The effects of indicators used in sovereign credit ratings: A research on G-20 countries

Necessity of information is directly proportionate to developments in financial markets. Decision making processes and valuations of bond issuers or sovereign countries can be achieved with the use of these information. Another aspect of the valuation and decision making is seen in risk management. One of the valuation methods used by the investors in this purpose is sovereign credit ratings involving qualitative and quantitative analysis. These ratings generally involve opinions of credit rating agencies about a company's or sovereign's ability to meet its obligations. Sovereign credit ratings may be subject to criticisms despite its importance for the investors. These criticisms involve use of both qualitative and quantitative variables during the process. Data on economic and financial structure can be defined as macroeconomic variables of the credit rating methodology. Both the effectiveness of macroeconomic variables used in statistical analysis and evaluation of structural and political risks raise the question of subjectivity of the credit rating methodologies in the literature. Analyzing known macroeconomic variables from the literature about sovereign credit ratings on G-20 allows assessments in large part of the world economy. In this direction, the purpose of this study is to analyze macroeconomic variables significant to sovereign credit ratings determined by three big credit rating agencies, Standard and Poor's, Moody's, and Fitch on G-20 members. Variables currently used in the literature and other variables thought to be effective determining sovereign credit ratings will be analyzed in this respect. Accordingly, foreign direct investment, portfolio investment, import, and export are considered as research variables. In other words, this study considers control and research variables differently from previous studies. In the scope of this study, sovereign credit ratings determined by three big agencies are modelled. This study differs from the literature by use of different macroeconomic variables as an indicator and valuation of the credit rating methodologies of the agencies. Results of econometric analyses contains implications on both international trade and international finance. Additionally, these implications should not only be watched out by the investors but also governing bodies and regulators. Points to consider from the implications can be clarified by differences in methodologies of the three big agencies. Furthermore, lack of competition in the credit rating industry makes objectivity of credit rating methodologies rather important. In a competitive environment, objectivity of the sovereign credit ratings expected to be higher.