Moody with a Chance of Downgrade: An Analysis of Macroeconomic, Fiscal, and Institutional Drivers of Sovereign Ratings in Emerging Economies

This thesis examines the determinants of sovereign credit ratings in 49 emerging market economies between 2009 and 2024, using a fixed-effects panel regression model. Sovereign ratings are transformed into a 21-point numerical scale, and the model incorporates a wide range of macroeconomic, fiscal, external, and institutional variables. Data are sourced from Bloomberg, the IMF, World Bank, and the Heritage Foundation, with missing observations handled through forward fill, backward fill, and regional mean imputation. The analysis finds that real GDP growth, GDP per capita, inflation, long-term interest rates, gross government debt, and financial freedom are statistically significant predictors of sovereign credit ratings. Specifically, higher GDP growth, higher income per capita, and greater financial freedom are associated with higher ratings, while higher inflation and government debt are associated with lower ratings. Long-term interest rates are also positively associated with ratings, suggesting a potential link between market confidence and creditworthiness. Other variables such as the primary balance, reserve adequacy, and tax burden show marginal significance. Institutional variables like property rights and government integrity were not statistically significant in the final model. These findings underscore the importance of both macroeconomic stability and market-oriented institutional environments in shaping sovereign credit assessments across emerging markets.