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Credit Ratings Matter for Those Who Need Them Most

Otaviano Canuto's picture

Debt and credit ratings keep making headlines. But for a moment, forget about their impact in the U.S. and Europe, where an abundant set of economic data exists both for international investors and bondholders. Instead, think of what would happen if you lived in one of the 58 developing countries that remain unrated by Standard & Poor’s, Moody’s, and Fitch, the three international credit rating agencies. You would have very limited access to capital and investment, and the cost of borrowing would be significantly higher.

Let me explain why. In the case of countries not routinely tracked by the majority of investors, the absence of information on creditworthiness – which is costly to acquire – is a disincentive for bond purchases. Sovereign ratings act as widely available and internationally comparable indicators of a country’s fiscal performance, collectively economizing on costs of information collecting and processing. Even if a government is not issuing bonds, the rating often fulfills a function as a “ceiling” for the private sector and its absence can negatively affect access to the international capital market. In addition, assessments of sovereign creditworthiness are also taken into account by donors providing official development aid.

So if you are one of the 58 developing countries still not rated by the three international agencies, you remain pretty much cut off from the many potential bond holders. This is unfair because an unrated country is not necessarily at the bottom of credit worthiness. Contrary to popular perception, some of the non-rated countries would even deserve to be considered investment grade, as our latest World Bank work shows.

According to the latest edition of our Economic Premise series, "Shadow Sovereign Ratings," many unrated countries turn out to be doing quite well. Of the 47 unrated countries analyzed, 7 countries, mainly from the Caribbean and the South Pacific Ocean, are likely to be above investment grade (BBB- through AAA). Another 10 are likely to be in the BB category, equivalent to speculative grade; and 10 in the CCC or lower categories of high and very high default risk.

This shadow rating model is no substitute for the broader, deeper analysis that experienced rating agencies are expected to provide, but it gives us an approximate idea of where countries stand and what they need to do to improve.

There are numerous reasons for a country’s reluctance or inability to be “officially” rated --from the complexity of the process itself to some politician’s fear of losing control over the final outcome. To overcome these disincentives, the international community should play an important role in helping developing countries obtain ratings and even get upgraded. The benefits totally outweigh the risks.

In the meantime, the next time you equate unrated with unworthy, please think twice.


For staff who work for the WBG or the IMF, the Library Network provides access to premium rating services such as: EIU Risk Ratings FitchResearch Moody's Standard & Poor's RatingsDirect Business Monitor Int'l (IFC only) Thomson One (IMF Only) Stay on top of the changing environment by using these sources.

Submitted by Sanket on
Maps of sovereign credit ratings as of August 2011 available at Chartsbin ( provide an interesting representation of this issue. Some interesting findings: The majority of the unrated countries (in very light yellow) are also among the poorest countries in Africa. There are also several in Western and Central Asia and a scattered few in Latin America. These regions should be the area of focus. Also, the United States is now the same color as China!

Submitted by Andrey on
It is an interesting study that undoubtedly contributes to price assets of unrated countries. It reminds me the long term structure of interest rates. One thing: the government solvency (budget surplus / deficit) could not be another variable of the model? In addition, I believe that the international financial system could be safer if credit rating agencies were legally responsible for rating. I guess IOSCO and CVM are working on it. Thank you for the opportunity.

Thank you for sharing this paper - really interesting and potentially quite useful to those of us struggling with unlisted early stage BOP investments in unrated countries! I've forwarded the link to the report to a number of colleagues in microfinance and BOP/social investment and all confirm that this is a valuable line of inquiry. Regards, Lauren

Submitted by Edward Ojo on
Otaviano, It all seems such a coincidence that you have such words as Standard, Poor, Moody, and Fitch in the names of the rating agencies. It is obvious that S&P goes more for the "Standard" countries and not for the "Poor" ones like the 47 which you covered in the "Shadow Sovereign Ratings". The financial markets will certainly get moody or even go up in fitch if, for example, they have to waste their time and resources rating "poor" Bangladesh instead of "standard" Belgium. Politicians in most of those "Poor" countries do not lose any sleep over not being rated. You mentioned that "fear of losing control over the final outcome" is one reason why some of them do not wish to get rated. The truth is, the political elites in those countries are not the "poor" ones. It is the ordinary people that are. A bulk of the funds, generated internally, or obtained through credits go back to banks in the "Standard" countries - stolen by the politicians with the active support of, yes, you guess right - top officials of the financial institution in those "Standard" countries. The arrangement had worked perfectly well. S&P, Moody and Fitch (and in particular S&P) had been left in peace to use very defective, unscientific methodologies and crappy statistical tools to make flawed ratings based on mostly doctored data. They had got it right sometimes - that is occasionally. No one really cared. They never upset those that really mattered. (Who cared what rating if any, S&P had on “Poor” Burundi for instance?) So, they never came under any scrutiny. Their methodologies were treated like some form of black-box. Even when the evidence pointed to the fact that their ratings of some "Poor" countries made absolutely no sense, no one complained. Everyone was happy. They made money for their owners. That was before they decided to take on "Standard" countries as well. Suddenly, their sins were no longer forgiven. Even the forgotten ones were quickly remembered. Their meddling in the "ratings" (for the lack of a better word to describe their charade of blatant guesstimates) of "Standard" countries such as Greece, Portugal, Ireland was to send the EU leadership into a very "Moody" and "Fitchy" stance. The "rating" agencies somehow managed to draw attention to how Europa leaders were putting beautiful and neat wall paper on a cracked wall. EU leaders came out in a united force to decry the arrogance of the agencies and to draw attention to the need to do something about the insensitivity and monopoly (or is it cartel) of the so-called rating experts. The arrogance knew no bounds. The unrated rating agencies went for the ultimate trophy. Encouraged by the amount of air time they got following their ruffling of feathers in Europe, they decided to take on the one that thought that it was the most "Standard" of the countries. Well, they had reasoned that if WikiLeaks could do it and get away with it, so could they. Yes, we can! Otaviano, it is indeed in the interest of the common people in most of the "Poor" countries that they stay away from being rated by Standard, Moody and Fitch. Why should generations yet unborn have to end up paying off debts entered into by their politicians while the loots are neatly and roundly benefitting generations of lucky people in such "Standard" countries as Switzerland?

