The Benevolence of Time, Sound Macroeconomic Environment and Governance Quality on the Duration of Sovereign Ratings Phases

Abstract

Using long-term sovereign ratings data for a panel of 130 countries over the last three decades, we rely on discrete-time Weibull models to investigate the duration and determinants of sovereign ratings phases. We find that the likelihood of the end of the 'speculative-grade' phase increases as time goes by (i.e. positive duration dependence), but the 'investment-grade' phase is not duration dependent. Thus, for sovereigns rated as speculative, the build-up of reputation as good borrowers is a gradual process, whereas the reputation of investment-grade sovereigns solidifies and remains unchanged as time passes. However, the length of both phases has proven to be significantly dependent on the country's economic conditions and the quality of governance. In particular, lower inflation, better economic performance and sounder fiscal policies shorten (prolong) the speculative- (investment-) grade phase. In addition, a better perception of the quality of public services and the ability of the government to formulate and implement sound policies and regulations help to reduce the duration of speculative-grade phases.

Keywords: duration analysis, Weibull model, duration dependence, sovereign ratings, speculative-grade, economic environment, fiscal position, quality of governance

JEL Classification: G10, G15, G24, C23, C25