In order to provide a more comprehensive picture of a country's economic state, Sovereign Credit Ratings need to include further variables that indicate labour market conditions and measures of social development.
Implementing institutions
ILO
Origin
Alan Wild, 2002
Further info. sources - text
Wild, Alan: Preliminary Executive Overview: Sovereign Credit Ratings and their Relevance to the ILO (ILO June 2002)
Policy Brief
Problem statement
Rating agencies emphasize economic rather than socio-political indicators. There is space for including further variables, notably those that examine labour market considerations. This would provide investors with a better picture of a country's economic viability.
Analysis
A Sovereign Credit Rating (SCR) is an assessment of a government�s ability and willingness to service its debt in full and on time. Ratings are coded using alphanumeric scales and fall into two broad categories, investment grade and non-investment grade. An �outlook� or forecast is also sometimes provided. This falls under three categories, positive, negative or stable, and indicates the view of the rating agency on the future movement of the rating.
Rating grades influence the viability of a prospective bond issue by influencing the cost of debt and the numbers of prospective investors. As a result, countries with no ratings or a rating below �investment grade� are unable to borrow from the international capital market. They consequently depend on official loans from multilateral organizations like the World Bank, various development banks, or loans from friendly governments.
Not only does the sovereign rating affect a national government�s ability to borrow, it effectively sets a rating for private sector organizations in that country.
Aency ratings have followed rather than predicted market movements and tend to be pro-cyclical. They extend �booms� beyond the appropriate level and both deepen and lengthen �busts�.
Including additional variables, notably indicators on labour market conditions and social stability, can provide incentives to national governments to develop their social and labour standards in order to attract investment. Emphasizing these additional variables should also lessen the pro-cyclical tendencies of SCRs and promote a longer term perspective towards investment.
Significance of Policy Proposal
At the corporate level a number of organizations are starting to deal with the concept of 'Social Return on Investment', according to which ethically managed companies make better long-term investment propositions. Similarly, greater consideration of social and labour conditions could provide investors with a more comprehensive picture of a given country's investment potential.
Critique
Three main credit agencies are involved in the SCR business: Moody�s, Fitch, and Standards and Poor. There is probably more space to establish a fourth that would include objective measures of social development, than to reform the criteria used by existing agencies. While existing indicators have a more encompassing approach (including the World Times Wealth of Nations Triangle Index) these are not credit-rating agencies as such.
Keywords
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