Credit Rating Agencies, Developing Countries and Bias: Policy Review

This policy review was requested following a non-creditor meeting convened by UNCTAD in February 2024. A sovereign credit rating is an opinion issued by a rating agency that reflects its perception of the probability that the issuing country will be able to service debts fully and in a timely fashion. Acquiring a credit rating is usually a prerequisite for a debt issuer to participate fully in global capital markets. In mid-2024, 68 developing countries had sub-investment grade ratings and therefore only had limited and/or relatively expensive access to global capital markets. By contrast, only 24 developing economies had investment grade ratings. The rating shifts, especially the downgrades during exogenous shocks, have the potential to negatively impact both public and private borrowing costs, debt restructuring efforts and investments – including those directed towards the attainment of Sustainable Development Goals (SDGs) and climate mitigation and adaptation initiatives. The review investigates the extent to which capital markets rely on sovereign credit ratings, analyzing the relationship between sovereign ratings and market yield spreads; it finds that financial markets are influenced by many other factors than ratings. Given the subjectivity of ratings methodologies and the large number of developing countries without a rating, the paper puts forward several UNCTAD initiatives designed to improve the sovereign ratings process and limit negative impacts on developing countries.