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Sovereign Ratings

  • Sovereign ratings are assessments of the relative likelihood of default or a country. It considers both kinds of factors like
  • Solvency factors that affect the capacity to repay the debt
  • Socio-political factors that might affect the willingness to pay of the borrower
  • For example, S&P determines the rating by evaluating the country’s performance in each of the following areas:
    • Political risk
    • Income and economic structure
    • Economic growth and prospects
    • Fiscal flexibility
    • General government debt burden
    • Off-shore and contingent liabilities
    • Monetary flexibility
    • External liquidity
    • Public-sector external debt burden
    • Private sector external debt burden

Variables for Sovereign Rating

  • GDP per Capita – positive
  • Real GDP Growth – positive
  • Unemployment – negative
  • Government Debt – negative
  • Fiscal balance – positive
  • Government Effectiveness – positive
  • External Debt – negative
  • Foreign Reserves – positive
  • Default History – negative
  • Current Account Balance – uncertain, a higher current account deficit could signal an economy’s tendency to over-consume, undermining long-term sustainability. Alternatively, it could reflect rapid accumulation of fixed investment, which should lead to higher growth and improved sustainability over the medium term
  • Inflation – on the one hand, it reduces the real stock of outstanding government debt in domestic currency, leaving overall more resources for the coverage of foreign debt obligations. On the other hand, it is symptomatic of problems at the macroeconomic policy level, especially if caused by monetary financing of deficits


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