The Study of Bond Spreads and Credit Ratings in Honduras

Abstract

This research rigorously examines the intricate influences on Honduras' cost of borrowing from 2013 to 2022. The study employs the Corruption Perceptions Index (CPI) and Standard and Poor's as main determinants. Control variables include macroeconomic fundamentals that pertain to a country’s performance such as GDP growth, inflation and international reserves, fiscal variables such as debt-to-GDP ratio, and the central administration’s balance, and global factors such as global risk aversion measured by the Chicago Board Options Exchange's CBOE Volatility Index (VIX) and U.S rates. The study finds that country-specific fundamentals, global factors, corruption perceptions, sovereign credit ratings, and political risk all play significant roles in influencing Honduras’ cost of borrowing. It also exposes the limitations of credit ratings in capturing the truth about bond pricing in Honduras. These findings highlight the complex interplay of economic, global, and sociopolitical factors in shaping Honduras' bond spreads, emphasizing the need for a comprehensive approach to credit risk assessment and bond market analysis. The results from this research contribute to economic stability strategies for policymakers, enhance understanding for economists, and assists investors and financial analysts in making informed decisions based on identified variables impacting bond spreads.