISSN
Published
2007-06
Author(s)
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.
Citation
“Ratha, Dilip; De, Prabal; Mohapatra, Sanket. 2007. Shadow Sovereign Ratings for Unrated Developing Countries. Policy Research Working Paper; No. 4269. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/ddc75ebf-3865-5aff-b6ce-7a0c9e6d08b4 License: CC BY 3.0 IGO.”
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