Shadow Sovereign Ratings for Unrated Developing Countries

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.

Bibliographic Details

Main Authors:	De, Prabal, Ratha, Dilip, Mohapatra, Sanket
Language:	English
Published:	World Bank, Washington, DC 2007-06
Subjects:	ACCOUNTING, ACTUAL DEBT, BANK LENDING, BENCHMARK, BONDS, BORROWING, BORROWING COSTS, BUDGET BALANCE, CAPITAL FLOWS, CAPITAL MARKET, CAPITAL MARKETS, COMMERCIAL BANKS, COUNTRY RISK, COUNTRY RISK RATINGS, CREDIT MARKET, CREDITORS, CREDITWORTHINESS, CROSS-SECTION DATA, CURRENT ACCOUNT, CURRENT ACCOUNT BALANCE, DEBT, DEBT BURDEN, DEBT BURDENS, DEBT CRISIS, DEBT DEFAULTS, DEBT INTOLERANCE, DEBT OBLIGATIONS, DEBT RATIO, DEBT RESTRUCTURING, DEBT SERVICE, DEFAULT, DEPENDENT VARIABLE, DEVELOPED COUNTRIES, DEVELOPING COUNTRIES, ECONOMETRIC MODEL, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC GROWTH PROSPECTS, ECONOMIC OUTLOOK, ECONOMIC STRUCTURE, EMPIRICAL ANALYSIS, EQUITY CAPITAL, EQUITY MARKETS, EXCHANGE RATES, EXPLANATORY VARIABLE, EXPLANATORY VARIABLES, EXPORTS, EXTERNAL DEBT, EXTERNAL DEBT BURDEN, EXTERNAL DEBT SERVICE, EXTERNAL LIQUIDITY, EXTERNAL OBLIGATIONS, FINANCIAL CRISIS, FINANCIAL STRUCTURES, FORECASTS, FOREIGN CURRENCY DEBT, FOREIGN EXCHANGE, GDP, GDP PER CAPITA, GOVERNMENT DEBT, GROWTH RATE, HIGH CORRELATION, HIGHLY INDEBTED COUNTRY, INCOME, INDIVIDUAL COUNTRIES, INFLATION, INFLATION RATE, INSURANCE, INTEREST RATES, INTERNATIONAL DEBT, LINEAR REGRESSION, LIQUIDITY, LIQUIDITY CRISIS, LOAN MARKETS, LOCAL AUTHORITIES, MACROECONOMIC VARIABLES, NATIONAL INCOME, NATURAL RESOURCES, NEGATIVE RELATIONSHIP, PER CAPITA INCOME, POLICY RESEARCH, POOR COUNTRIES, POOR COUNTRY, PRIVATE DEBT, PRIVATE DEBT FLOWS, PRIVATE SECTOR, PROPERTY RIGHTS, PUBLIC SECTOR, REAL GDP, REGRESSION ANALYSIS, REGRESSION MODELS, REGRESSION RESULTS, REGRESSION SAMPLE, RISK EVALUATION, RISK PREMIUM, SAVINGS, SECURITIES, SECURITIZATION, SHORT TERM DEBT, SHORT-TERM DEBT, SOVEREIGN BOND, SOVEREIGN BONDS, SOVEREIGN BORROWERS, SOVEREIGN DEFAULT,
Online Access:	http://documents.worldbank.org/curated/en/2007/06/7746920/shadow-sovereign-ratings-unrated-developing-countries https://hdl.handle.net/10986/7448
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