Abstract
The aim of this study is to identify the relationship between fiscal policy and sovereign credit ratings within a comparative framework for the post-2000 period. In this study, indicators affecting credit notes of three rating agencies through domestic savings, growth, inflation, unemployment, current account balance and public revenues, public expenditures, primary deficits, budget deficits and public debt data for selected countries for the period between 2001 and 2016 are evaluated by using probit analysis under four scenarios. The study reveals that growth, unemployment, savings, current account deficit and public debt have come to the forefront in the realizations and far estimates, while the main indicators in the public sector, namely the impact of expenditure, deficit, primary balance and debt on rating decisions, are more dominant in the near estimates. These results show that the factors that are differentiating the credit rating evaluation period are the indicators of public finance. It seems that models used by the credit institutions are more likely to show short-term outcomes in the sense of public finance parameters mainly reflecting the macroeconomic responsibility level of the ruling governments.
Highlights
Credit rating agencies operate in developed countries as watch dogs that inform investors about the credibility and solvency of borrowers so that investors could make sound investment decisions
The aim of this study is to identify the relationship between fiscal policy and sovereign credit ratings within a comparative framework for the post-2000 period
The study reveals that growth, unemployment, savings, current account deficit and public debt have come to the forefront in the realizations and far estimates, while the main indicators in the public sector, namely the impact of expenditure, deficit, primary balance and debt on rating decisions, are more dominant in the near estimates
Summary
Credit rating agencies operate in developed countries as watch dogs that inform investors about the credibility and solvency of borrowers so that investors could make sound investment decisions. After 1980s, the attention of credit rating agencies gradually turned to developing countries as neoliberal policies (characterized by the deregulation, privatization and capital account liberalization) gained importance, resulting in developing countries’ governments’ increased access to global financial markets to finance government debt for public sector deficits. The objectives of the fiscal policy are to reach stability and the intervention in the economy via the fiscal policy is deemed as a solution for the economic instability as per the Keynesian doctrine; it is seen as a source for instability since such an intervention would destroy the market equilibrium under the circumstances of impartiality in public finance and decrease the production of goods and services as per the neo-classical approach (Musgrave, 1984; Yılmaz, 2007). Government involvement runs the risk of excessive spending tendencies emanating from political competitions resulting in growing public debt problems and this risk calls for the involvement of credit rating agencies
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