Sovereign Bond Ratings and Neoliberalism in Latin America

Abstract

The importance of credit rating agencies (CRAs) in rating sovereign bonds has grown as developing countries increasingly issue bonds to attract foreign capital. Although in their methodologies CRAs claim that the initiation of neoliberal reforms influences bond ratings, given the secrecy surrounding ratings, it is unclear what impact reforms actually have on CRAs. Controlling for macroeconomic and political determinants, we use statistical analyses, as well as recent qualitative evidence, for some 16 Latin American countries from 1992 to 2003 to assess the effects of economic reforms on CRA decisions. We find that among neoliberal policies only trade liberalization positively and consistently impacts bond ratings. The relative ease of implementation along with the credible commitment to maintain trade policies help explain higher bond ratings. The results also show that inflation and bond defaults negatively affect CRA assessments. The findings provide reasons for optimism. Many economic policies, often politically difficult to implement, do not lead to higher ratings. Others that are relatively easy to implement do. Policy makers in Latin American countries have more options to lessen political tensions, lower the cost of capital, and increase its availability for investment and growth than previously predicted.

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