Dear Otaviano, This is really an interesting and timely subject to debate – thanks very much for raising such an important issue. Forgive me for brief comments – my knowledge in global or macro level economic is rather limited and focused on involvement in socio-economic analysis on poverty, employment and microfinance related to disability and groups at risk (from protection perspective). That is said, the issue raised is a cross-cutting one and affects all levels of development process and its coutcomes. Your article on shadow sovereign rating has been truly informative, appreciated. The issue if I understand correctly concerns ‘credibility and functionality of existing credit rating’ and how a ‘shadow rating’ helps developing countries accessing international finance. This makes part of WB working and/or proposed strategies for poverty reduction as well as for increasing aid effectiveness. After reading the article, I wonder what are the real barriers that makes certain countries unwilling to take part in a rating exercise other than the impact of such assessment on their ability to access further credit – I acknowledge and agree with all other valid raisons cited in the article and think it is an excellent read, though. Perhaps, there is a need for redefining the boundaries and parameters (criteria) used in such rating to make them more responsive, accurate, accommodating and user friendly in terms of outcomes? May be, trying to come up with another assessment and measurement instruments that could do the job such as the proposed predicting of shadow sovereign rating etc. This is especially true given that 58 countries remain unrated - this is alarming and makes more than a quarter of world’s nations and perhaps nearly half of total developing countries, if not mistaken. This looks like an important issue to look at by donors: WB, IMF and other development banks and financing institutions. While the concept of credit rating is based on pure business ideals, in development cooperation it also concerns aid effectiveness and the capacity of partner/s to manage development assistance as rightly pointed out in your conclusion. So, in business terms, what makes a country more worthy of accessing credit than another? Is it the existing wealth/resources to pay back, its potential capacity or its collaterals? Not to forget other factors which may influence worthiness of accessing credit such as politics, security, strategic concerns, etc. This discussion bears similarities with microfinance (I coordinated community credit funding in the past) which includes a process of credit assessment similar in principle to our subject of discussion. Before partnering with local organization (often NGO), we did institutional capacity assessment to see if they were a capable partner, worthy of investment and risk minimum – we also viewed credit worthiness history and their collaterals. This is also a common practice at the individual level when requesting personal finance. Of course, the model of microfinance at village level is another reality from macro and global finance, but I thought to share what is familiar to me and also to point out that lessons could be drawn and learned from and for both models. Surely, it is in the interest of everybody to have effective measures in place for aid effectiveness in developing countries including proposed rating/s mechanisms and models. Simplifying the procedures of accessing credit or the process of rating itself can also make aid more effective. I don't know much about problems of rating exercise, but I speculate if these were purely administrative and procedural issues, then much of them can be resolved at policy and program level, I guess. I would be tempted even to say that further debate/research including country case studies are needed on the subject! I hope this makes sense. All the best. Majid Turmusani

Submitted by Max Berre on
I used to work on Caribbean sovereign debt and have researched rating agencies. Overall, I agree with the views and proposals expressed in the article. I think its a good idea for all countries to have their sovereign debt rated. Perhaps this would be a project for the major internaitonal institutions, (WTO, IMF, WB)

Otaviano, this interesting “Shadow Sovereign Ratings” mentions that “A country´s sovereign rating provides a basis for international investors and bondholders to assess the risks of a country´s ability to honor its public debt”. That begs the following question: If the markets already consider these sovereign ratings, what business is it of bank regulators to consider again exactly those same ratings in order to set the capital requirements for the banks? The answer should clearly be… none whatsoever! This is the source of a monstrous regulatory mistake. By considering the ratings twice the regulators effectively created a regulatory subsidy to whatever is perceived ex-ante as “not risky” and, as a consequence, imposed a tax on what is perceived “risky”. The result, which should have been expected, some of us warned about it, was the current crisis, which has detonated because of an excessive bank exposure to “not-risky” sovereigns and other AAA rated instruments. The foolishness and arbitrariness of the whole capital requirements for banks structure is perfectly exemplified in the article when it mentions “Basel capital adequacy regulations that assign a lower risk weight (100 percent) to unrated entities than those rated below BB- (150 percent) may also discourage the borrowings entities from being rated” It is bad enough that the Basel Committee made this utterly foolish mistake but it is almost unpardonable that the World Bank, our world´s major development institution, still keeps completely mum about it, something which amazingly endorses a counter development excessive risk-adverseness. Shadow Sovereign Ratings is a great idea, but only if we get rid of the distorting Basel risk-weighting system. World Bank… Speak up and speak out! As is, it smells of complicity

In “The riskiness of country risk” September 2002 I wrote the following: “What a difficult job for the credit rating agencies! If they overdo it and underestimate the risk of a given country, the latter will most assuredly be inundated with fresh loans and will be leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line. If on the contrary, they exaggerate the country’s risk level, it can only result in a reduction in the market value of the national debt, increasing interest expense and making access to international financial markets difficult. The initial mistake will unfortunately turn out to be true, a self-fulfilling prophecy. Any which way, either extreme will cause hunger and human misery.”

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