Determinants of spread and creditworthiness for emerging market sovereign debt: a panel data study

Abstract

This study uses a panel-data framework to identify the determinants of the spread over US Treasuries of emerging market sovereign issues as well as of the creditworthiness of the issuers, where the latter is represented by the Institutional Investor's creditworthiness index. We use a sample of 16 emerging market economies, together with time series data for the period 1998 to 2002 when analysing the spread, and from 1987 to 2001 when analysing the creditworthiness. The results suggest that for both the spread and the creditworthiness, significant explanatory variables include the economic growth rate, the debt-to-GDP ratio, the reserves-to-GDP ratio, and the debt-to-exports ratio. In addition, the spread is also determined by the exports-to-GDP ratio, and the debt service to GDP, while the creditworthiness is influenced by the inflation rate and a default dummy variable. * The opinions expressed here are those of the authors and not necessarily of the Banco de la República, the Colombian Central Bank, nor of its Board of Directors. ConclusionReferences

Emerging market yield spreads: Domestic, external determinants, and volatility spillovers

“…In the main, the latter set of studies relies on univariate time series models of spread behavior. Rowland and Torres (2004), however, is an example of a study that argues in favor of panel estimation. First, panels help to identify patterns in the data that are not easily captured using only time series or cross-section data.…”

Sovereign Bonds and the “Democratic Advantage”: Does Regime Type Affect Credit Rating Agency Ratings in the Developing World?

“…that assess the ability and likelihood that a government will pay its sovereign bond issues+ The information CRAs provide is designed to signal investors about problems or opportunities and it has proven to effect global capital flows+ 2 When CRAs, for example, downgrade a country's rating, the risk premia increase, resulting in a higher bond spread and greater cost to bond issuers+ 3 Essentially, CRAs assess government credibility and the likelihood that a state will repay sovereign bonds, making CRAs nothing less than the guardians of the gates of capital to emerging markets+ 4 Much of the political economy literature has attempted to assess government credibility but with less focus on CRAs and more on the benefits of democratic institutions to attract capital+ North and Weingast argue that seventeenth-century England's adoption of more democratic institutions led to better access to capital through borrowing+ 5 Schultz and Weingast termed this greater access to capital for democracies, the "democratic advantage," and have argued that limiting government through the existence of democratic processes has allowed democracies to fare better than other forms of government in access to loans+ 6 Democracies are also expected to make more credible commitments to repay their debts because to break international agreements is likely to result in lost constituent support and to damage reelection goals+ 7 Other scholars question the notion of "democratic advan-tage+" Tomz argues that there is a conditional, rather than direct, relationship between democratic accountability and debt repayment+ 8 Similarly, Saiegh shows that regime type has little effect on interest rates charged to developing countries+ 9 While the democratic advantage literature provides unique insights, many of the studies are concerned with historical bank financing and not with the more common role today of states generating capital through bond markets+ Moreover, the literature tends to ignore the central position CRAs now play in the global financial market+ 10 Given the importance of bond ratings, a CRA literature has developed but, unlike the democratic advantage debate, the literature uses economic determinants to explain different bond ratings+ 11 Although a few studies examine the effects of 2+ See Ferri, Liu, and Stiglitz 1999;andSetty andDodd 2003+ 3+ See Cantor andPacker 1996;Vaaler and McNamara 2004;and Vaaler, Schrage, and Block 2005and 2006+ 4+ Sinclair 2005+ 5+ North and Weingast 1989+ 6+ Schultz and Weingast 1996+ 7+ See Schultz and Weingast 1998 For an excellent study that investigates how reputations form in international capital markets and affect the incentives of lenders and borrowers but without considering CRAs, see Tomz 2007+ 11+ See Afonso 2003Cantor and Packer 1996;Eichengreen and Mody 1998;Nogués and Grandes 2001;and Rowland and Torres 2004+ political institution...…”

Forecasting Sovereign Credit Spreads

“…More recent studies are Alfonso [2002] and Rowland [2004]. Rowland and Torres [2004] provide an extensive overview of this literature. Its salient feature is a lack of theoretical underpinning for the analytical form of the estimated models (mostly cross-country regressions) and thus no strong claim to structural stability.…”