3/2001 (inglise keeles) Andres Vesilind, Ingrid Toming ja Raoul Lättemäe. Determinants of Estonian sovereign credit rating

Working Papers of Eesti Pank. No 3, 2001

The paper focuses on sovereign credit ratings assigned to Estonia and analyses their possible determinants. The first chapter gives an overview of different rating agencies and the methodology they use in rating process. Besides that the interpretation, comparability and explanatory power of different ratings are analysed. The chapter concludes with the description of Estonian rating history.

The second chapter analyses the possible determinants of Estonian rating. Firstly, the possible problems in analysing the determinants are discussed. Secondly, the factors that have been seen as important determinants of ratings in theoretical literature or previous empirical researches are presented.

The third chapter analyses empirically the determinants of Estonian credit rating. For this purpose, Estonia is analysed in the context of three country groups: former socialist countries, developed European countries and countries having similar ratings. Also the factors that different rating agencies have pointed out in their reports about Estonia are compared with the empirical results. The chapter concludes with the comparison of the results of the analysis and SWOT analysis.

The results of the paper show that the most critical factors for Estonia that can constrain possible rating upgrade in the future are low nominal level of per capita GDP, high unemployment rate and high CA deficit. At the same time it should be looked after that other important indicators that have a strong relation with rating (such as inflation, fiscal balance, foreign debt level and speed of transition and EU accession) are kept under control.

Authors' e-mail addresses: vesilind [at] epbe.ee, raoul.lattemae [at] epbe.ee, itoming [at] epbe.ee

The views expressed are those of the authors and do not necessarily represent the official view of Eesti Pank.

Table of Contents

Introduction
1. Ratings, rating agencies, methodology and Estonian rating history
1.1. Rating agencies and their products
1.2. Problems in determining ratings (of transition countries)
1.3. The interpretation, comparability and explanatory power of sovereign ratings
1.4. Estonian rating
2. Factors determining credit ratings. Results of previous researches
2.1. Overall comments
2.2. Per capita income and GDP growth
2.3. Inflation
2.4. Fiscal and external balance
2.5. External debt
2.6. Threshold levels of economic development
2.7. Default history and other factors
3. Empirical analysis
3.1. Included variables, countries and their ratings
3.2. Empirical analysis
3.2.1 Rating and per capita GDP
3.2.2 Rating and average real GDP growth
3.2.3 Rating and CPI inflation
3.2.4 Rating and dynamics of REER
3.2.5 Rating and fiscal balance ratio to GDP
3.2.6 Rating and current account (CA) balance ratio to GDP
3.2.7 Rating and government debt ratio to exports and GDP
3.2.8 Rating and unemployment rate
3.2.9 Rating and threshold level of economic development
3.2.10 Rating and international reserves ratio to import
3.2.11 Other, not measurable factors
3.3. Comparison of the results and SWOT analysis
Conclusions
References
Appendix 1. Description of ratings (rating agencies Fitch, Standard & Poor's and Moody's)
Appendix 2. Group of transition and former socialist countries and their ratings
Appendix 3. Group of Estonia and developed European countries and their ratings
Appendix 4. Group of Estonia and countries with similar ratings
Appendix 5. Relation between rating and different economic factors among Estonia and other transitional countries
Appendix 6. Relation between rating and different economic factors among Estonia and developed European countries
Appendix 7. Relation between rating and different economic factors among Estonia and countries with similar ratings
Appendix 8. Relation between rating and threshold level of economic development

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