On the duration of sovereign ratings cycle phases

Abstract

• We analyze the drivers of sovereign rating phases via discrete-time Weibull models. • For speculative-rated sovereigns, reputation build-up as good borrowers is gradual. • The reputation of investment-grade sovereigns remains unchanged as time passes. • The length of both phases significantly depends on the country's economic conditions. • Better governance quality helps to reduce the duration of speculative-grade phases. Using long-term sovereign ratings data for a panel of 130 countries over the last three decades, we investigate the duration and determinants of sovereign rating phases through the lens of discrete-time Weibull models. We find that the likelihood of the end of the ‘speculative-grade’ phase increases as time goes by (i.e. there is 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 significantly depends on the country's economic conditions. In particular, lower inflation, stronger growth and sounder fiscal policies shorten (prolong) the speculative- (investment-) grade phase. In addition, better governance quality helps to reduce the duration of speculative-grade phases.