Determinants of sovereign credit ratings

Abstract

Sovereign ratings are independent assessments of a country's financial health. It provides insights to potential investors about the creditworthiness of an economy to determine scope for investments. The ratings are an indicator calculated by rating agencies such as Moody’s, Standard & Poor’s and Fitch. Countries seek to obtain sovereign ratings for the purpose of issuing bonds in external debt and attract foreign direct Investments (FDI). The interest rates for obtaining credit in international financial markets is often influenced by sovereign ratings of a country. Data on sovereign ratings is used by organizations such as World Bank and IMF to fund projects and provide financial aid to a country. The increasing globalization of markets has increased demand of sovereign rating as an important metric in making financial decisions for investors and internationally diversified funds. Sovereign bond ratings have been issued since the beginning of 1900s. The ratings have come under scrutiny in the wake of the Great Depression, Lehman crisis, etc. Currently, the ratings are being calculated for more than 150 countries on a regular basis.