Short And Long-run Determinants Of Sovereign Ratings

Sovereign debt risk is getting worse and worse recently. Sovereign rating catches more attention because of the rating changes by the three international credit rating companies. Short and long-run determinants of sovereign ratings can help government make right economic policies to improve sovereign rating and avoid sovereign debt risk.We study the determinants of sovereign debt ratings from the three main rating agencies. Select the determinants by Frisch method. Using linear and ordered response models, we employ a specification that allows us to distinguish between short-and long-run effects, on a country’s rating, of macroeconomic and fiscal variables. Changes in GDP per capita, GDP growth, government debt, and government balance have a short-run impact on a country’s credit rating, while government effectiveness, external debt, foreign reserves, and default history are important long-run determinants. The models correctly predict the rating of40%of the sample and more than75%of the predicted ratings lie within one notch of the observed value. They also correctly predict between one-third and one-half of upgrades and downgrades.According to the empirical results, we give suggestion to the sovereign rating method, how to improve sovereign rating and rating system of china.